fbpx

9 March 2020

The black magic of compound growth, and assorted thoughts on COVID-19

Sonnie Bailey

This article consists of various disparate thoughts about COVID-19. For a more structured, practical article, check out COVID-19: an exercise in managing risk.

The black magic of compound growth

In the world of personal finance, a lot is said about the "magic of compound growth".

It's powerful: 1% per year over an extended period of time makes a huge difference on your financial outcomes. That's why investing too conservatively can be risky.

You don't understand exponential growth.

Don't take it personally. I don't understand exponential growth either. I know this because we're human.

Compound growth is a form of exponential growth.

We can understand exponential growth intellectually, but I don't think we quite grasp its ramifications at an intuitive level that informs us of its benefits and potential dangers.

This video illustrates the power of exponential growth by explaining why you only need to fold a piece of paper *48* times to get to the moon:

A good primer on exponential growth as it relates to COVID-19 is here:

The "magic of compound growth" is amazing enough in the context of personal finance, when we talk about the difference of an extra 1% or 2% over time frames of years or decades.

What about if the growth occurs more quickly? Like an increase of 1% of people infected per day or week?

The number of people infected by a highly transmissible disease won't increase in a slow, steady, linear fashion. The number of people infected will explode in a way that will hard to believe.

This isn't the Big Bad one

COVID-19 might be really bad. But it could be much worse.

Although it's sad that COVID-19 seems to be very harmful for older people, it's something of a relief that it doesn't seem to significantly impact infants and young children. It could be worse on that simple dimension.

But the Big Bad one will be much worse. I suspect it will be man-made.

The Big Bad one will be targeted. Maybe it will effect vulnerable people. But it will probably target people with certain genetic characteristics, and everyone else will transmit it while asymptomatic. That sort of scenario is scary.

I say this with a degree of certainty. Of course, I'm not certain. I'm not even sure this is possible -- currently, or whether it'll be possible in the future.

In my view, COVID-19 should be considered something of a trial run for a much worse pandemic in the future. We need to commit resources to getting our act together.

We're all in this together

If you think you're going to be fine if you get COVID-19, and as a consequence you don't need to practice good hygiene, or do anything to stop yourself from getting it or spreading to others: please think about people who are more vulnerable than you.

We are all in this together. Just because you will be fine, doesn't mean that the person you infect, or the person they infect, will be fine.

Maybe the person who becomes seriously sick, or dies, would have become sick anyway. But if it took them an extra day or week to become sick, at a time when the health care system wasn't as stretched by dealing with lots of people at the same time, and while doctors and nurses themselves weren't infected, it might make all the difference.

In a sense, society is like a rat king:

If we all go down, we all go down together.

COVID-19 isn't an existential threat. But this perspective influences why I think we should give attention and resources to existential risks. We're all in this together.

In some respects, GDP is a callous measure

It seems like COVID-19 is especially fatal for older people. If I were working in a facility that catered to older people, such as a residential care facility, I would be very worried right now. I think we'll hear some really sad stories in the coming days and weeks.

Let's say COVID-19 causes a lot of older people to die.

COVID-19 will have some negative first- and second-order effects. The obvious first-order effect is the passing of loved ones who would otherwise have lived for longer, and the grief and fallout on their families.

But like almost everything, it will end up having some favourable second- and n-th order effects. One of these might be that it will make sure we'll be better prepared for the Big Bad one, when that happens.

What I'm about to say is even more callous, and I say this to emphasise the callousness of focusing entirely on economic measures such as GDP.


From an economic perspective, there will be "positive" second-order effects.

As a society, we spend a lot of money on elderly people who aren't "economically productive". Here in New Zealand, we pay NZ Super, out of our tax dollars, to the tune of $21,000 per year for single people and $32,000 per year for couples. We spend even more on elderly people who are in residential care facilities, who require a lot of care.

These people are much more likely to pass away from COVID-19. Their passing will result in less costs to us as a society.

It will reduce the "dependency ratio": the ratio of people not in the labour force compared to people who are in the labour force.

There are also likely to be other effects, too. Like a significant intergenerational transfer of wealth, for better or worse.

This is callous. Even saying these things makes me feel like I'm committing a "thoughtcrime" and that I'm running the risk of being "cancelled".

