The most powerful force in creation
Legend has it that someone once asked Einstein what the most powerful force in the universe was, and his answer was "compound interest". He'd be right. If you can get interest working for you, you can make money without ever having to do anything at all. For banks, that means making loans. For people like you and me, that means putting our money in a savings account or CD.
When it comes to compound interest, there's a rule of thumb that can show you just how powerful it really is. It's called the rule of 72: if you multiply the interest rate by how long it takes your money to double, the product is 72. At 1% interest, you'll have twice the money you started with in 72 years. At 4% interest, it would take only a fourth of that time, or 18 years. At 7%, which some of you probably have mortgages at, it would take only ten years to double. Every ten years after that, it would double again. If you could save money at 7% for 50 years, you would end up having 32 times the money you started with, having done nothing at all!
The problem comes when interest works in the other direction. If compound interest is working against you, because you've borrowed money, you will end up paying much more than you borrowed. Take a look at this mortgage calculator. The default mortgage it pulls up for me is on a $165,000 house, over 30 years, at 7% interest. That's a payment of about $1,100 a month, for 360 months. To get the $165,000 you want today, you'd end up paying the lender almost $400,000 over the next 30 years! The question you have to ask yourself is, is it worth all that money in the future to have this extra money today that I haven't earned yet?
Our governments almost always answer, "yes". Instead of either raising taxes or cutting spending to balance the budget, they take out loans in the form of bonds. From that point on, we taxpayers are on the hook for the loans our elected representatives took out in our name. We are now paying over $450 billion dollars a year in interest on the federal debt. Do you realize what that means? Until the latest round of "stimulus", that was almost enough to cover the entire federal budget deficit every year, including the Iraq and Afghanistan wars! The deficit was caused almost entirely by the interest on previous years' deficits! The budget being so far out of balance now is in large part a consequence of the budget being much less out of balance decades ago, and our representatives taking out loans to cover the difference.
In a common news topic, California is in a similar situation. According to their proposed budget, the state of California is paying nearly $5 billion dollars a year in interest payments. In their case, of course, that is only a quarter of their projected budget shortfall. California has other issues, including the same overpromising on retirement benefits that contributed to the failure of GM, and which will soon devastate the federal budget as well if not fixed. But it's unquestionable that if the state government had closed their budget gap years ago by more responsible means, the problems they face now would be much easier to manage.
So how can such an egregious thing happen? Well, it's simple, really. When faced with budget shortfalls, elected representatives have three basic options: raise taxes, cut spending, or send the people into debt. Raising taxes and cutting spending will both hurt their political popularity. Going into debt won't. They choose the option that hurts their own interests the least, instead of choosing the option that is right for their constituents. Because of that failure of judgment, you and I and our grandchildren will be forever paying taxes to cover government outlays that either should have been paid for generations ago, or should never have been made at all.
You, and your children, have been sold into debt slavery by your own employees. And it's getting worse every day we allow it to go on.
There is only one way to stop this. Make sending us into debt hurt them more than raising taxes or cutting spending hurts them. Don't vote for anyone who isn't absolutely committed to sane budgetary policies. Don't let your friends. This has to stop, or we are all going to drive right over a cliff.
When it comes to compound interest, there's a rule of thumb that can show you just how powerful it really is. It's called the rule of 72: if you multiply the interest rate by how long it takes your money to double, the product is 72. At 1% interest, you'll have twice the money you started with in 72 years. At 4% interest, it would take only a fourth of that time, or 18 years. At 7%, which some of you probably have mortgages at, it would take only ten years to double. Every ten years after that, it would double again. If you could save money at 7% for 50 years, you would end up having 32 times the money you started with, having done nothing at all!
The problem comes when interest works in the other direction. If compound interest is working against you, because you've borrowed money, you will end up paying much more than you borrowed. Take a look at this mortgage calculator. The default mortgage it pulls up for me is on a $165,000 house, over 30 years, at 7% interest. That's a payment of about $1,100 a month, for 360 months. To get the $165,000 you want today, you'd end up paying the lender almost $400,000 over the next 30 years! The question you have to ask yourself is, is it worth all that money in the future to have this extra money today that I haven't earned yet?
Our governments almost always answer, "yes". Instead of either raising taxes or cutting spending to balance the budget, they take out loans in the form of bonds. From that point on, we taxpayers are on the hook for the loans our elected representatives took out in our name. We are now paying over $450 billion dollars a year in interest on the federal debt. Do you realize what that means? Until the latest round of "stimulus", that was almost enough to cover the entire federal budget deficit every year, including the Iraq and Afghanistan wars! The deficit was caused almost entirely by the interest on previous years' deficits! The budget being so far out of balance now is in large part a consequence of the budget being much less out of balance decades ago, and our representatives taking out loans to cover the difference.
In a common news topic, California is in a similar situation. According to their proposed budget, the state of California is paying nearly $5 billion dollars a year in interest payments. In their case, of course, that is only a quarter of their projected budget shortfall. California has other issues, including the same overpromising on retirement benefits that contributed to the failure of GM, and which will soon devastate the federal budget as well if not fixed. But it's unquestionable that if the state government had closed their budget gap years ago by more responsible means, the problems they face now would be much easier to manage.
So how can such an egregious thing happen? Well, it's simple, really. When faced with budget shortfalls, elected representatives have three basic options: raise taxes, cut spending, or send the people into debt. Raising taxes and cutting spending will both hurt their political popularity. Going into debt won't. They choose the option that hurts their own interests the least, instead of choosing the option that is right for their constituents. Because of that failure of judgment, you and I and our grandchildren will be forever paying taxes to cover government outlays that either should have been paid for generations ago, or should never have been made at all.
You, and your children, have been sold into debt slavery by your own employees. And it's getting worse every day we allow it to go on.
There is only one way to stop this. Make sending us into debt hurt them more than raising taxes or cutting spending hurts them. Don't vote for anyone who isn't absolutely committed to sane budgetary policies. Don't let your friends. This has to stop, or we are all going to drive right over a cliff.
posted by Stephen Collings at
8:26 AM
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