The American Dilemma and How We Can Fix It

Posts tagged ‘Albert Einstein’

A PRIMER ON ARITHMETIC (COURTESY OF A. EINSTEIN)

As a follow up to the two previous posts on government accounting it just so happened that I was reading today that Albert Einstein’s brain was “different” from most of ours.  Without going into the specifics (of which I have only a poor grasp), let me just acknowledge that he was a genius – whatever the reasons for that might have been.

Einstein claimed that his greatest discovery was “The Rule of 72”.  He happened upon it when he was employed in the patent office as a clerk and had some down time in his duties.  The rule is very simple.

If you want to know how long it takes money to double at a specific compound rate of interest, divide the interest rate into 72 for an approximation.  In other words, one dollar will double at a rate of one percent interest in approximately 72 years; at two percent in approximately 36 years, at three percent in approximately 24 years, etc.

This rule becomes less accurate the higher the rate of interest – as we can see by inspection.  An interest rate of seventy-two percent is not going to double in the expected one year but show an increase of seventy-two percent.  The smaller the rate of interest, the more accurate the calculation.

What the rule demonstrates is the power of compounding.  That can work either to our advantage or to our detriment.

The handwritten chart below demonstrates this principle at five different interest rates.  There is a reason that the chart is handwritten (pardon my calligraphy).  Yes, I can use Lotus and Excel spreadsheets.  Yes, they look neater.  But plugging in formulae and letting a computer do the thinking for us is one of my pet peeves.

You see I believe that, notwithstanding the wonderful achievements we have attained through technology, once in a while it is imperative that we use our own brains to solve problems.  Otherwise, we unintentionally wind up dumbing ourselves down – and there is a lot of that going around.

This example assumes that Grandma made a gift to her grandchild in the amount of $100 at the age of sweet 16.  The child had the choice of placing this gift in an investment that would yield a consistent return at one of five specified interest rates, ranging between two to twenty-four percent.  (You will say, there is probably no investment available that would yield a consistent twenty-four percent and you would be correct.  In today’s market environment it’s hard to find an investment that yields a consistent two percent).

This example also assumes that there would have been no tax collected on the increase of the investment during the years from 16 to age 70 when the grandchild cashes in her gift.  (Now there’s hallucinatory thinking elevated to its epitome).

So here’s the chart:

CCF11202012_00000

As you can see, after fifty-four years of working on behalf of the grandchild, the investment which yielded two percent has now grown to a mere $286.  (I computed the difference from age 52 to age 70 manually since this investment required a 36 year period to double).  That’s pretty anemic.  Of course, the investment at four percent did better – but not twice as well as many would expect.  It did almost three times better than its lower tier brother.

And then we get into the shocking return on the eight percent investment.  Again, twice the interest rate had the effect of producing eight times the result.  And the twelve percent interest rate dwarfed that, providing the beneficiary of Grandma’s original $100 gift by rewarding her with $51,200 in her account.  We’ll save discussing the twenty-four percent interest rate for just a bit.

It really is amazing how the difference in the interest rate on an investment coupled with long time periods results in different returns.  Unfortunately, most of us are not cognizant of this because we are never taught these principles in our schooling – and many of our parents are as unaware of them as our teachers.

Now there is good news and bad news in all of this.  You’re probably correct in believing that receiving a guaranteed return of twenty-four percent a year is un-attainable.  And you’re right – unless you happen to be a bank that issues credit cards to less than top notch borrowers.  A twenty-four percent interest rate on unpaid balances is not unusual for people who fall into that category.

So instead of an investment, let’s think of this $100 as a loan.  The bank which issues it is very generous.  They are making it for a 54 year period – and the terms (other than the rate of interest) are very beneficent.  Nothing will be due until the loan recipient reaches age 70 – at which point the principal and interest will become payable in full.

As you can see from the chart, this $100 loan and accrued interest has grown to the staggering amount of $26,214,400.  Egad!  And that is the negative effect of compound interest.

After reviewing and, I hope, thinking about this for a bit, you will perhaps understand why the American consumer has gotten herself into very muddy waters with credit card debt.  But that is merely the tip off the iceberg.

We have a government that has similarly encumbered itself (and all of us) in the same problem.

It is estimated that the interest that will be due on our National Debt for calendar year 2012 will be approximately $360,000,000,000.  For those of you who, like me get lost with all those zeroes, that’s $360 Billion.  Take into account, that amounts to an interest rate of only 2.25% of our current outstanding balance – even with the Federal Reserve’s current policy of artificially suppressing interest rates.  The reason the effective interest rate is this high is because a significant amount of this debt was issued at higher rates than the one quarter of one percent rate that is currently in effect.

