http://formulafordebt.blogspot.com/2010/11/exponential-grouth-of-2-inflation.html
Those who did the homework will know that the Dr. Albert A. Bartlett’s aim with this video was to show that the greatest shortcoming of the human race is our inability to understand the exponential function. They will also know that the exponential function is used to describe the size of anything that’s growing steadily, for example, 5% per year; ordinary fixed growth. If it takes a fixed length of time to grow five percent, then it follows that it takes a longer fixed length of time to grow by 100%. This longer time is called the doubling time.
How does one calculate the doubling time? Just take the number 70 divide it by the percent growth unit time and that gives you the doubling time. For example if the percent growth per year is 5%, divide 5 into 70 and you get fourteen. Thus, the time it takes anything to double that has a steady growth of 5% per year is 14 years.
Where did the 70 come from? Well, it’s approximately 100 divided by the natural logarithm of two.
Now we’re talking about the Bank of Canada’s plan to hold the inflation rate at a constant two percent. Most of us have no idea what that means for the future that our children and grandchildren will have to experience.
If you don’t yet have an understanding of the exponential function please watch the videos found at the link above. If you do you will understand that to find what two percent inflation means for the future all we need to do is find the doubling time of prices with a 2% yearly growth rate we divide 2 into 70 and we find that prices will double in 35 years.
So the answers to our questions are, Prices will double by 2045, double again by 2080 and double again by 2115. If the price of gasoline in 2010 is $1.15 it will be $2.30 in 2045, $4.60 in 2080 and $9.20 in 2115. I have a minivan with a 110 litre fuel tank. I complain at having to pay over $100.00 to fill it. In 2115 my great grangchildren will have to pay over $1,000.00 for the same amount of fuel.
Pick any product today and use this simple arithmetic function and see what the price will be in 2115. Let’s pick an automobile priced at $45.000 today. In 2045 that car will by $90.000, in 2080 it will cost $180.000 and in 2115 it will cost $360,000.
A home that costs $250.000 today will cost $500,000 in 2045, $1,000,000 in 2089 and $2,000.000 in 2115.
Now ask yourself if this is really what you want your children, grandchildren and great grandchildren to face. And remember, this is if the Bank of Canada holds inflation at 2%. Do the math to see what prices will be if inflation averages 5%.
The doubling time when growth is 5% is 70 divided by 5 = 24 years. At that rate prices will double by 2034, then by 2058, then by 2082 and again by 2108. That litre of fuel will rise to $2.30 in 2034, $4.60 by 2058, $9.20 by 2082 and $18.40 by 2108. The car will by $720.000 in 2108 and the home will be $4,000,000. Inflation at any rate is bad.
A forthcoming post will tell you why the Private Central Banks of the world need inflation
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