Monday, March 07, 2005

Bogus Quotations

Politicians and popular writers who retail in bogus quotations should have a close cousin of the logic stick applied to their silly heads.

Senator Charles Grassley (R) was on C-Span this morning talking about Social Security reform among other things. He attributed the following quotation to Albert Einstein: "Compound interest is the only miracle in the world." Did Einstein say that? I rather doubt it. It is too stupid a thing for Einstein to say. There is nothing miraculous about compound interest, and there is no 'magic' in it either. It is very simple arithmetic. Suppose you invest $2000 at 10% compounded annually. At the end of the first year, you have $2,200. How much do you have at the end of the second year, assuming no additions or subtractions from the principal? $2,400? No. What you have is $2,200 + 220 = $2, 420. Where did the extra twenty bucks come from? That is interest on interest. It is the interest on interest on interest . . . that make compounding a powerful tool of wealth enhancement.

But there is nothing miraculous or magical about it. Words mean things. Use them wisely.

And don't look to Einstein for advice on personal finance.