"The most powerful force in the universe is compound interest" ~ Albert Einstein
"Not any more…" ~ Ben Bernanke
Einstein was a genius known for his simple elegant expressions of complex natural laws. Indeed, what is simpler than E=MC2? While it may be urban legend that Professor Einstein was reputed to have said that compound interest was the "eighth wonder of the world and the most powerful force in the universe", the point is well taken.
"Compound interest is the eighth wonder of the world. He who understands it, earns it … He who doesn’t … pays it" ~ Albert Einstein
Einstein’s observations were perfectly accurate back then as he noticed that the universe was expanding. Because growth is a natural phenomenon, the human race, in general, and any man, in particular, can take advantage of natural law by putting off consumption today and investing in the future. This is the force behind compound interest. A seed of corn not eaten but planted will multiply into a thousand seeds at the future harvest; an acorn nurtured and planted can produce a mighty oak; an olive grove cultivated now may take 40 years to mature but it will take care of future generations. Thus, the moral of the story is always the same: Save today, invest for the future, and reap fabulous rewards. If you can invest at 7.2% for ten years, your wealth will double!
The mathematics of finance should be incredibly simple and elegant to watch in motion but they’re not, thanks to the efforts of the Federal Reserve.
Einstein came to America during a time of great turmoil in Germany and Europe. Germany was turning into a National Socialist Party with a dictator and command economy. In a command economy, interest can be fixed by the government at zero or even negative, and savings accounts can be stolen and used to fund the wishes of the state. The river of investment that runs forward creating capital can be forced by state-created inflation to run in reverse, destroying capital. In other words, seed corn rots if it’s not eaten, and investment dries up because saving is for suckers.
Ah, welcome to 2012 America. The Fed has decreed interest rates at zero for four years, and promised to keep them there for at least another two. The Fed is still printing money out of thin air as well as buying long term treasuries. By locking the yield of the 10-year Treasury at 1.6%, it’s well below the rate at which staples like food, energy, utilities, transportation, education, and health care, are rising in cost.
