The Inverse of the Rule of 72 - Obama Style

Heard of the Rule of 72 for savers? It also works in reverse and applies to what is happening to the US economy.

It has consequences which are being ignored.

Sadly, along with all this government spending and entitlement is a shrinking of the real economy - and, in particular, the very jobs the economy wants to retain for the less skilled and less educated.

As the society adds costs to any employment (and we've seen and are seeing this in spades), the less valuable or affordable jobs are dropped. But, somehow the administration is oblivious.

If they spent some time in Europe, they'd get the picture very quickly. The flip side is lots of very low paid jobs and jobs with very little purchasing power.

Thus, it pays to watch the percent of GDP the government plans to take and is taking.

And like the inverse of the rule of 72 with investing, the less principal you leave each year, the lower the growth rate can be - no matter what the intrinsic rate of return.

Thus, take two economies growing at the same rate (say 6%). If one third of the growth is siphoned off into consumption in Economy 1, then Economy 1 will have only 2/3rd of the growth left for reinvestment (say 4%). With the rule of 72, this would 18 years to double. If the other economy left all 6% to reinvest, it would double in 12 years.

Now, take a situation where it's not just the growth in the economy that is taxed away but the equity built up (read: unionization, etc.), then the real growth will be even less.

So, as the US is heading hell-bent-for-leather down the road of expanded entitlements, it is also eating into the meat of the economy and it is hard to believe this won't have the same impact on the economy that exactly the same types of policies had on GM, where the UAW took the meat out of the company year-in, year-out.