Investing, Compound Interest and the Ancient Lie

Investing, Compound Interest and the Ancient Lie

There is a vicious lie about investing that periodically makes the rounds in financial circles.  It goes something like this.  If, at the height of the Roman Empire around 100 AD, you were to have put one day's wages into a savings account that earned a mere 2% interest, you would have an unimaginably large sum of money today.  This thought experiment is ostensibly supposed to impress the financially illiterate with the power of compound interest.  Instead, it demonstrates how out of touch denizens of Wall Street and other financial con artists are with the real world.

Let's begin by dissecting the myth.  In the ancient Imperial Roman world, one day's wages was approximately equal to a single denarius, a silver coin weighing about 3.4 grams.  This coin later became a unit of account that eventually turned into the medieval silver penny and, subsequently, the modern day copper penny most of us are familiar with.  In fact, before the decimalization of British currency in 1971, pennies were still abbreviated as "d", short for denarius - a nod to their distant Roman ancestry.

So there are three ways to think of a day's wages in Roman times.  First it can be viewed literally as 3.4 grams of silver.  We'll round this down to 3.0 grams of pure silver to account for other, alloying metals in the denarius.  Second, if one is stingy, it can be viewed as a single, modern-day penny ($0.01).  Lastly, it can be conceived of as today's dollar equivalent of a (non-skilled) day's wages.  For this sum I'll use 8 hour's work at $8 an hour, equaling $64.

Ancient Silver Denarii from the Roman Empire

If you had invested $64 back in 100 AD at a 2% compound interest rate - never mind that the dollar wouldn't exist for another 1700 years or so - today you would have the unbelievably large sum of $1,923,574,759,697,820,000.  That's almost two quintillion dollars - enough to buy the entire world's real estate (a mere $217 trillion dollars) 8,864 times over.  That is a nice way of saying that this scenario is a complete fiction.  If you had this much money you could theoretically buy everything and everyone on Earth and still have enough left over to buy Mars and some other planets as well.

So let's be a little more conservative with our next calculation.  Let's assume that you banked one modern day penny way back in Imperial Roman times and then let it compound for the next 1900 years straight.  Under this scenario you would end up with $300,558,556,202,784, or about $300 trillion dollars.  This is about 3.7 times the total amount of money in the world today - around $80 trillion dollars worth.  Once again, our parable is from a world of fiction.  There is no way such a large sum of money could ever be accumulated.

We have one more calculation to perform.  This time, we'll deposit a modest 3 grams of pure silver into our fictional Roman era bank account and let is accrue at 2% per annum for the next couple millennia.  When we finally withdraw our deposit, we will find that it has grown to 90,167,566,860,835,300 grams of pure silver or just over 90 billion metric tons.  We should be elated by this good turn of fortune, until we realize that the total amount of extant silver in the world today is estimated at only 777,275 metric tons - not even one million metric tons.  It might be tough for our theoretical bank to pay out 116 times the amount of silver currently in existence.

So we are left with an excellent question.  If compound interest is so powerful, why didn't any of our smart Roman, Celtic, Indian, Chinese, Persian or Mayan ancestors deposit a single day's wages into a conservative bank account a couple thousand years ago so that we could all be obscenely rich today?  The answer is rather obvious.  There were no interest-bearing bank accounts in ancient times, and even if there were, the bank would have gone bankrupt long ago trying to satisfy our ancestor's claim.

This is one of the reasons I'm leery of long-term, high return, pie-in-the-sky compound interest projections made by the Wall Street mafia.  You won't get your 10% a year in stocks over the next 30, 40 or 50 years for a very simple reason - you can't get it.  It is a physical impossibility.  And the charlatans who make you these dubious promises will be long gone - their pockets stuffed full of commissions and fees - by the time anyone figures out their game.

On the other hand, tangible assets like bullion, gemstones, art and antiques have a lot of excellent attributes absent from traditional financial assets.  Being physical, they cannot evaporate in the mathematically inevitable busts that must periodically occur in paper financial markets.  Nor can they be easily confiscated via government decree, provided you hold them personally.

And although they may not always earn phenomenally - and unrealistically - high returns, you can rest assured that tangible assets will generally earn you a fair return.  And they will do so steadily and predictably over the course of decades and even centuries.  Don't fall prey to the lies of paper asset alchemists.  Ultimately, physical wealth is real wealth.  And real wealth is wealth you keep.

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