Monday, January 16, 2012

Exponential Growth

Most of you already know most of what I will write and illustrate below.  Exponential growth of our money supply (roughly inflation) and of our US national debt will be the two examples of how exponential growth of these two is leading us into great financial peril.

In looking at the decline of the dollar (inflation) I use as a starting point 1913, the year the Federal Reserve was founded and a popular place for many in showing how the purchasing power of $1.00 in 1913 has fallen to about $0.03 today...  That is, 3 cents then is now what a 2012 dollar is now worth.  Because so many of you have seen those graphs and/or are familiar with this concept, I will follow that template.

All my graphs and comments below are not the exact numbers (which would be disputed anyway), but are close enough to make the lessons clear.

This first graph illustrates what happens in a constant 3% inflation from 1913 - 2012.  3% is close to the average rate of inflation since 1913, but is NOT the correct figure, but it is close enough.  A hammer that cost $1.00 in 1913 would cost over $18.00 today, given that 3% inflation (blue series data points).  The red data points show a 3 cent (not 3%!) fixed increase each year.  I put the "red" data in because that would be what would have been PERCEIVED by a hammer buyer looking at a price change over a year or two.  CLICK on any of the graphs for a better view.

The next chart is the "inverse" of the above and may be more familiar looking.  It shows the value of the dollar falling vs. the 1913 dollar.  Most researchers who have prepared a similar graph to the below usually arrive at a final end point of the 2012 dollar being only worth 3 cents.  In my case here (using a constant 3% inflation), the dollar has fallen in value from 1913 - 2012 to about 4 - 5 cents:

Again, I picked a close to 3% inflation as "about right" for the period 1913 - 2012, so my graph and end result is different than what other researchers have put out there (again, this for educational purposes here).

This next graph extends the first graph out to the year 2032 (twenty years from now).  You may be thinking two things:

1)  20 years, that's a long time.  My response, look how the last 20 years have flown by...
2)  That curve doesn't look so bad.  My response, please look at the vertical scale, a $34 hammer in 2032 vs. $18 now...

The red data points are the same, a three cent increase each year.

The next graph is an extension out to 2062.  Yes, I know that it is unlikely that we will see 3% constant inflation from now until then AND that 2062 is a year for our grandchildren, but it illustrates well what happens in "the out years" (note that the $1.00 1913 hammer is now over $80):
I now turn our attention to the US National Debt, a current figure that is in the Debt Widget above.  Again, this debt widget throws off a number which is different than the approx. $15.2 trillion typically seen elsewhere, but it certainly close enough.  The below graph shows what would happen if we allowed our national debt to grow at 11%, which by some rough-and-ready calculation is what I derive from 2007 until now.  This 11% growth is probably conservative (low) for the interval since 2007, and would be much disputed, but it is at least approximately right and useful enough to illustrate our plight.  Note that our debt would be at over $70 trillion dollars by 2026, a mere 14 years away (a mere 14 years for long-term thinkers anyway!).  Note that I started with 2007 debt at $9.8 trillion, it has grown a little faster up through today than my graph shows (that's why I said recent growth in our debt of 11% is likely conservative = a  low growth rate).

In the next graph I extend the time frame out some more to 2036:

We would have a $200 trillion dollar national debt in 2036.  Obviously that is not going to happen, unless we hyperinflate.  But, it is HARD for politicians to stop spending, so a scenario like the above (11% growth of national debt) is possible even if very unlikely.  Predicting things out to 2036 is really a fool's chore, I just illustrate here what would happen given 11% growth in the debt, even if this scenario will not happen.

Let's play pretend one last time (or have a "Thought Experiment" for finicky adults who do not like to play).  "Let's say" that in a moment of relative panic and seriousness that our politicians in 2017 (after Obama's second term or after Romney's first term) decide to get "really serious" about our debt.  I mean it, really serious!  And, let's say they are SO serious that they decide limit the growth of government debt by 5% per year (as the looming debt growing at 11% is starting to look scary even for politicians...).  They are SO SERIOUS that they get a Constitutional Amendment through limiting growth of the debt to 5% a year!  Wow!  That's pretty serious!  Well, that sounds pretty good, doesn't it?  And 5% is not so much, no?  Just a little bit over our projected economic growth rate.  Hallelujah!  Hallelujah!

Well, let's see:
Mmm.  In studying this one, we see the debt still going up at a 5% rate after 2017.  Look carefully at the "kink" in the graph in the year 2017 (just after the "2015" label).  The curve then grows markedly less steeply than just before in 2014, 2015 and 2016.  But, take another look at 2036 (when a lot of us may still be alive), the debt has grown to over $70 trillion.


All of the above debt figures are just the US National Debt, and do not count "unfunded liabilities" (which are some very large numbers, many trillions MORE than our national debt).  Nor do these debt figures count other debts (states, municipalities, student loans, mortgages, credit card debt, etc., etc.).  And of course this is for the USA alone.

1 comment:

  1. Wish my income would go exponential - but as an army ant/worker bee, TPTB have preprogrammed that out of the equation. Learn the (baaaaa) sheeple language and put your hind legs in the masters boots. Laws and Taxes (but not exponential wage growth) are for Peons and Peasants.

    Keep it up the Great writing Robert - the army is awakening.

    The Navigator


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