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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, tru

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 12y ago
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.
- ganeumann 12y ago
  > For obvious reasons, it can't be more than the wealth of the world I think your reductio ad absurdum carries more weight than you give it. Real risk-free interest can't on average over a long period be greater than economic growth. If capital is always rewarded more than the value it creates (economic growth is the meaure of the total value created) then where does the extra value come from? It has to come from labor. Labor will not, in the end, work for nothing (obligatory Pikkety reference should be inserted here.) The sum of all capital in the world can only take a share of economic growth, some share must go to labor. That means that if there is an investment that returns more than economic growth, there must be an investment that returns less. As the pool of money being invested grows larger, it has to take part in both.
  - sliverstorm 12y ago
    It has to come from labor Or information asymmetry?
    - ganeumann 12y ago
      But then it's coming at the expense of some other investor (unless I'm misunderstanding.) No value is created. This might work if the amount being invested is small, but not as it grows larger.
      - sliverstorm 12y ago
        Yes, at the expense of someone else. It can still work as the amount invested grows, if you are in a position with a reliable feed of such information. See Plunkitt's "honest graft".
        ganeumann 12y ago
        My point was to capital as a whole (that is, all of the capital.) When I say "get large" I meant as a large percentage of all capital. Even multi-billion dollar funds have this problem, and that's just a tiny fraction of all capital.
  - hyperpape 12y ago
    I agree that it can't even get near 100% of economic value (though I don't have a clue how to make 'near' precise). I was being handwavy about how much, and could've been clearer.
- hnnewguy 12y ago
  >you would have growth beyond what the economy experienced during that period, right? Are you looking at US growth, or global growth?
- ianferrel 12y ago
  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?
  - mcguire 12y ago
    Cf. Berkshire Hathaway.
  - logfromblammo 12y ago
    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.
- james1071 12y ago
  One of the things that investors soon learn is that achieving any sort of compound growth over a long time frame is virtually impossible.
mdemare 12y ago
In the U.S. average inflation over the last century has been 3.2%, while the average interest rate of 10 year treasuries has been 4.9%, so you'd been able to grow your fortunes 5.4 times in real dollars, at a rate of 1.7% per year. That rate is smaller than the average rate of GDP growth, however. So, after investing your money for a century, you'd be a lot richer than in 1915, but you'd own a smaller slice of the pie.
sliverstorm 12y ago
It could happen, hypothetically, if you repeatedly picked winners and losers and in that way steadily grew your share of the economy. But it's quite infeasible.
markpundmann 12y ago
Trust funds can grow faster than the economy depending on the assets. I cannot remember where I read it, but warren buffet said stocks return on average about 7%. 2% for inflation, 3-4 % for economic growth, and the rest from dividends. (It's not much more, but dividends still add some value)
chrismealy 12y ago
Capital's share of the economy definitely can grow faster than than the economy as a whole. There's a whole book about this: http://en.wikipedia.org/wiki/Capital_in_the_Twenty-First_Century http://en.wikipedia.org/wiki/Capital_in_the_Twenty-First_Cen...
- ChrisLomont 12y ago
  But it cannot surpass the total value of an economy, and if you started with a tiny fraction of all capital at the start, your portion of final capital will likely be around that same small portion of all capital. Thus the premise stands. Compound interest is not a parasite eating value from other items. It is only a return on investment, which everyone is competing for.

hyperpape 12y ago

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.

ganeumann 12y ago
> For obvious reasons, it can't be more than the wealth of the world I think your reductio ad absurdum carries more weight than you give it. Real risk-free interest can't on average over a long period be greater than economic growth. If capital is always rewarded more than the value it creates (economic growth is the meaure of the total value created) then where does the extra value come from? It has to come from labor. Labor will not, in the end, work for nothing (obligatory Pikkety reference should be inserted here.) The sum of all capital in the world can only take a share of economic growth, some share must go to labor. That means that if there is an investment that returns more than economic growth, there must be an investment that returns less. As the pool of money being invested grows larger, it has to take part in both.
- sliverstorm 12y ago
  It has to come from labor Or information asymmetry?
  - ganeumann 12y ago
    But then it's coming at the expense of some other investor (unless I'm misunderstanding.) No value is created. This might work if the amount being invested is small, but not as it grows larger.
    - sliverstorm 12y ago
      Yes, at the expense of someone else. It can still work as the amount invested grows, if you are in a position with a reliable feed of such information. See Plunkitt's "honest graft".
      - ganeumann 12y ago
        My point was to capital as a whole (that is, all of the capital.) When I say "get large" I meant as a large percentage of all capital. Even multi-billion dollar funds have this problem, and that's just a tiny fraction of all capital.
- hyperpape 12y ago
  I agree that it can't even get near 100% of economic value (though I don't have a clue how to make 'near' precise). I was being handwavy about how much, and could've been clearer.
hnnewguy 12y ago
>you would have growth beyond what the economy experienced during that period, right? Are you looking at US growth, or global growth?
ianferrel 12y ago
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?
- mcguire 12y ago
  Cf. Berkshire Hathaway.
- logfromblammo 12y ago
  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.
james1071 12y ago
One of the things that investors soon learn is that achieving any sort of compound growth over a long time frame is virtually impossible.

mdemare 12y ago

In the U.S. average inflation over the last century has been 3.2%, while the average interest rate of 10 year treasuries has been 4.9%, so you'd been able to grow your fortunes 5.4 times in real dollars, at a rate of 1.7% per year. That rate is smaller than the average rate of GDP growth, however. So, after investing your money for a century, you'd be a lot richer than in 1915, but you'd own a smaller slice of the pie.

sliverstorm 12y ago

It could happen, hypothetically, if you repeatedly picked winners and losers and in that way steadily grew your share of the economy. But it's quite infeasible.

markpundmann 12y ago

Trust funds can grow faster than the economy depending on the assets. I cannot remember where I read it, but warren buffet said stocks return on average about 7%. 2% for inflation, 3-4 % for economic growth, and the rest from dividends. (It's not much more, but dividends still add some value)

chrismealy 12y ago

Capital's share of the economy definitely can grow faster than than the economy as a whole. There's a whole book about this: http://en.wikipedia.org/wiki/Capital_in_the_Twenty-First_Century http://en.wikipedia.org/wiki/Capital_in_the_Twenty-First_Cen...

ChrisLomont 12y ago
But it cannot surpass the total value of an economy, and if you started with a tiny fraction of all capital at the start, your portion of final capital will likely be around that same small portion of all capital. Thus the premise stands. Compound interest is not a parasite eating value from other items. It is only a return on investment, which everyone is competing for.