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The Power of Compound Interest in a Globalized Economy

Guest post by: Michael Farrell

Article Overview: Smart investors have always looked to international markets for specific opportunities related to diversification, globalization, and efficiencies resulting from deployment of information technology to lower cost labor markets around the globe, suggests Mike Farrell with aspenIbiz. Read this short post as it reveals the power of compound growth in a globalized economy and that investing in emerging international markets is far more compelling now than in the past.

The Power of Compound Interest in a Globalized Economy

Smart investors have always looked to international markets for specific opportunities and diversification. Today the reasons for investing in emerging international markets are far more compelling than they were in the past. The reasons are simple.

In the old days, economies tended to develop independently. There was international trade but empires and societies accumulated capital and increased productivity within relatively defined borders. Today, globalization is breaking down borders at an increasingly rapid rate. Electronic communication and improved transportation allow individuals on opposite sides of the globe to work as if they were in adjacent cubicles. The Internet has put the tools of the most developed economies of the world within reach of the poorest.

There has been a political and social impact as well. Populations, except in the most oppressed nations, know far more about the rest of the world than they did in the recent past. Furthermore, there is a startling amount of communication between cultures today. Increasingly, people whose governments prevent economic development know well what they are missing and they solicit the same opportunities from their leaders.

As a result, economies, including the whole global economy, have grown at exponential rates for centuries. Just as exponential growth is barely noticeable in the early phases of an investment, global economic growth seemed trivial for more than a millennium. For centuries, the global economy inched forward however this is no longer the case.

As an example, prior to 1500 A.D. standards of living and productivity rose barely 0.01% per year. It took 300 years to increase productivity to 0.2% per year and it rose faster in northwestern Europe and North America. In the beginning of the 1800s, productivity growth rose to about 0.5% per year. The early 1900s saw a rise to 1.6% annual growth. Growth per worker rose in America to 2.1% by the 1970s.

Today, the World Bank estimates that the total global GDP has dipped a small amount the past few years due to issues associated with the Global Financial Crisis. There is anxiety, pessimism, and institutional gloom; consumer confidence numbers are down despite spectacular and recent improvements in the quality of life.

One reason that the public has underestimated the strength of the economy is that both economists and politicians are themselves confused.

Politicians portray themselves as being able to fix a broken economy however they have far less impact on the economy than they think they do as the forces behind economic growth are too diverse and powerful to be impacted over the long term by political posturing.

With respect to economists, traditional economic analysis is incapable of dealing with the technology enabled global transformation that we are experiencing. Consumer price indexes and standard of living quotients are guesses at best and honest economists will admit to this fact. Tools that worked to judge progress in the past now grossly underestimate real growth in a transformational age.

In simpler times, it was easy to compare the costs of food and housing over time. Falling food costs due to agricultural technologies could be calculate as a component of economic progress. Oranges for example, fell in real prices by an order of magnitude in the last half century. This had significant benefits for consumers, even if it did not show up directly in GDP statistics. Today, many new products and services have no historical comparison. This has led to all kinds of illogical analyses.

We hear complaints, for example, that health care costs are increasing as a share of total expenditures. If the results of medical care over time were stable, this would make some sense. We are however being cured of diseases that were killers less than a generation ago. We are living increasingly longer and healthier lives. Comparing health care costs today to health care costs a century ago is like comparing the cost of amputation to antibiotics.

Traditional economics has no way to deal with current exponential rates of growth. This growth however is not just American growth. In fact, it is happening even faster in other countries. Today, countries do not have to go through the difficult bootstrap process. Nations can adapt the practices, policies, technologies, and institutions that have enabled economic success. They can even bring in capital from slower-growing developed nations. Many, in fact, are doing so.

The big story over the past decade has been China. Even with an incredible growth rate, China has a long way to go before it's per capital GDP and standard of living approaches that of America. Still, history has never seen anything like this before.

Those who are blasé about this transformation are missing the boat. More importantly, there are persuasive reasons to believe Chinese economic grow will persist, presenting enormous long-run opportunities.

It is useful to remember that "Made in Japan" was once used to label inferior products made with cheap labor. A similar phrase was used for South Korea. Both of these countries' incomes, productivity and standards of living are now approaching America's. They in fact are outsourcing manufacturing to lower-cost regions.

