by Edwin Ivanauskas | Tags: Personal Finance, Banking

Debt Clocks Are Stupid

Everyone has heard of or seen national debt clock at Times Square. It counts up the debt of the United States for all to see in one of the largest cities in the world. And now, after the current economic crisis, the national debt clock is running out of digits to show us how large our debt is! Isn't this a great visual to see what kind of trouble our country has gotten itself into? No, it isn't.

I find debt clocks pointless and misleading, let me illustrate.

Side Note

Let's make an "allowance clock" for our kids to play with and see how much money they are saving. Bear with me as this won't be very realistic. Let say we give this child an allowance of 1 penny to start, but we double it every week. Since we only started at a penny lets go ahead and give our allowance clock 6 digits, two of which are for change.

$ _ _ _. _ _

That should be plenty big; after all we are starting with only a penny so there's no way it will grow to a thousand dollars. So we spend a few hours of grueling, labor intensive work (hey, it's a pretty awesome debt clock) and make this great clock, and we start using it.

After 8 weeks the allowance has grown to $1.28 and everyone is enjoying the allowance clock. But in the next 4 weeks we notice something shocking... the allowance went from $1.28 to $20.48, that's quite an increase. Next thing we know and month later we are paying out $328.68 a week in allowance and this is getting way out of control. By week 18 (that's only two weeks from $326.68) the allowance is already at $1,310.72, how unforeseen! Now we can't use the allowance clock anymore because it ran out of numbers, how could this have happened?

 

This happened because we failed to take into account exponential growth. Now, the example above is pretty out of this world. After all, what reasonable person will promise to grow something at 100% return? That's a doubling of the previous value. Yet over a larger time frame and with some external shocks, exponential growth can easily surpass people's expectations.

So what exactly is going on here if not a huge economic crisis that we should panic about? Check out my article on exponential growth.

Making a physical national debt clock is a silly exercise. If you make too many digits it looks strange having only a handful of the total digits actually filled out. But if you make it too small, exponential growth will quickly outpace your ability to add more digits.

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