It is obvious: numbers can be very tricky.

I often run the old prostitute joke on people over house prices, particularly when I hear the words: “I can’t sell my house”. I ask if they think it could be sold tomorrow for £1m. The answer is no. (I don’t have friends that are that rich.) Then I ask if they could sell it tomorrow for £1. The answer is always a derisive “of course”. Then I ask if it could be sold tomorrow for £10. Then I ask £100, then £1000, then £10,000. The answer is always that it can be sold. Therefore we have agreed that it can be sold tomorrow and are just looking for the best price to achieve that. You can sell your house in any timescale you want (which is usually short) by setting the price appropriately. This is not a blog about house prices though.

The current increase in world population is down around the 2% level (8 cents a passenger mile anyone? https://chrisrick13.wordpress.com/2009/11/24/how-useful-is-a-statistic/). This won’t carry on for that much longer as in 800 years or so there will be someone for every square metre of land…which we clearly will never reach. We have 8bn people now. At what level will there be zero growth? When will we get there? Will we reach a sustainable level? Have we already overshot sustainable and will have a reduction at some point? We can choose how to prolong and sustain life, but will we ever choose or have to choose how to reduce it? This is not a blog about population.

I’m interested in the rule of 72 as I used to know it. In fact I found out that it is actually more accurately the rule of 70. It is a very useful rule. It simply says that if you divide 70 by the percentage yearly change in some number you will get how many years are required for the original number to double.

If you buy a house for £100,000 and the value goes up by 10% a year then it will be worth £200,000 in just 7 years. If you have money on your credit card at 23% and pay the minimum each month then after just 3 years the money you owe will have doubled. If you have 2% population growth then that means it doubles about 3 times in a hundred years. So in 2109 we will (would) have 64bn people on the planet. Clearly the net increase will have changed radically downwards before then. In 2044 we would have 16bn people and I am very sure that the rate of increase will be down to zero or below before then.

Suppose I have a pension fund that earns me over the long term 7% a year and the long term inflation rate is 3.5% then if I start paying into it at age 20 and retire at 60, I will have doubled my pension fund in today’s terms. The reality is that a differential of 1% is not often reached and if pensions were taxed they just would not work. All that I am doing with a pension is giving money away for 40 years (reducing) where the pension fund promises to give me money with the same purchasing power as it had when I gave it to them after the 40 years. They will also do it via an annuity which will even out what they give to me over my expected lifetime. If you smoke don’t bother even if you trust pension companies and the world order.

This does not sound like a particularly alluring argument. I’ll save (say) 30% of my income when I am young, fit and healthy so that when I am old and can do a lot less with my reduced needs I’ll have enough to live on. How about have fun now and work 1 1/2 days a week when you get older? If that goes wrong and you can’t work then the state will look after you or your children will. A much better strategy to my way of thinking. There are enough people who will have no fun up until they retire and will then have to live off the state.

Do I really think that the financial system will be around to support that in 40 years? Have I confidence that any pension fund will last that long and make consistent returns over that period?

Perhaps the rule is most useful when applied to GDP? Recently world GDP has shrunk but there is a long term average. Picking a number is difficult but I could put up arguments for 2%. This means that at that rate the world GDP will double in 35 years. Do you really believe that will happen? In 35 years not only will there be twice the current population in the UK, but also twice as much economic activity? At some point growth will reduce to zero. Either it will be managed or we will have a war, a disease or an environmental problem that will kill a lot of us off. However the world order has been based on 2% a year for a long time. The rate of increase is constant but that is not very helpful. Think of a car accelerating at 2% of its current value each hour starting at 10mph. At the end of an hour it is going 10.02 mph. By the rule of 70 it is doing 20 mph after 35 hours. Any car can do this, even if many drivers could not. This is not very useful. You are not going to get anywhere like that…except that travelling from London you would have reached Aberdeen. The UK government is counting on 3% growth to get this economy out of debt. How many years do we need that growth rate to get out of trouble? How many years will pass before our GDP doubles?

Get your rule of 70 out and use it regularly. More examples will follow.

It is obvious: numbers can be very tricky but it is easy to get control of them.