Thursday, August 18, 2011

Growth, Debt, and Investment

(Continuing my series on economics)

The world economy has been growing steadily for hundreds of years. Usually at a rate of 1-4%, but any continual growth is exponential.

This is the incredible power of compound interest. 4% growth seems low. You have $100 now, and you'll have $104 next year - big deal. But, in 20 years, you'll have $219.11. In 40 years, $480.10.

These investments are needed to counteract inflation, and to provide for yourself after you are unable to work.

Investments also provide the funds involved in debt.

Some people have a knee jerk reaction against debt ("all debt is bad"). This is because a lot of people misuse debt, and are enslaved to it.

There is nothing inherently wrong with debt. It provides a way to access future earnings. A person with an idea for business takes out a loan, and starts that business. The gains from the business pay back the interest on the loan. The lender gains interest, which protects their savings against inflation.

Debt and investment are two sides of the same coin - as long as the economy is growing, and has win-win situations.

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