Dr. Albert Bartlett, Professor Emeritus Physics, University of Colorado has said that “the greatest shortcoming of the human race is the inability to understand exponential function”. When Albert Einstein was supposedly asked what the greatest invention in the world is, his reply was ‘compound interest’. Johnny Carson once quipped that scientists had developed a powerful new weapon that destroys people, but leaves buildings standing. It’s called 17% interest. In the 1980′s when Carson made that remark it was pretty funny because people assumed that once Fed chairman Paul Volker put the brakes on inflation, interest rates would trend down and it would be business as usual once again.
But today, with over 6 million homes headed for foreclosure by 2013, nobody’s laughing anymore and the ‘powerful new weapon’ did exactly what it was intended to do, leaving the buildings standing, the people homeless, and the banks getting bailed out giving them the green light to move on down the road to the next deal. It has now become painfully obvious that it doesn’t take a 17% interest rate to wreak havoc on an economy, but only the slow and steady exponential growth of interest rates to achieve the same affect.
Exponential function is best known for showing rates of resource depletion, species extinction, and world population growth. These are simple examples that can be charted on a x and y axis on a graph where x is the time component and y is the growth component that increases over time on a percentage basis. Exponential function also lends itself particularly well to uncovering the more hidden aspects of monetary growth, namely inflation and compounding interest that generally tend to exert their affects relatively slowly over a generation or more. We therefore tend to pay little attention to these pernicious affects relative to overall spending power in the economy.
One of the chief characteristics of exponential growth is that it starts out slow, but increases faster and faster yielding a graph curve that looks like a ‘J’ or a hockey stick. Once a given quantity moves around the bend of the hockey stick curve, the growth rate can become explosive reaching an almost vertical spike on the graph. Given enough time, even a small percentage rate of change can still yield very large amounts. And with exponential function where the rate of change is constant, the amount of change grows larger over time, meaning that each time the growth doubles, it yields a number greater then all the preceding stages added together.
Exponential function can be best understood in conjunction with doubling time and the Rule of 70. The rate at which a given quantity will double is always a function of 70 divided by the percentage of growth, with 70 (roughly) being the natural logarithm of 2. For example a annual growth rate of 5% will double the quantity in 14 years. Even with an interest rate of 5% that is considered rather modest, the doubling time happens pretty quick.
There are numerous stories about the power of doubling that have been passed down throughout history, my favorite is about the game of chess invented by a mathematician. Here, a certain king was so delighted with the game of chess that he decides to reward the inventor with a gift. For his reward the inventor requests that he be paid in a quantity wheat equal to a total sum of wheat placed on the 64 squares of the chessboard, starting with just one grain of wheat on the first square and then doubling this number on each the remaining 63 squares. The king assumes this will add up to a very modest reward and agrees to the inventor’s request. But with the doubling power of two working through the 64 squares on the board, the king soon discovers that the reward is anything but modest. In fact what it adds up to is 500 times the 1976 worldwide harvest of wheat.
Now let’s move on the our main story here that once again shows us the power of doubling starting off with a very small quantity. This illustration put together by Chris Martenson (www.chrismartenson.com) is based loosely on a talk given by Dr. Albert Bartlett. Martenson takes us to Fenway Park home of the Boston Red Sox where he constructs a hypothetical scene in the stadium consisting of the Red Sox pitcher, a loyal fan and a simple dropper bottle.
The game is set to begin at 12 noon, but the pitcher won’t be throwing any fast balls and instead is handed a dropper bottle of water with instructions to place one drop of water in the palm of his hand beginning at 12 :00 and then to double the number of drops placed in his hand every minute. Notice what we have done here is to set up the preliminary components necessary to plot graphically the x and y axis of an amount of something that is increasing over time. We are also creating a heuristic device (Fenway Park) to illustrate from a more intuitive angle simple principals of compounding and exponential growth that are constantly at work in our world. So you, as a dedicated Red Sox fan are seated in the bleachers at the top row of the stadium and being a hard core fan, you will be staying for the full nine innings.
Now the game that is being played out in front of you has nothing to do with baseball and everything to do with the amount of change in drops of water falling into the palm of the pitchers hand. The pitcher has been instructed to place a drop of water in his hand and to double the amount of drops every two minutes until Fenway Park is completely filled with water.
The question is not who is going to win the game, but how long you, our loyal fan will remain seated in the top row at Fenway Park before it is completely covered with water? Remember that the amount of water drops from the pitchers water bottle will be doubled every two minutes. So for the first six minutes you see that there is barely a tablespoon of water and you are thinking that you will be sitting there for at least a millennium before the water even begins to cover the ground on the field. But with exponential change the growth is always slow at the beginning, inevitably moving into the curve on the hockey stick where it really begins to pick up speed before it begins to go critical.
Okay, so it’s time to place your bets on just how long it will take to fill up Fenway Park and get you out of your top seat in the stadium. If you think you will be sitting there for a 1000 years, well you are more then a little off….you are not even in the ball park. If it’s a hundred years, still not even in the ball park. What about a decade, a year….a month? Not even close. The correct answer is that the stadium will be full and you our dedicated Red Sox fan will be completely under water at 12:49 on the same day.
Now in order to grasp the full import of the events taking place at here, we need to ask one other question and it’s a question that has much to do with how we as humans really prefer to operate in a state of ongoing denial regarding the simple laws of exponential growth.The question is, at what time of the day will the Park still be 93% dry, giving our fan the distinct impression that he will still be sitting high and dry for a long time to come. The answer here is 12:45, just four minutes prior to completely going under.
