
Compound interest can help save for the future, or it can bankrupt the world - Thevet
http://laphamsquarterly.org/future/trust-issues
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ianferrel
This article seems to be based on a fundamental misunderstanding of economics.

A trust can't grow faster than the value of its investments, and on average,
trusts won't grow faster than the economy as a whole. So there's very little
risk that a trust will grow to encompass a significant portion of total wealth
in a way that could threaten an economy.

Science fiction stories that show someone waking up to find their small
balance has grown into a fortune are just that, fiction. Anyone who's kept
money in a bank knows that the interest doesn't even keep up with inflation.

~~~
hyperpape
I'm confused by this comment. That sounds like a savings account you're
talking about. But a T-Bill grows at inflation + (small percentage, though
probably still less than GDP growth). And a stock market fund grows faster
still (and in general, the stock market has shown sustained growth when
measured over decades--though one might question that after the last 15
years). Given an index fund invested in 1929, you would have growth beyond
what the economy experienced during that period, right?

There are questions about how you'd manage a multi-trillion dollar fund: you'd
eventually reach the point where you can't just use index funds. But other
than that, your comment doesn't seem accurate.

Edit: What is true is that there is a limit to what your investment could
become. For obvious reasons, it can't be more than the wealth of the world,
and there would be asymptotic behavior at even less than that.

~~~
ianferrel
I'm only referring to a bank account in the final two sentences. There is a
common trope in time travel stories where a person finds that their small bank
account has become a fortune. The linked article seems to think that that's
not just reasonable, but likely. But it's obvious nonsense.

Yes, a T-bill grows faster than inflation, but slower than the economy as a
whole. So you're going to get a smaller and smaller piece of the total economy
--completely at odds with the premise of the article.

The rest of my comment is valid regardless of the assets the trust holds.
Certainly, someone can get a bigger slice of the economic pie by investing
wisely (or luckily), but there's no particular reason to fear that a long-
lived trust will do so, and plenty of reasons to think they won't. Look at
successful companies from 100 years ago. Most of them don't even exist any
more. Why would we think the management of a long-trust would be better at
navigating the future economy than that of a major company?

~~~
logfromblammo
That trope has a dual premise. First, compound interest is in play. Second,
the beneficiary is not drawing on the account for living expenses.

If you can put $10 in an account at 3% interest and wait 200 years, you can
take $3693.56 out. The key is not needing that money at all over a 200 year
time span. The interest only accumulates on money that stays in the account.

Rich folks can afford to let money sit and gather interest. Poor folks spend
all that they earn, if not more.

As a thought experiment, take two identical trust funds. Put $10M in one, and
$20M in the other. Both grow at 4% per year. At the end of each year, the
beneficiaries may withdraw up to 3% of the fund. The beneficiaries have
similar tastes, and initially withdraw $250k. Each subsequent year, they draw
3% more, unless they hit the cap.

How many years before the larger fund grows from double to triple the size of
the smaller? 25. It is four times the size after 42 years. It is 10x the size
after 112 years. It takes 14 years for the less endowed beneficiary to hit the
withdrawal cap, and 128 years for the other to reach it, at 10.64 times the
size, spending 10.64 times as much per year, forevermore.

If your expenses grow more slowly than your investments, you will grow ever
richer. If your spending grows faster than your income, such as for everyone
in the US earning a wage or salary since 1970, you grow poorer.

~~~
jdmichal
> If you can put $10 in an account at 3% interest and wait 200 years, you can
> take $3693.56 out.

Yes, but how much is that $3693.56 worth in 200-years-ago dollars? Chances
are, the number is less than $10.

~~~
logfromblammo
In 200 years, other things could also happen.

\- US/Federal Reserve Dollars could be obsoleted in favor of a different
currency. Your account might automatically be converted to a non-interest
bearing account in a different unit of account.

\- Your account could be flagged as inactive and plundered by the banking
institution or the governing authority.

\- The currency could be inflated much faster than your fixed rate of return.
Your $3693.56 could buy one ramen noodle--not one packet of noodles, one
noodle.

\- The banking institution could cease to exist. If there is a successor
institution for your account at all, you might not know what it is.

But the point is that if you just take your $10 bill into the future with you,
you would only have one worthless 200-year-old $10 note, of interest only to
curators and collectors. You wouldn't have the not-even-$10-worth of era-
appropriate currency.

------
saalweachter
I suspect the concerns about how large a trust might grow are just camouflage
for the people trying to get at the money early.

None of the trusts ever actually grew to be that significant when compared to
the wealth of some living persons and dynasties -- the Rockefellers and the
Kochs and the Waltons. The set of people terribly concerned about the undo
political influence of those running a perpetual trust seems disjoint from the
people concerned about the undo political influence of the living rich.

------
facepalm
You can not simply invest your money at "compound interest" for an arbitrary
number of years. Market interest rates change over time. And even if you would
manage to get some institution to guarantee you interest x for n years, that
institution might go bankrupt before you get your money back.

Some long running investments exist, like governments still paying off debts
from World War 1. But you can not count on such deals being available when you
need them.

I think Andreas Eschbach handled it pretty well in his excellent novel One
Trillion Dollars. It also has the premise of a heritage that compounds for a
very long time. But it explains that there was a family whose sole purpose was
to manage the fund for centuries until the heir was ready. (The book is not so
much abut the wonders of compound interest as about the value of money).

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witty_username
Even if someone was infinitely rich it would merely cause hyperinflation. This
article seems to have quite a bit of economics misunderstandings.

~~~
bsbechtel
There was an econ professor that gave a guest lecture early in my college
years that said inflation is merely a societal disagreement about the
distribution of income between the wealthy and everyone else. He explained why
this is the case very well at the time, but I can't remember the details now.
If anyone else has been told this and can explain it here, it would be greatly
appreciated.

~~~
notahacker
He was most likely referring to the view that bargaining over the share of
company revenues spent on wages is often a driver of inflation. In brief:
Employees feel that their company's growth should be reflected in higher wage
incomes for them (especially if they're worried about higher prices in future)
and so seek to negotiate higher wages, to the extent labour market conditions
permit them to. Business owners feel the benefits of the growth should instead
accumulate to them and therefore seek to protect their profit margins by
increasing prices (especially if they're worried their suppliers might put the
prices up in future), to the extent conditions in their market permit.

~~~
bsbechtel
I think this was similar to the argument he made.

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joshuaheard
This could not happen in the U.S. because it would violate the Rule against
Perpetuities.

[http://en.wikipedia.org/wiki/Rule_against_perpetuities](http://en.wikipedia.org/wiki/Rule_against_perpetuities)

However, compound interest is a very powerful tool.

[http://www.daveramsey.com/article/how-teens-can-become-
milli...](http://www.daveramsey.com/article/how-teens-can-become-
millionaires/lifeandmoney_kidsandmoney/)

~~~
ChrisLomont
>This could not happen in the U.S. because it would violate the Rule against
Perpetuities.

From the same link, not all states follow that. Many others adopt a "wait and
see" rule, which may change one way or the other over the relevant time
period.

So it's not quite true to claim this could not happen in the US.

------
known
"Give me control of a nation's money supply, and I care not who makes its
laws." \--Rothschild in 1744.

------
danielweber
This article is at least as old as 2011, since there was an MR discussion of
it then:
[http://marginalrevolution.com/marginalrevolution/2011/09/the...](http://marginalrevolution.com/marginalrevolution/2011/09/the-
magic-of-compound-interest.html)