So if you want to think about an apocalyptic event, consider what a return to normal interest rates, (in the area of 3 – 5 %) would mean in terms of the amount of money that would be required to pay the interest on our $16 Trillion National Debt balance.

And that’s why, when you hear people say that we have encumbered ourselves and our children and our grandchildren with an almost unresolvable problem – short of default – they have a serious point that they are making.

And on that happy note, I’m going to spend a bit of time reading and then head off to slumber land – thinking about the National Debt and Albert Einstein.

Darn, that guy was smart.

English: Albert Einstein Français : Portrait d...

English: Albert Einstein Français : Portrait d’Albert Einstein (Photo credit: Wikipedia)

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GOVERNMENT ACCOUNTING –PART II

It is the Tuesday before we turn our attention to our national day of Thanksgiving.  We have a lot for which we should be grateful despite the many challenges that lie ahead of us.

I began writing this blog a little over a year ago.  With the exception of about ten posts which were the work of others and which I re-blogged, the writing has been an expression of my thoughts and feelings, my hopes and my concerns.  There are now over 450 original posts which have been uploaded for your review.

No one either lives or writes in a vacuum.  If a person were to write the “Great American Novel” and no one read it, would its existence matter?  And so I remember that when I began and started to learn to navigate a little bit around Word Press, the excitement I felt when someone first clicked the “like” button on something I had written.  I remember thinking, “Oh my gosh, somebody actually read what I had to say.”  I guess we all need a little validation for our efforts.

As my blogging journey continued, I suddenly had a “follower”.  Just one – but that was exciting.  And then another and a few more.  As I began reading other blogs, it was only natural that I noticed how many followers some of them had.  Hundreds and hundreds, which led me to feel that what I had to say was probably only important to me and perhaps a handful of others.

And while I wanted to stop and enjoy a private pity party for a bit, I realized that if what I had to say mattered only to an audience of one – myself – I was honor bound to say it – with or without the acclamation of others.  It seems to me that is what personal honesty and responsibility are all about.

Perhaps one of the nicest compliments I have heard about my posts has come from two different people at the dog park who are not “followers” but are regular readers.  In the past week both of them have commented on specific posts and have described them as being written with “passion”.  I can think of no higher accolade and I am grateful to them for those words of encouragement.

And it is to all of you have taken the time either to click the “like” button and especially to those of you have taken your time to leave a comment to whom I want to express my gratitude and thanks.  Although you may not have realized it, your comments were a sustaining nourishment that enabled me to get as far with this blog as I have.

And there is one more thing about your comments which needs to be said.  You have provided the inspiration for many of these posts by causing me to think about things which otherwise I might have overlooked.  Such is the case with this post’s predecessor – which before reading the three comments that are currently posted, I considered a completed work.  But your thoughtful commentaries have now given rise to this post, and two more which will follow in the next few days.

So with a grateful heart, I say to all of you, “Thank you.”

And now – on to the subject of this post which I dedicate to all those who have taken their time to comment in the past.

When Gracie and I returned home this morning from the dog park I was sitting out back enjoying a beautiful morning and a strong cup of coffee.  Gracie, who in many ways is my muse, was happily munching on a homemade dog biscuit and I was thinking about the comments that “illero” and “irishsignora” and “William Lawson” had left on the first episode of “Government Accounting”.  And then I was inspired.

I agreed in my reply to “illero” that the amount of money deprived our seniors through SSA’s accounting gimmickry was chump change, although we both felt that the practice was petty and wrong.  But then I read “irishsignora’s” comment about how she is teaching her children about the value of things.  The combination of the two caused me to think about the real story here – one beyond that which I reported in the first post on this subject.

That caused me to think about Albert Einstein who understood the importance of “compounding” (read more in the next post) and that led me to think about the implications of this practice not just in one year but over periods of time.

If you followed my logic in “Government Accounting” (I wonder if I have to go back and rename it Part I – nah), SSA is currently saving $200 Million a year through their practice of always rounding down to the next lowest dollar the benefits that they pay out to seniors.  When you have a government running a $1 Trillion annual deficit, that is truly small potatoes.

But think about it for a moment.  According to the SSA, the “average” beneficiary receives a payment for a little over 16 years.  So, assuming that there is an annual increase in benefits of any amount (we just had a three year period where there were no increases – but that is an all time first in the history of the program), each year this accounting gimmick is going to compound the savings to SSA by an equal amount.  So in year two, the savings will amount to $400 Million, in year five, $1 Billion and in year sixteen, $3.2 Billion.  This is no longer “chump change” – and I think the late Sen. Everett McKinley Dirksen would strongly agree.

