Thursday, May 06, 2004

Deliver Us From Reality - Part 3

Even the repayment of debt, the pre-requisite of capitalism, is mathematically possible only in the short-term. As Heinrich Haussmann has shown, a single pfennig invested at 5% compounded interest in the year 0 AD would, by 1990, have reaped a volume of gold 134 billion times the weight of the planet.

Compound interest makes principle grow hugely over time in ways that are indeed profound and surprising, but this statement is bonkers. For a start, there was no year zero AD, but I quibble.

Come with me through the following thought experiment: In practical terms, if I had my penny, what choices would I make as to how to use my penny?

Throughout history, inflation devalues assets, both governments and individuals default on their debts and political changes leave property rights in flux. Our hypothetical investor would be quite likely to find himself losing some or all of his assets, in the periodic changes of dynasty in China or in the periodic collapses of political order in Europe, from the fall of Rome to the Russian revolution. Look in the Financial Times and you won't see prices posted for markets in Julius Caesar's debts or shares in Crassus' money lending business.

Remember also that under law usury was forbidden from roughly 400 AD to 1400 AD. England's Jews and the Knights Templar both learned the hard way, when their spendthrift creditors to liquidated their debts by liquidating the debtors.

In reality, no asset would survive as long as the example assumes; even land would be certain to be confiscated or lost over twenty centuries. Only really in England have some aristocratic families been able to hold onto significant holdings, and only then since the Norman Conquest, in a country exceptional in Europe for its political stability.

The only real alternative would be for our theoretical investor to bury the penny in the ground for his extremely patient and no doubt multitudinous descendents to retrieve, with no interest!