Whiteside's corollory of Einstein's supposed law of compound interest ...


As explained in the last point, Einstein is often credited, probably wrongly, with having made a statement on the long term impact of compound interest. along the lines of


"Compound interest is the most powerful force in the universe"

Whether or not he actually said this, is is certainly true that the cumulative effect of compound interest over a perid long enough to allow an investment to double repeatedly in real value - which requires a period of some decades and interest rates which are nearly always above inflation - can be dramatic.

Unfortunately the converse is also true and this gives rise to what I shall call "Whiteside's Corollory"

"Negative real interest rates, if sustained continuously for a decade or more, are one of the most destructive things which can happen to an economy."

Britain has already had rock bottom interest rates - well below the rate of inflation, and which therefore have the effect of destroying the purchasing power of savings - for longer than the present government has been in office.

This is only sustainable as a short term measure and only justifable in an economic emergency.

I happen to believe that the catastrophic economic legacy left behind by the last Labour government was such an emergency and accept that there are extremely good arguments for the Bank of England's declared policy of not increasing interest rates until unemployment drops below 7%.

Nevertheless a policy of negative real interest rates remains harmful to savers and extremely damaging in the long run.

Britain's long-term economic strategy needs to ensure that interest rates go back above inflation as soon after unemployment drops below 7% as can be achieved without the sort of sudden shock which might choke off the recovery. And thereafter they need to stay there.

There might be a temptation for someone reading this post to ask if I am criticising the government's economic policy.

Actually no, because the most important precondition for getting interest rates back into positive territory is to cut the deficit, which the coalition government is trying extremely hard to do.

But I am sounding a warning why cutting the deficit, and returning interest rates to positive real levels, must remain an economic imperative for this and any future government.

Comments

Jim said…
well, you are on the right track in your thinking. Interest rates must rise, though judging by your post you are using the hand cart found in old films and cartoons to head along the track. The answer lies in taking the Japanese bullet train.
3:49 pm
Post a Comment

Popular posts from this blog

Nick Herbert on his visit to flood hit areas of Cumbria

Please note that the post below was published more than ten year ago on 21st November 2009 Nick Herbert MP, shadow cabinet member for the Environment, Food, and Rural Affairs, was in Cumbria this morning to see the areas affected by the flooding. He writes on Conservative Home about his visit. Here is an extract. I’ve been in Cumbria today to see the areas affected by the floods. I arrived early in Keswick where I met officials from the Environment Agency. Although the river levels had fallen considerably and homes were no longer flooded, the damage to homes had been done. And the water which had got into houses wasn’t just from the river – it was foul water which had risen from the drains. I talked to fire crews who were pumping flood water back into the river, and discovered that they were from Tyne & Wear and Lancashire. They had been called in at an hours’ notice and had been working on the scene ever since, staying at a local hotel. You cannot fail to be impressed by the
Read more

Quotes of the day 19th August 2020

Image
"Wise men profit more from fools than fools from wise men; for the wise men shun the mistakes of fools, but fools do not imitate the successes of the wise."  ( Cato the Elder , who lived 234 BC - 149 BC, quoted in "Lives" by Plutarch.) There is a similar saying by Germany's Iron Chancellor, Otto von Bismarck: Benjamin Franklin is supposed to have put the same saying in a more humorous form: "Wise men profit by the mistakes of others, while fools will not learn even from their own blunders." See also this thread on the "Quote Investigator" website . Let us all be wise and learn from the events of the last few days.
Read more

Quote of the day 24th July 2020

Image
I was moved to put the passage below forward as a quote today when I saw a horrible post on twitter from someone writing that it was "excellent" that someone who took a different view from her about Brexit had died. I won't write which way round it was so that all the Remain supporters can assume the post was from a Brexit fanatic welcoming the death of a remainer and all the Leavers can assume it was a Remainiac welcoming one less Brexiteer. There's been plenty of nasty stuff on both sides but if you catch anyone of your own viewpoint  posting something like that who might listen to you, please do call them out on it - and point out that they're giving everyone on your side of the argument a bad name. Anyway, here's the quote from John Donne.
Read more