Why compound interest is magic.

You put money in a pile, and every so often you check back and there is more money there. MAGIC!!!!

Well, not really. The secret is that the money in that pile isn't actually there any more. That money is being lent to people and exists elsewhere as a home loan, a car loan, the money that companies borrow from the end of the month to pay payroll in the middle of the month, and the like. Why would anyone agree to this? Why would anyone allow their cash reserves to be taken by people they don't know and used to make things happen that they never even hear about? The answer is that magic extra money that shows up. That magic extra money can quickly end up being far greater than the money actually put in the first place.

This means that the same money can be actively saved by one person and actively spent by someone else. One of the bigger problems that contributed to poverty in our history was the problem of finding enough money to actually make stuff happen. Compound Interest made that vanish as a problem for almost all of us. It's relatively easy for us to get the bills required to pay the bills, most of us don't have to worry about finding hard currency or scramble to barter because we just don't have the currency required to make stuff happen. MAGIC!

I mean if a farmer has $5 and a mechanic has $5 at the beginning of the month how much money exists? Well, ten dollars. But if the mechanic buys food for $5. Then, a week later the farmer fixes his equipment for $10. Then, even later the mechanic buys food for $5. At the end of the month, how much money existed? Ten dollars or twenty? The answer, of course, is both because magic. But what if the farmer didn't have the money to pay for repairs? Well, you'd have one sad farmer and one hungry mechanic.

There is, however, a problem with this system. When money slows down the opposite happens. If there was a guy who held money throughout that month, how much more money exists? Well, none. Not really. Money only has value in movement, if it's shoved in a bed then it doesn't mean anything except potential. It could eventually maybe have meaning. While when money is lent and lent again it lets us have our cake and eat it too. When that money comes to a screeching halt because someone charged up credit cards and are unable to keep up or people give home loans to cocker spaniels then it takes our cake and kicks sand in our collective faces. That's what happened in the Great Recession, and is also MAGIC. Although, this magic is the kind that makes you make out with a coat rack in a hotel event room for the amusement of a couple hundred drunk strangers.

In short, compound interest is magic. But you have to be nice to it, and not let people charge you money to give you money. Because that magic can be used against you just as easily as it can be used for you.