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Thoughts from the Frontline

The “Miracle” of Compound Inflation

April 22, 2011

Choose your language

Albert Einstein is famously quoted as saying, “Compound interest is the eighth wonder of the world.” And compounding is indeed the topic of this week’s shorter than usual letter, but compounding not of interest but of inflation. As you might expect, I am giving a great deal of thought as to how we get out of our current financial dilemma of too much debt and deficits that are far too high. While I will use US data for our illustration, the principles are the same for any country.

Let’s start with a few graphs from the St. Louis Fed database (a true treasure trove of numbers). First, let’s look at nominal GDP over the last 11 years, from the beginning of 2000. The data only goes through the third quarter of last year, so sometime this year it is quite likely that GDP will top $15 trillion.

So, the economy has grown by roughly 50%, right? Give…

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francis wong

July 1, 2011, 1:20 a.m.

You simply must understand compound interest if you know what is useful to you. Interest and primary move hand in hand, and you also need to know where that hand has been. Knowing about compound interest can save you from a prospective bankruptcy. You are able to better understand your installment loans also.

Jeff Martin

April 25, 2011, 9:17 p.m.

Hope you are feeling better and had a wonderful Easter.
Right now it seems to me that the ocean of liquidity that was created by the Fed is only causing commodity inflation.  Unless the banks start lending money to individuals and small businesses, the only inflation will remain in commodity futures and the bank’s own trading desks will be creating it.  That will actually lead to stagflation and then Japanese style deflation as the economy will never achieve escape velocity.  With wages stagnant, unemployment at 8+% and the consumer still deleveraging, high commodity prices will eventually stall the fledgeling recovery.  The market and the economy diverged a while ago and higher futures prices will bring them back in line…in a negative way.

Jeff Martin

Dave Scotese

April 23, 2011, 9:32 p.m.

“As you might expect, I am giving a great deal of thought as to how we get out of our current financial dilemma of too much debt and deficits that are far too high.”

I regard those in possession of promises from governments with some disgust.  No, let me correct that.  I regard those in possession of promises from governments, who also expect those promises to be kept, with some disgust.  I was a teenager when I asked my father what a dollar really was.  I meant, what was it a note for?  He didn’t have a good answer for me.  I can forgive my teenage self for failing to pursue the issue, but the lack of gold backing is not my main point here.  The main point is that the clues are everywhere. 

Oppression has been packaged by government and put to use and everyone can see it.  Perhaps they can’t see it well enough to tell that their own lives are worse because of it, and in many cases that is because we evolved not to distrust others, but to trust them, and so we buy the lies of those who are most prone to lie to us because they have learned charisma.  Nietzsche called them the “charming ones” (at least that’s how Kaufmann translated it).

Do you know how much evidence there is that the 16th amendment was actually ratified?  Philander Knox’s proclamation that it did so is just about all there is.  This can be compared to the evidence that it was not ratified and most people will come to the same conclusion, that it was not properly ratified.  In itself, this doesn’t bother me.  The problem is that the federal courts of this country have ruled that whether or not the amendment passed doesn’t matter.

We learned in school that the Bill of Rights was created in order to limit the government, but then we allow that government to make us promises and then demand that it keep them regardless of the burden that must be loaded onto the back of the hapless taxpayer.  Whose fault is this?  Can we blame the Free and the Brave for not paying attention?  Or have we paid attention and simply failed to act in the defense of our fellow countrymen against an out of control government?  I think we paid attention, but if we saw a chance to benefit, rather than suffer, from government promises, we let it go.  I did it too, until a friend opened my eyes.

So my solution is to laugh all the way to prison when they finally take me for refusing to help pay for their mistakes.  If they still have enough credibility to run prisons, that is - prisons for the most enlightened and industrious of the citizens in this country, citizens who see and understand the fatal flaw in trusting the stewardship of mankind not to the individual men and women themselves, but to some group that assumes control over the lives of others and pretends it is based on a well-respected but largely ignored piece of paper we call the Constitution.

Dame-Anna Wang

April 23, 2011, 6:41 p.m.

I enjoy very much the post,  especially the shared article of Scylla and Charybdis â?? The Federal Reserve and the FDIC (by David Kotok), as I was supposed to be at the GIC, but had to cancel for personal reasons.

Hope to attend a future conference where I hope to meet you in person, John.

Happy Easter and hope your heel bursitis has healed.

Mark Sladoje

April 23, 2011, 6:26 p.m.

I view the happenings in Washington, DC of Congress, the President and the Agencies as someone has opened ‘PANDORA’S BOX’ and that all the present that are now appearing are preventing a smooth and organized recovery of the economy and the Dollar.

david rosenstock

April 23, 2011, 1:24 p.m.

I am a big fan of â??Thoughts from the Frontline.â?  Have read it regularly for a few years.

above says this…


Now letâ??s run through a few â??what-ifâ? scenarios. What if the next 11 years look more or less like the last, with 4% nominal GDP growth? That would mean that in 2022 nominal GDP would be 50% larger than now, right at $22.5 trillion. But that is with only 2% inflation.

What if inflation were 4%, with the same growth? Then nominal GDP would be $30 trillion! What a roaring economy, except that gas would $8 a gallon (assuming current levels of supply and demand). In essence, you would need $2 to buy what $1 buys today.


Startling and scary.

Howeverâ?¦ the very useful â??rule of 72â? suggests that at 4% inflation, it takes about 18 years for prices to double.  In 11 years with 2% real GDP growth and 4% inflation, GDP would be about doubleâ?¦  but prices would not.  Agreed?

Walt Spaude

April 23, 2011, 11:43 a.m.

Wrong again! It was AE!

Walt Spaude

April 23, 2011, 11:38 a.m.

I have been wrong before but I always thought the qoute about compound interest was from Lord Keynes.

Martin R. T. Mersch

April 23, 2011, 6:20 a.m.

Hello John,
Thank you for another thoughtful tome. I believe that you should be focusing more of your research effort on a brand of 1970’s stagflation. What I am seeing on the horizon for the next 5 or so years is rather disturbing. The Gen-X group that is so highly leveraged will be devastated. The baby-boomers will be forced into early retirement by an economy stuck with a glut of over capacity. The whole system of ‘entitlements’ will be scaled to a much lower threshold. This will cause much weeping and gnashing of teeth throughout society. I started working on the floor of the Chicago Mercantile Exchange in 1973, (when I was 16 years old). I have been a voracious student of the markets since that time. All the best, Martin R. T. Mersch

Nelson Swanberg

April 23, 2011, 2:06 a.m.

Ronald Raygun was dumb lucky enough to have bought military hardware with his Quantitative Easing thus putting Americans to work instead of the Chinese. The Bush bail out plan just handed billions of dollars to his “base”, the criminals in the banking system, for which we have received very little in return and no jobs in the process. Obama was not smart enough to have changed the Bush plan when he could have. Now we are stuck in a no jobs recovery that is just inflating assets in the Wall Street Casino.

How long have we been in recession by the blue collar definition? - if GDP is not increasing by the sum of the inflation rate and the population growth rate someone is falling behind!

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