Now the main point here with our illustration is that with exponential growth things can go along for a long period of time with seemingly very little change, and then all of a sudden it reaches critical mass and bang that’s it and the explosive change takes off. Again, we are back to rounding the bend on the hockey stick curve where the amount of change really only becomes significant in the last few minutes where the line on the graph goes vertical and the Fenway Park fan is unexpectedly (but predictably) under water.
The question before us is always, when will things go critical? And the answer is, we will have little or no warning. Now lets shift the game out of Fenway Park. We will play by the same simple rules of exponential function, but instead of looking at drops of water filling up a stadium we are looking at compound interest with the US dollar emptying out the ‘stadium’. The stadium in this example is our communities, the regions where for generation after generation we have built value into the land, our farms, our businesses, the whole infrastructure that allows our communities to operate smoothly. The two main players in the game our now value and debt and they always move in indirect proportion to each other.
In a debt currency system all the money that we use on a daily basis is loaned into this system somewhere, to somebody at some rate of interest. The crux of the matter is that there is no way of paying off the interest because all money created bears more interest, so therefore this interest will continue to compound, yielding again our hockey stick curve.
There are a number of other factors that also influence the rate of debt compounding including the fact that some of this interest will end up getting spent back into the system. But irregardless as a general rule, this debt will continue to compound on a collective level having a pernicious affect on both our spending power due to inflationary pressures to keep pace with compounding debt (US dollar loses value over time) and also our capacity to maintain created value in our communities through succeeding generations that are forced to mortgage more of their labor to pay the hidden costs on this debt.
It is also important to consider the various levels of debt. At the national level, debt is theoretically irrelevant. The Treasury acting in concert with the Fed creates ‘thin air money’ through its power of seignorage. Neither the principal nor the interest are ever intended to be repaid, it is just rolled over into more of the same bond offerings. The real purpose of the national debt is ultimately to enforce central government policy on the states through austerity measures allegedly due to the need to ‘balance the budget.’
However, at the public level of business and consumer, debt is highly relevant, and because all money is loaned into circulation as a debt, and this amount of debt in the system will always exceed the amount of money. This results in a highly competitive atmosphere for access to capital, forcing businesses and consumers to compete with debt, resulting in scarcity which fuels inflation leading to a vicious cycle of boom and bust, collapse and control. In a debt money system it is always, ‘inflate or die’, the primary policy responsible for causing rapid resource depletion on a global scale.
A debt money system is purposely designed to deplete resources and to extract value, for the very simple reason that this depletion and extraction will always guarantee huge profits for the financial sector of the economy at the direct expense of the remaining economy. Again we are back to inevitably moving through the curve in the hockey stick as the debt increases exponentially (in reality it’s compounded) over time. This value extraction through debt is in fact the principal reason that our system of modern debt banking was created in the first place beginning with the Dutch Wisselbank founded in 1609 and then foisted upon England in the 1690′s with the Charter of the Bank of England after the demise of the Stuart Kings and the placement on the English throne of the Dutchman King William of Orange, a pawn of the Wisselbank. This same game of course gets played out over and over again and I have covered the subsequent events in further detail here, http://currencycommonsvt.org/2010/08/the-colonial-money-revolution/.
You can look at it as the perfect class warfare strategy where never a shot is fired and as Thomas Jefferson warned, “If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered”. Any of this sounding familiar yet?
This mechanism of value extraction is continually at work in your community, moving value from the center where it is created straight out to the periphery and into the finance sector that moves inexorably to create a economic atmosphere of greed, scarcity and competition, the three primary qualities that characterize our modern money system run amok.
It is greed on a scale largely unimaginable where a government completely captured by the financial cartel continues to pay tribute to the finance sector that is now looking to complete the shakedown of the middle class. It is scarcity in the form of austerity budgets, the privatization of public assets and the end of a 100 years of labor rights and collective bargaining. And it is greater and greater competition for fewer and fewer jobs due to 40 years of outsourcing.
The really ironic part of the dollar trap is that we like to continue to believe that there is a way out. Everybody has a different fix. If you are part of the right it’s about balancing the budget through austerity programs and further privatization. If you are part of the left you push for cutbacks in defense spending. If you are a libertarian you push for gold money. And if you are hip reformist you advocate for a Public State bank. It is all to no avail as the water will continue to rise because one of the key requirements that underlies all of modern banking is that it must perpetually expand. Now we put a little spin on it and call it Qualitative Easing and sit around waiting for the trickle down affect. Stay tuned for QE3.
It is this perpetual expansion driven by dollars trying to keep pace with debt that has pushed resource depletion to the brink, wrecked lives, families and economies from one side of the globe to the next, and continues to fuel the flames of disaster capitalism where the race to the bottom is guaranteed to profit the 2 percent at the top. The debt money system was never designed to work for We The People. It was designed to work for the financial sector. It cannot and will not work otherwise. And this is why laws forbidding usury are some of the oldest laws ever written. Until we come to terms with this fundamental fact that debt extracts value and depletes resources forever, yes forever, we will have little or no sustainable impact whatsoever on the course of human affairs given that the global economy is based entirely on a debt system of exchange.
At this moment we are all seated in the top row at Fenway Park looking out over the playing field, concerned that the water is rising, but thinking the game has a long way to go before its over and still pondering the question: When will things go critical? Just remember the hockey stick curve, four minutes prior to Fenway’s complete inundation, the park was still 93 percent dry. In other words, the game is now in the top of the ninth inning. Batter up!