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One big lesson in macroeconomics is that money circulates. One person’s spending is another person’s income. Everything happens within the macroeconomy.
Ignoring the closed-loop nature of the macroeconomy leads to the rise of peculiar and persistent ideas, like double taxation, something I’ve written about before and discussed in the FET podcast.
All payments circulate. My income is taxed, then spent on goods and services, which is the income for a business, which is taxed, who pay their workers, which is taxed, and around we go.
Another less obvious but persistent and strange idea is that compound interest has a special magical power. Here’s Australia’s superannuation lobby group latching on to this idea that there is something special about compound interest.
A commonly misunderstood topic is compound interest and its benefits. We in the financial services industry know the magic and power of compounding and how it can work to help build wealth.
Sure. One person can benefit from compound interest. But like every income, the income in the future from compound interest comes from within the macroeconomy—it is also other people’s money being spent on you, just in the future.
It is funny how some people think there is no magic money tree for governments when it comes to taxation, but also think there is a magic money tree called compound interest.
For example, one welfare policy idea is that a government can deposit money into an investment account when a child is born for them to get when they are 18 years old. The NSW Liberal and National version of this idea is to match funds up to $400 per year contributed by parents into this type of savings fund.
Once the child turns 18 they will be able to withdraw from their fund – which could be worth between $28,000 and $49,000 per child – for either education and housing so they can begin to secure their own financial future.
Here’s where the magical compound interest sneaks into it:
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