"Simple question: What would you rather have after 31 days (month). A million bucks or "a penny on the first day and the each day after your total doubles and so on for 31 days"

I had to run this in excel just now to beleive it.

Having been schooled in finance, I understand the compound factor very well. The problem is even worse than just killing lillies. Some fish have to die as well. The needed 50% reduction in debt will wipe out 30% of GDP for several years and the counting number will stay in that range for years afterwards. As measured, the debt growth and GDP are irretrievably linked. We all know so much GDP is a total fiction, like the growth in the medical industry, the education industry and any other government linked industry, all of which served to add to this problem.

The great trick is to compound $1 by 1% for 2000 years. The factor is 1.01 to the 2000th power. Use 5% and you come up with a figure that will buy the world several times over. This is starting with just $1, a population much smaller than the lilly pad. Bankers have been lending money for thousands of years so the evidence that even $1 compounded literally proves the debt game collapses.

I think there is something to the very high income taxes on significant amounts of interest income. This is the only way to extinquish the compound. Debt and money are mirrors of each other and in order to keep debt down, one also has to keep money down. I hate to endorse one big time socialist plank, but the idea one can maintain a debt system without some method of extinquishing both ends of the equation only addresses one side of the equation and attempts to maintain an impossibility. The only question that has to be answered is what is rich and where should the brackets start. The problem with government was the put out schedules and didn't adjust them. Breton Woods failed because we inflated credit with no adjustment on the price of gold. The income tax failed for the same reason, that when the schedules were created, the top brackets were impossible amounts of money, movie star/rock star incomes. By the time Reagan came along, they were upper middle class amounts. One can't exist without the other, the debits and credits and this include the entire economy, which is a factor of that equation. Compound interest has to be maintained at a very low level over time or it can't be managable. Just try the 1% equation above and see how long you can expect to last.

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I think there is something to the very high income taxes on significant amounts of interest income. This is the only way to extinquish the compound. Debt and money are mirrors of each other and in order to keep debt down, one also has to keep money down.

No.

All you have to do is refuse to bail anyone out and tie money and credit supply to GDP.

You can lend recklessly all you want. But if you do, the borrower will go bankrupt and so will the lender.

This is self-correcting, exactly as are trade deficits if you don't interfere by emitting credit to counter the drain of capital.

Good stuff Karl. This reminds me of one of those lectures by Nials Ferguson(?) where he talked about dynamic systems that may at some point appear to be stable for a long period of time but eventually the instability no matter how small initially will ultimately destroy the system.

You may have heard the old tale of the emperor and the wise man playing chess. When the wise man won, he was offered a princely sum, but asked instead only that he be paid a single grain of rice on the first square of the chessboard, and double that amount on each succeeding square, until all 64 squares were filled.

(To calculate his prize you'll need estimates for the density of rice (grains per pound) and the price of rice, and, as you progress up the board, prices for gold and gemstones.... another example of the power of exponents.

Mannfm11: look up the story by HG Wells, its about what you're referencing. Guy goes into a coma for a couple hundred years and wakes up...because of compound interest he pretty much owns the world.

Packet: Or, in a more modern twist, an episode of Futurama, whereby Fry started with pennies in his account in 1999, and with interest compounded over 1000 years, wound up having billions in his bank account in the future.

Help if you had the title.. When the sleeper awakes

I've watched the vid a few times before and was going to post it in the comments because it was exactly what came to mind as I was reading, then I saw it was already posted in the Ticker! Great stuff.

Long time lurker, first time commenter. Love KD and this site. This is like an oasis of sanity in an ocean of craziness!

Couple of things.

First, the massive gov't debt load is one reason why the Bernank keeps rates low. Imagine a rate of 5%. It's game over.

Second, this may be slightly OT, but I can show you how exponents work in reverse with regards to pensions and why the pensions are broke.

I work for a county with a very nice pension plan. However, over the last 9 years, I have earned about 1.5% interest annually. OUCH!!!

Making matters worse, it took 8.5 years of contributions and interest to reach 1 year's full pension at my current salary.

Therefore, if I work 45 years, I will have 5 years of full pension, at about 6 grand a month.

HOW IN THE HELL IS THIS GOING TO WORK IF I LIVE 15-25 YEARS AFTER I RETIRE?

And remember, I am just one and what about my/our replacements?

When I bring these issues up my colleagues look at me like I have 10 heads and come from Venus!!!!

Oh well, as long as I have a job here, I will never retire, but that is okay. I am a librarian, so my physical work load is light while my mental work load is challenging. I should be good till I am 90!

We'z allz gonna diez.

Not being a smartass, nor a cynic. We don't have the will - political or moral - to change the outcome now. I firmly believe we're not going to stop until forced. Time to hit the range again.

Maxpower,

What was before tin....

(that's an uncompleted sentence, not a question)

The modern version is he awakens to find the government seized the five cents and he has been charged $5 a month on his zero balance account and the fee was increased every three months. There was also a document charge for the statements sent to his old address which are all sitting in a dead letter bin.

> We'z allz gonna diez.

I'm tending to agree with you lately. I won't stop fighting and talking etc but I'm not hopeful.

