Welcome to European Tribune. It's gone a bit quiet around here these days, but it's still going.
jeez you guys, I'm supposed to be working for a living.

here's a thought:  perhaps what we call 'capitalism' today might better be called 'interest-ism' or 'usury'.  our financial mindset relies heavily on the notion of compound interest, an inherently aphysical concept which cannot be mapped onto the reality of biotic systems or the energy or mineral budget of a planet.  to realise these unnatural rates of return, real capital (natural capital, the only kind there is) has to be liquidated -- much as a business can be liquidated by selling off its premises and physical plant to realise a high return in a single year.  we maintain the fantasy of interest-ism only by liquidating real capital.

it has long seemed to me that compound interest is an inherently absurd premise.  how about a thought experiment?  let's say that in the time of Augustus we -- you or I, who statistically speaking might most likely have been skilled-crafts slaves or artisans at the time -- had invested a denarius -- call it a single copper penny -- at 5 percent interest compounded annually, and that the world financial system had remained stable ever since -- 2000 years for a nice round number.

compound interest calculation

tcl>expr 1 * pow(1.05,2000)                        

after 2000 years we'd have 2.39 times 10-to-the-42nd- power in pennies today.  how big is that number?

a pre-1982 US penny (when they were still mostly copper) had a mass of 3.1 grams.  if we pretend that our Roman copper penny was actually a US penny, then we would now, in theory, be the proud owners of ummm... 7.412e+42 grams of copper.

a kilogram is about 2 lbs or about 1/1000th of a US short ton.... we or our lineal descendants would own 7.412e+39 kilos of theoretical copper penny here, or 7.412e+36 tons of copper. check me on the numbers -- I'm doing this on the fly, back-of-envelope stuff -- but even if I've dropped an order or two of magnitude the grotesquerie of the calculation seems self-evident.

"Worldwide economic reserves of copper are stated to be 470 million tonnes by the USGS 2005 summary for copper. "  (ignore the rest of the article, this USGS quote is the relevant bit).

470 million tons is only 4.70e+8 -- so compound interest if applied literally to metals, would award us after 2000 years at 5 percent, significantly (to say the least) more copper than the entire world currently owns or has at its disposal.  by, what, 27 orders of magnitude?

but money is not metal, we argue -- we went off the gold standard years ago and the world didn't come to an end.  so what we would really have is 2.39 times 10^42 pennies -- pennies worth far, far less in real purchasing power than the same weight of copper would have been in Roman times.  pennies aren't even copper any more.   OK, fair nuff.  so how many trillions of dollars is that?  a trillion in the US is a one with 12 zeros or 1 times 10^12.  we would have some 27 orders of magnitude more than 2.39 trillion dollars.  dunno about you, but my brain sits down and sulks when it encounters numbers like this :-)

In 1998 the World Bank claimed that the total GDP of all surveyed nations was 28.8 times 10^6 millions of dollars, or about 2.9 times 10^13 dollars.  So our invested penny would have increased in value to more than 10^29 times the total world GDP...

how much purchasing power is that?

Gold is around $500/oz right now, or 2 oz for a grand.  So we could buy, ummm, 2.39 times 2 times 10^39 ounces of gold.

"What is the mass of planet Earth?" The quick answer to that is: approximately 6000000000000000000000000 or 6e+24 kg -- in other words, our Roman penny after 2000 yrs of compound interest would be worth a heckuva lot more gold than the total mass of planet Earth, at 2005 gold prices.  many times more.  what's a few orders of magnitude once we're in the realm of fairyland already?

this is why it seems to me that there's something inherently absurd about compound interest -- it's a fiction.  any system based on the idea that real wealth can accrue by usury, is going to need a devastating reset and devaluation every few years -- let alone centuries -- to overcome its own divorce from physical reality... real wealth in the end comes down to material reality.  we cannot have more clothes without using more fibre, dyes, and energy to produce them.  we cannot have more cars (regardless of the power source for their traction engines) without using materials and energy to make them.  we cannot have more people eating more food without the water, trace minerals, sunlight, land, and other inputs required to produce sufficiently nutritious food for them to eat.  not to mention the fuel and water to prepare it.

in the real physical world, interest does not compound, or compounds only gradually for a limited time and then stabilises at a fixed return rate.   fibonacci and other geometric sequences can be approximated by animal or plant populations fed by a nutrient bonanza or deprived of an effective predator, but they quickly outstrip the baseline "return rate" of solar energy, photosynthesis, and water recycling and suffer a population crash.

creatures living in a sustainable ecological niche survive by squandering (losing) some of their reproductive potential to predators and mishaps (thus preventing a geometric population growth) and by consuming the yearly "rate of return" of the foodstuffs available in their niche.  not all manage to do so.  some populations show K selection and others R selection, that is, R selected species reproduce rapidly and go through a boom/crash cycle, and K selected species demonstrate a levelling-off effect where their population stabilises fairly close to the resource limits of their habitat.

consumer capitalism presupposes that even where populations may level off, consumption is theoretically infinite;  one person in the US now routinely consumes something like 17 Bangladeshis'-worth of energy and raw materials per annum.  there is no obvious ceiling on the desire for material possessions and conveniences; and lest that desire accidentally approach satiation, it is relentlessly provoked and cultivated by the marketeers, driven by their own necessities.  the fantasy of compound interest requires infinite growth, (accelerating too) to repay the ballooning burden of debt on usurious loans and to return liquidationist rates of return to deluded stockholders.

so I agree with the Guardian article, except for the caveat that what we call "capitalism" today is actually more like rentier-isme, or "finance capitalism" or "the usury state."  it's an absurd ideology that requires us to liquidate real capital to produce unsustainably high short-term returns.  more than just the technology has to change, to gring us to a genuine "capital"-ism rather than a breakneck casino "interest"-ism.  [I note also that compound interest vastly favours the larger fortune, so that those who have accrued in the past see ever-accelerating rates of accrual and wealth gaps widen more and more rapidly over any stable investment period;  wealthy families (especially with the repeal of estate taxes) and corporations act as long-lived "super-individuals" who are positioned to realise the long-term absurdity of compound interest to accrue grotesque sums of theoretical wealth.  so interest-ism also accentuates the accreting of vast wealth around smaller and smaller elites.]

a long time ago my father -- not the most progressive of thinkers by any means -- told me that any rate of return higher than 3 pr 4 percent (annual, not compound) on an investment was an indicator of shady dealings and/or high risk.  his words strike me today as far more Delphic (and frightening) than he ever intended.

one way to deal with the structural usury problem (the problem that has the third world buried under a mountain of compounding debt that can never be repaid) is the ancient Hebraic concept of the Jubilee Year.  instead of waiting for a crash-reset, every N years (I think it was seven?) all bad debts are written off and everyone starts over.  so usurious interest cannot compound to planet-crushing levels.  another option is to outlaw usury -- prohibit compound interest entirely and fix reasonable rates of simple return, proportionate with biotic return rates.  and so on.

the more I think about it, the more it seems to me that as long as compound interest is at the heart of our understanding of finance, investment, and profit, we are in irreconcilable conflict with the biological and physical envelope of our own existence.

I'd be interested to know whether this apparent paradox has occurred to others and what possible resolutions have suggested themselves.

The difference between theory and practise in practise ...

by DeAnander (de_at_daclarke_dot_org) on Thu Feb 9th, 2006 at 08:43:37 PM EST

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