November 9, 2023

Senator Lippincott's Weekly Column

The Power of Money

If you want to get a teenager's attention, ask him if he would like to become a millionaire by the time he's 65. Tell him it will take a relatively minimal investment and absolutely no effort after he reaches the age of 21. 

That's the power of the “Rule of 72” and it's a principle far too few of our citizens and, sadly, even many of our elected leaders don't seem to understand.  Example: divide the interest rate you are receiving on your money (in this case 10%) into 72 = when money will double. ie. 72/10% = 7.2 years.  

Here's how it works. If a young person were to invest $2,000 each year for a period of six years (say from the age of 16 until 21) into an individual retirement account (IRA), where it will grow tax free, and invest it in an S&P 500 Index Fund which has had a 10 percent return over many decades, the Rule of 72 will begin to work to multiply that investment. Seven years later, by the time that person is 28, that $12,000 will have doubled to $24,000. By the time the investor is 35 it will have become $48,000, by age 42 it's $96,000, it multiplies to $192,000 at age 49, $384,000 at age 56 and pushes over the $1 million mark by age 65. If the investor still doesn't touch the money by the time he or she is age 70, that initial $12,000 investment at age 21 will have become $1,536,000. Even with the current runaway inflation, most people could live quite comfortably on that during their retirement years.  

Of course, the secret is having the discipline to leave your savings alone to grow into a significant nest egg. As an investor, compounded interest works for you but when you borrow money, it works against you in the same way.     

Nebraska, along with 40 other states, has a balanced budget requirement in its state constitution. As a state government, we live within our means! But this is not true of our federal government.  

The U.S. government is currently $33.7 trillion in debt. The interest on that debt is 8 percent of our budget and is forecast to be 14 percent of our budget by 2033 when it will exceed both our defense spending and Medicare expenses. The cost of that interest in 2023 is $659 billion, which is a whopping $184 billion more than last year and the interest is ballooning at an enormous rate. As a debtor nation, the Rule of 72 is not Uncle Sam's friend.  

Who do we owe the debt to? The interest on this debt is paid to individuals, businesses, pension and mutual funds, state and local governments and, worst of all, foreign entities. One third of our overall national debt is owed to foreign countries with China being one of them. We owe the Chinese Communists $859 billion. (Japan is our No. 1 debt holder at $1.1 trillion)  

We are the world’s leading debtor nation and presently 43 cents of every dollar is borrowed. Needless to say, we are recklessly speeding toward a 1929-like cliff in terms of our nation's economy.

Mostly because of the printing of money since 2020 to pay for COVID relief programs, inflation is the highest it's been in 42 years. The top causes of this hyper-inflation are out-of-control government spending, which needs to be put on pause and social programs, many of which are incentives not to work (we desperately need welfare reform). Finally, in order to pay for this profligate spending, the government printing presses have been putting money into the economy at a rate never seen before in our history. 

In May of 2021 the website Tech Startups reported this startling statistic: “40 percent of U.S. dollars in existence were printed in the last 12 months.” By December of that same year that number had doubled, leading the site to report, “Since January 2020, the U.S. has printed nearly 80 percent of all U.S. dollars in existence.” 

Clearly the Fed needs to curtail the money supply because more dollars chasing fewer things equals inflation. 

It was economist Thomas Sowell who said, “The first lesson of economics is scarcity; there is never enough of anything to fully satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics.” This is certainly true of the printing of money. When you make more of it, it is worth less! Simple!  

Henry Hazlitt made this poignant observation, “Once the idea is accepted that money is something whose supply is determined by the printing press, it becomes impossible for the politicians in power to resist the constant demands for further inflation.”  

Indeed, when politicians are asked to appropriate tax dollars for various programs, it's easy for them to say yes. After all, it's not their money. It's yours!  It takes discipline and solid principles to know where to spend taxpayer dollars and where not to. 

Down through the pages of history, inflation and monetary instability have been the cause of the fall of many countries. Germany’s hyper-inflation following WWI led its civilian populace to turn to someone (anyone) who would promise to lead them out of their demise. This led to the rise of Adolf Hitler and WWII. 

The primary role of the government is to keep the peace, and when that peace is violated, to exact  justice and restore the peace, while guarding the individual liberties of its citizens! Beyond those duties, the government does not perform well. It works least effectively as a financial institution. 

Here's a challenge. The next politician you see, ask them if they know about the Rule of 72. Their answer may tell you whether you can trust them with your tax dollars. 

Paid for by Nebraskans for Loren Lippincott, 2611 Highway 14, Central City, NE 68826. All rights reserved.
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