In many ways, China is much better positioned than Japan was before it began its dramatic improvement. Despite growth pains, China is already competing with Japan and Korea in key tech areas. However the education system in Asia has historically stifled creativity and its success has relied heavily on its ability to mobilize cheap labor, cheap capital, and on copying and assembling the innovations of others.

When Japan, Korea, or China gets richer, America does not become poorer. What happens is individuals in these countries do compete with each other for good jobs and those with the best skills will get the highest paying jobs. Essentially, more and more people around the world are able to compete with Americans. This means more and more Americans must continuously improve; they must adapt or die and this is the hallmark of what made Americans better off.

In addition, Asia's surging economic growth is the result of the free-market economies of the West with the USA being the world's most vigorous champion of free trade and investment. As an example, the transistor, communications satellites, the personal computer, the cell phone, and the Internet, not to mention the PalmPilot, the iPad, the iPhone, and the Kindle were all invented in the USA and then brought to market by American-based companies. This gives more and more people around the world the toolkit to compete and remove barriers erected by their own governments.

No doubt there will be disruptions over the next few years in these booming international markets. They will experience ups and downs just as the Western economies have. In China, for example, there is still a lack of freedom, there is rampant corruption, and it has horrible pollution. Even with these issues, not only will economic growth in these emerging markets continue upward, it will continue to accelerate. Globalization will indeed act to equalize worldwide market economies upward.

The impact of exponential growth is not an easy concept to get across. When you look at the charts of compound growth, they start off slow and flat. Over time, they tilt dramatically upward and then they are nearly vertical.

If more people understood this concept, they would invest much earlier in their lives.

It is even more difficult to get people to understand that the same exponential growth that builds portfolios also works on the macroeconomic scale. The international economy demonstrates the exact same sort of growth.

Financial analysts that assume that projecting current growth rates into the future is a safe or conservative strategy are mistaken.

If investment models or portfolios do not take into account the increasing economic and technological growth of the future, your account will not benefit from Compound Interest and will not generate maximum returns.

I trust this post has provided some background and evidence of the power of Compound Interest especially in terms of economic development in the global economy that is enabled by advances in technology.

I favor a quote from Steve Forbes. Forbes says that pursuing additional financial education and the resulting increase in our financial literacy (including the investment returns that can be generated by Compound Interest) will open our eyes to alternative wealth creating strategies and this will be the key to resolving our global financial crisis.

To gain the necessary financial education, it is best to obtain association with, access to, and membership in a wealth creation community. As a result, you will learn and have the knowledge to use alternative wealth creating strategies such as Bank on Yourself, debt reduction, and asset protection. You will be exposed to wealth acceleration investments in areas (discussed in this and previous blog posts) such as the power of Compound Interest, new internal-combustion engine designs, the shale gas revolution, surfing the mobile wave, the space gun technology boom, the wireless data boom, the smart power grid, nanotech being applied to biotech, biotech and nanotech converging with the semiconductor industry, electric cars, new access to space, 3D virtual technology, atomically precise manufacturing, nuclear power generation, commercial space ventures, Carrier Ethernet technologies, nanotech lithography, robotics, nano-based next-generation battery technology, precious metals, water rights, oil, natural gas, potash mines, food commodities, and gold mines. You will have the knowledge to consider investments in assets that are inherently useful like oil rigs, hydropower, or methanol plants; things that are hard to build, difficult to replace, and costly to substitute; definitely not financial stocks, definitely not retail stocks, definitely not commercial property.

Another benefit of membership in a wealth creation community is exposure to entrepreneurial leadership and business opportunities. Many of these leaders suggest that if you don't focus on being a digital entrepreneur, being self-employed, or being a small business owner, it will be a very tough road in the months and years ahead; actually it will be an uphill battle. As a result, the innovative wealth creation communities provide education and training on B2B, and B2C, eCommerce enabling a new breed of professionals that are creating six figure second incomes.

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Article Tags: B2B B2C eCommerce, Breakthrough Technology, Compound Interest, Financial Education, GDP, Global Economy, Mike Farrell aspenIbiz, Second Income Opportunity



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