This, by extension, is why using GDP and "economic growth" defined in narrow terms, is a terrible measure for assessing the success of a society.

  • Someone is diagnosed with cancer? That's good, because it will increase consumption of health care services and expensive pharmaceuticals, which will increase GDP.
  • There's an earthquake? That's good, because it will drive construction activity, which will increase GDP.
  • There's a major war? That's good, because that'll increase military consumption and production, which will increase GDP.
  • Regulations that make sure large corporations don't rip off consumers, or have to be responsible for the harms they cause to unrelated third parties (externalities)? That's bad, because it reduces profitability, which will reduce GDP.

Lots of older people passing away? If you want to be really cynical, let's say that private health insurance companies in the US might have certain economic incentives, which make the incompetent US response seem a little more rational. 

Technology is amazing

Peter Thiel famously said that "We wanted flying cars, instead we got 140 characters". He meant it pejoratively. I'm not sure I agree with his take.

We live in an interconnected world. This makes us more vulnerable to contagion, whether that be sickness or otherwise.

But. We are in a much better place today than we would have been even were 10 years ago. I can keep up to date with what's happening with COVID-19 and the world in general wherever I am. It's more pleasant and easier to self-quarantine and stay at home than it used to be. I can watch any number of things on Netflix, listen to new music on Spotify, and download whatever I want to read on my Kindle. Instead of venturing out I can arrange food delivery from my local supermarket or order via Uber Eats. I can email, call, and Skype with almost anyone. Many people can work at home pretty effectively. Ten years ago, not all of these things were possible, or at least not as easy to do.

Say what you will about the broader societal effects of all of this recent technology. But it's not all bad: and in cases like this, it's a very good thing.

(At a personal, unrelated level: I'm grateful for the technology at my disposal. My business wouldn't be possible without he infrastructure that underpins the internet.)

There will be blood on the streets. This is bad for some and good for others

Baron Rothschild is credited with saying "the time to buy is when there's blood in the streets". Another famous saying is that "a crisis is a terrible thing to waste".

If people self-quarantine and stop going out as much, a lot of businesses will have solvency issues. Supply chain issues could cause a lot of dominoes to fall. Some households will also have significant solvency issues.

Lots of vulnerable businesses and households will be forced to make decisions that are not in their long-term interests.

People and organisations with means and resources will have opportunities they'll be able to exploit.

This reinforces a point I made several years ago: perhaps money isn't the measure. Perhaps the real measure is risk.

Am I scaremongering by sharing these thoughts?

Maybe. I think my comments are a function of my own personal biases/prejudices, which is that I tend to be relatively pessimistic, or very sensitive to risk. As with everything, take with a grain of salt.

But as the 3Blue1Brown video I shared above concludes: "The only thing to fear is the lack of fear itself".

Maybe the spread of COVID-19 can be contained. SARS and MERS were basically contained, and Ebola was contained to a large extent. Containment won't happen if the powers that be are complacent about the matter.

Maybe we can't contain it. What we have the power to do as individuals is to take steps to stop or slow the spread, by practicing good hygiene and taking steps to delay getting infected, and reducing the probability of infecting others.

This chart puts the point well:

If we can't stop COVID-19, we might not be able to slow exponential growth from happening, but we might be able to slow its growth. Not just to keep infections below healthcare system capacity, but also to ensure our economy continues ticking along.

I really don't want to see the nth-order effects of a significant disruption to supply chains, even if the effects are short-term in nature. Neither do you.


Tags

blood on the streets, coronavirus, COVID, crisis, gdp, general, misc, rat king, risk, technology, thoughts


About the author 

Sonnie Bailey

In his spare time, Sonnie likes telling people that he’s a former Olympic power walker, a lion tamer, or that he is an orthodontist. He is none of those things. In reality, Sonnie is a financial planner based in Christchurch. Through his business, Fairhaven Wealth (www.fairhavenwealth.co.nz), he provides independent, advice-only, fixed-fee financial planning services. Sonnie is a “recovering lawyer”: he has specialised in trusts and personal client work. He has also worked as a financial services lawyer for many years.

You may also like

COVID-19: some perspective and silver linings

“Risk management” just became sexy

Even cash can be risky

FOR NOTIFICATIONS, SIGN UP