Bet You Didn’t Think the Rule of 72 Worked Like This

If you read last Friday’s Money Morning, you’ll know about a disturbing speech given by the Bank of England’s chief economist, Andrew Haldane.

Here’s the key quote from the speech:

One interesting solution, then, would be to maintain the principle of a government-backed currency, but have it issued in an electronic rather than paper form. This would preserve the social convention of a state-issued unit of account and medium of exchange, albeit with currency now held in digital rather than physical wallets. But it would allow negative interest rates to be levied on currency easily and speedily, so relaxing the ZLB constraint.

It’s a cold and ‘wordy’ statement from the central bank official.

The last sentence really made our jaw drop.

But there’s even more to it than that…

We’re sure you know what Mr Haldane means by negative interest rates.

If not, it’s quite simple. When you have money in the bank, you’ll earn interest. Until a few years ago, you could earn between 4–7% interest.

Today, you’re lucky if you can get a rate that starts with a two.
If a positive interest rate means that you earn interest on your savings, we’re sure you know what it means to have negative interest rates. That’s right, rather than the bank paying you interest, the bank would deduct interest from your savings.

How long to halve your money

A 2% positive interest rate on $10,000 would earn you $200. That would leave you with $10,200.

A 2% negative interest rate on $10,000 would cost you $200. That would leave you with $9,800.

Got that? Right now, central bankers are looking for more ways to take money out of your pocket in order to give it to governments, vested interests, and financial elites.

Interestingly, if you’ve heard of the Rule of 72, you should know that it works with negative interest rates too. The Rule of 72 is simple. It shows you how long it takes to double your money with a constant interest rate.

You take 72 and then divide it by the interest rate.

If the interest rate is 6%, it will take you 12 years to double your money. 72 divided by six is 12. Easy.

If the interest rate is 2%, it will take you 36 years to double your money. 72 divided by two is 36. Easy.

But when it comes to negative interest rates, you’re not working out how long it will take to double your money. You need to know how long it will take to halve your money. In this case, the formula is the same.

You take 72 and then divide it by the negative interest rate.

So, if the negative interest rate is -3%, it will take you 24 years to halve your money. 72 divided by -3 is 24. (It’s actually -24, but we can ignore the minus sign.)

If the negative interest rate is -2%, it will take you 36 years to halve your money. 72 divided by -2 is 36 in this instance.

If the negative interest rate is -5%, it will take you just over 14 years to halve your money. 72 divided by -5 is 14.4.

You get the drift.

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This isn’t just about super, it’s about all your savings

The trouble with most mainstream Keynesian economists is that they spend so much time knee deep in statistics, spreadsheets, and numbers, that they forget what economics is all about.

Economics isn’t an exact science. As the Austrian School economists say, economics is all about human action and interaction. But mainstream economists don’t see that.

They see the economy as something to fine-tune by shifting interest rates, printing money, and raising or cutting taxes. It’s all about the numbers.

The truth is that most people already pay for goods electronically. It wouldn’t take much to make electronic payments the only form of ‘legal tender’. The government could outlaw bank notes and coins, using the ruse of counter-terrorism or the ‘war on drugs’ as a way to justify it.

Then, the government would just decide which banks it would allow to hold this electronic currency. Once the government did that, it could outlaw all competing forms of electronic currency — say goodbye to Bitcoin for a start.

Whenever we talk about this kind of thing, folks always say that it’s far-fetched. They say we’re part of the ‘tinfoil hat’ brigade. Hey, that’s fine with us. We’re not interested in convincing everyone. We just want to tell as many people as possible, and then leave it up to them to decide.

If you think Andrew Haldane’s plans for negative interest rates and electronic currencies could never happen, just go about your business.

Kris Sayce
Publisher,Port Phillip Publishing

Ed Note: This article was first published in Money Morning.

Kris Sayce
Kris Sayce, dubbed the ‘Jeremy Clarkson of Australian finance’, began as a London finance broker specialising in small-cap stock analysis on London’s Alternative Investment Market (AIM). Kris then spent several years at one of Australia's leading wealth management firms. A fully accredited advisor in shares, options, warrants and foreign-exchange investments, Kris was instrumental in helping to establish the Australian version of the Markets and Money e-newsletter in 2005. He is currently the Publisher, Investment Director and Editor in Chief of Australia's most outspoken financial news service — Money Morning.

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