And what is the cumulative amount denied our senior Social Security recipients over this sixteen year time horizon?  It totals up to a rather staggering $30.2 BILLION.

Those of our elderly who may occasionally have to resort to eating canned cat food could certainly trade up and buy a whole lot of filet mignons with that much money.  Even at the current market price.

LET FREEDOM RING

When someone shows exceptional talent, far beyond that with which most of us are gifted, you would think we would celebrate that gift and delight in it.  That is how we view many of our sports heroes and movie stars.  But it has not always been so.

There was a woman born in 1897 in Philadelphia, PA by the name of Marian Anderson.  She was perhaps the greatest classical contralto of the 20th century.  She was a black woman.

Marian Anderson was active in her church’s choir where her aunt noticed her exceptional talent.   She worked with her niece but the family was too poor to be able to afford professional music lessons.  But it was her aunt’s influence which she credited for her pursuing a musical career.  The two of them would go to free concerts whenever the opportunity presented itself.

Because of the accidental death of her father when she was 12 years old, Marian, her mother and two sisters moved in with her paternal grandparents.  The family was unable to send her to high school but years later she did receive her diploma.  She would often be asked to sing a few songs and the twenty-five or fifty cents that she earned would help to sustain the family.

The Pastor of her church and others in the black community saw a star in Marian Anderson and together raised the money that enabled her to take lessons from a private teacher and to attend high school.  In 1921 she graduated and then applied to The Philadelphia Music School but was turned away because of her race.

In 1925 Marian Anderson won a competition that was sponsored by the New York Philharmonic.  It was the break she needed to embark on what would ultimately become an incredibly successful career with glowing reviews from the New York critics.  But racism still held sway even in the liberated north and her career sputtered.

In 1930 she began on a European concert tour, giving her first performance in London.  She found that music lovers on the continent did not share the same racial prejudices as their counterparts back home and for the next four years she enthralled audiences with her performances.

In 1934 she signed as a client with Sol Hurok, the greatest impresario of the 20th century.  He was able to persuade her to return to America and she gave a performance in New York’s Town Hall which received critical acclaim.  But the thing that promoted her career the most, ironically, was racism.

In 1939 she was refused permission to sing in Constitution Hall by the Daughters of the American Revolution because she was colored.  The District of Columbia similarly refused to allow her to perform in the auditorium of an all-white high school.

As a result, then first lady Eleanor Roosevelt and others, angrily resigned from the DAR.  They further persuaded the Secretary of the Interior, Harold Ickes to allow her to give an open air concert from the steps of the Lincoln Memorial on Easter Sunday to a live audience of 75,000 and a radio audience of millions.

The link below will take you to the Secretary’s introduction and to Marian Anderson’s singing “My Country ‘Tis of Thee.”   There is a twenty second pause after Mr. Ickes concludes his speech until we hear Marian Anderson sing.

http://video.search.yahoo.com/video/play;_ylt=A0S00My.ovtPaBcAkpr7w8QF;_ylu=X3oDMTBrc3VyamVwBHNlYwNzcgRzbGsDdmlkBHZ0aWQD?p=youtube+marian+anderson&vid=E4667FC736FEE53231E3E4667FC736FEE53231E3&l=5%3A32&turl=http%3A%2F%2Fts3.mm.bing.net%2Fvideos%2Fthumbnail.aspx%3Fq%3D4618121269280782%26id%3D19a93d12c56bb65c9692eac28a61ed8a%26bid%3D4zEy5f42x39m5A%26bn%3DLargeThumb%26url%3Dhttp%253a%252f%252fwww.youtube.com%252fwatch%253fv%253dAkPI0VKM4Fk&rurl=http%3A%2F%2Fwww.youtube.com%2Fwatch%3Fv%3DAkPI0VKM4Fk&tit=Marian+Anderson+1939+Lincoln+Memorial+Speech+and+Song&c=2&sigr=11aap95t6&

During the Second World War and the Korean conflict, Marian Anderson entertained the troops.  She gave about 70 concerts a year and is widely reported to have been the reason that other black artists like Leontyne Price and Jessye Norman had their opportunity to break into the world of opera.

During the 1960’s she worked in the civil rights movement and became a good friend of Albert Einstein who took her into his home after she was denied a room  by a Princeton, NJ hotel owing to her race.  She stayed with him on several occasions.

In the ensuing years, Marian Anderson was the recipient of many awards, including the Congressional Gold Medal, the George Peabody Medal, and a Grammy for Lifetime Achievement.  She passed away in 1993 at the age of 96 but she left a legacy behind of which all Americans, whatever our color, may be proud.

“Let Freedom Ring.”

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