I'm spending a lot of mental cycles lately trying to figure out exactly what "dead" looks like, in practical terms.

Excellent ticker, Karl. Once again, going out to everyone who needs to understand this.

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It was dry and I bet nobody went and watched the whole series

I did for a second time in my life. Prof Al Bartlett is awesome!

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That ignorance is intentional.

Exactly Karl.

http://www.deliberatedumbingdown.com/

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Mannfm11: look up the story by HG Wells, its about what you're referencing.

Is it HG Wells, or RH Heinlin that wrote that?

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Best Ticker Ever.

Karl,

Nicely done.

Making a thorough analogy is always hard, and the question I have here is: how does default fit into the path of exponential debt ? Is default analogous to moving to a new financial pond, a reincarnation not available to fish ? Not that a passage through default would be absent of mortality, but it wouldn't necessarily be an extinction.

Imagine doing these compounding exercises using the base line 600 trillion derivatives market number as a starting point and using a moderate rate of compounding....never mind using those markets actual growth rates.


Wed run out of zeros if we tried the latter.

I've watched it 2 or 3 times myself over the past few years. I have tried to get others to watch it as well unsuccessfully. Everyone always says it's too long and loses interest. I especially like the petri dish example that Prof. Bartlett uses in the video to illustrate how nobody knows they are ****ed until the very last minute that something doubles from 50-100%. I try to explain that to people when I talk to them about where we are headed and why.

Genesis wrote..

I'm not sure that's true.

The most I've ever dealt with exponentially changing quantities was starting up and shutting down nuclear reactors and the only way to manage the process was to have instruments that read out in logarithmic scales to make the change appear to be linear.

I don't think that a human could watch a five decade per minute change (unaided by logarithmic instruments) for an entire minute and mentally conceive what was going on.

I wouldn't really consider that a "basic human task". Of course we have to adapt tools to meet observational requirements that go far above and beyond those directly available to us through our senses.

Also, your example (I think) kinda reinforces my point, except the computer is carrying out the process that our brains normally would, had we the ability to observe the reaction directly; Our "mental plot lines" are log scale, making exponentially increasing magnitudes "appear" linear.

Our brains are not sufficiently equipped to perform tasks of extreme precision or quantification. The logarithmic aspect is more about our ability to group and define qualitative relationships on-the-fly. Probably evolved to enable split-second survival decision making. The introduction of precise measurement tools is an adaptation, along with the linear numbering systems that go along with them. (At this level we're not talking "numbers", which are an abstraction, rather our brains' ability to interpret what our senses tell us about the world.) Using our senses alone, we naturally tend to "lump" increasing distances and larger magnitudes closer together.

Haven't had time to read it yet, but here's a link to a story about that study:
http://www.nature.com/news/2008/080529/f....

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One final point and I will leave you to think this over: The World Economic Forum (WEF) said recently that for us to achieve a 3% GDP growth for the next decade we would have to double the total systemic debt. That is a roughly 7% annual growth rate in debt, or a "spread" of about 4% over "growth". In order to do this, the amount of earnings from everyone in the economy that will have to be diverted to interest payments will also have to approximately double. Yet it is the inability to pay that interest (and principal where it is paid down) that is factually known as the trigger for the 2007/08 financial collapse and this growth in debt, at their assumed 3% growth rate in GDP, will produce only a 34% increase in output with which you must pay for that doubling!

That paragraph alone shows why a huge dislocation is coming. The person making the statement on the need for more debt is basically saying the debt to GDP ratio for new GDP is going to be 2:1. 2% of new debt for 1% of new growth. When you are behind the curve where it takes more debt to produce GDP than the GDP you are planning to produce it is over. You can't start out in negative territory, take two steps back for each step forward and expect to end up in positive territory. It is a mathematical impossibility! We've been fighting an unwinnable battle for 3 years now, anyone who has been paying attention knows that. The real battle is going to be over how we handle the collapse and restart.

I still remember back in 1984 I was about to graduate and was talking to a couple of my professors about salary, investing, and similar stuff. One of the professors said "if I would have known how things were going to work out I would have stayed borrowed to the hilt." At the time I was, and still am, risk averse so I never used any leverage but now that almost 30 years have gone by I know exactly what he meant. Those who took advantage of leverage locked in a low price while those who wanted to save and pay cash just watch prices rise.

I saw it happening but I just could never get myself into debt. I guess that degree in Mechanical Engineering taught me about exponents too well.

The exponential growth rate can be slowed down by lowering or eliminating the interest rate. On the surface “twist” is an attempt to get more time before the next doubling occurs.
However, Twist seems to be an attempt to increase more borrowing, (debt celling) with little regard to the time factor.

Timmie and ben seem to be counting on an exponential growth in ??? that would negate the the effect of the exponential debt growth. (Wrongly, of course).
I don’t see any growth anywhere except in debt. Where does he think the growth is going to come from?

Another great Ticker, though it doesn't have much to do with the "reality" of the Market. Another dire warning, another market rally....even though the sky IS falling and the pond IS being covered with lilies (but my aren't they pretty and their share price is up again!)