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You know the ominous Joseph's penny? The story is made up, but you can learn a lot from it and we're almost sure you'll be amazed at the result!
The Josephspfennig Declaration is quickly made, but the significance behind the story is enormous for investors. Therefore, in this article, we take some time for a clear Josephspfennig calculation up to the year 2020 and also express criticism.
To the Josephspfennig declaration we go back to the year 0, when Joseph wants to invest some money for him at the birth of his son. For this purpose he takes a penny and goes to the bank. At that time the interest rates were even better than today and he could fix an interest rate of a proud 5%.
"5% interest on a penny, what will that buy Jesus later?" You think?
Now the story continues. Neither Joseph nor Jesus ever think of investing money again and forget the penny invested in the bank. Year after year passes, every year 5% interest is added to the account. Before you scroll on, please think for yourself: How much wealth will one penny (also centime or cent) become 2020 years later, if you receive 5% compound interest every year?
1,000CHF, 50,000CHF, 10 million francs or something completely different?
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Before discussing the incredible result from above, we would like to briefly explain the Josephspfennig calculation. For this, we will use the compound interest formula:
Final capital = initial capital * ( 1 + interest rate )^Term
Josephspfennig example with 5% interest and 1 centime initial capital for a 2002-year term:
0,01 * ( 1 + 0,05)^2020 = 63,443e^39
Written out, the result of the final capital = 63,443,059,922,674,400,000,000,000,000,000,000,000,000 CHF
As this result of the Josephspfennig 2020 cannot be classified for us, we calculate the equivalent value in gold.
The gold price fluctuates of course, but we take the price of 56.205CHF per kg of gold.
If you divide the final capital by the gold price 63.443e^39CHF / 56.205CHF per KG you get
1128769434000000000000000000000000000kg of gold. This is still an incredible amount of gold.
Let's start modestly and use the weight of the earth as a reference. Our beautiful earth weighs a whopping 5,972 × 10^24 kg. If we multiply the weight of the earth by the price of gold, we get the price of the earth. Then we divide our final capital by the price of the "golden earth". In 2020, that would still buy about 189 million earth balls of pure gold. Well, that's still not so good to imagine.
So give me the sun! The sun weighs a proud 1.989 × 10^30 kg. The calculation is the same as for the "golden earth" and now results in about 567000 solar spheres of pure gold. No idea at which dealer we can buy this amount, but so slowly we got a handy number!
To criticize the Josepspfennig is not very difficult. 2020 years maturity? 5% interest? Where can you get something like that?
The fictitious example becomes relevant, however, if one considers 1. that certain institutions, dynasties or even families have owned large fortunes for centuries. And these 2. have not started with a penny, but with millions or even billions. Also, some returns are perhaps even higher than 5% on average. Especially when you think of major players on the stock market or dynasties that even initiate entire wars politically just to make a profit. But more about this elsewhere.
Meaning of Jospehspfennig and Josefspfennig calculator:
Do you know the YouTube video of Fabian the goldsmith? The Joseph penny not only illustrates the power of the compound interest effect. Imagine the citizens of a country borrowing money from an institution. The loan is long-term and the sum is in the billions, which is not unusual for government debt. Can you imagine how high taxes, consumption and economic growth must be to pay back the interest costs alone? Can a finite earth with finite resources cope with this? Do we perhaps have to redefine growth? Maybe even reintroduce full money?
These topics are exciting, but not easy to answer and would go beyond the scope of this article. Let's stick to at least one learning for now: compound interest is powerful! That is why it is often called the 8th wonder of the world. To understand it and if necessary also for you with skillful investments can therefore change a lot for you.
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4 Responses
Nice explanation and pictures. But a question: Would one not have to calculate with the volume for golden earths and suns? Gold has a density of approx. 19.3 g/cm^3 and the earth only an average density of 5.5 g/cm^3. If I weigh the mass of the earth in gold, I have only approx. 28% of the volume, thus a very much smaller sphere.
Hello Joe
thank you for your feedback and for thinking along.
Let's think "out loud" together again 🙂 Density is the quotient of mass and volume. If we have a mass X (our amount of gold) and know the density of gold, we can extrapolate to the volume. The volume then takes the size of many suns, but is based on the density of gold.
Should be all correct, right? 🙂
Dear Eric
In your formula "0,01 * ( 1 + 0,005)^2020 = 63,443e^39" you made a little mistake. 5% are 0.05. So you calculate with half a percent (0.5%).
Best regards
Engelbert
Is corrected, thank you!