|the myth of the time travelling dollar
||[Aug. 10th, 2011|01:24 am]
The myth, in its simplest form, goes something like this:|
You travel back in time to 1920, and deposit $1000 in a bank savings account. You earn 5% interest, and then travel back to present day, 2011. Your money has doubled about 6 times in the intervening years, and you now have $64,000. You repeat the process, and now have $4.1 million. Repeat until sufficiently wealthy, or until you can fund your time travel costs, ad nauseam.
This is an exploratory post designed for me to think out loud about the concepts of income, wealth, and rent. It is not intended as a justification for wealth, poverty, usury, rent-seeking, envy, lust, greed, or any other first world problem.
There are many forms of this myth, and I will get into why these are all myths. I will also discuss some of the problems and challenges of savings and wealth. But first, some definitions. I'm not sure to what extent these are generally accepted or textbook, so these definitions may need to be accepted provisionally for the purposes of this discussion.
- Wealth: the ownership of assets.
- Asset: any object, tangible or intangible, from which either income or rent can be extracted over a finite period of time.
- Income: an amount of money that requires expenditure of effort/energy to extract.
- Rent: an amount of money that is exchanged for a fixed duration usage of an asset.
- Savings: an amount of money that is rented as an asset.
- Money: a quantity which at any point in time is negotiably exchangeable for other assets.
As an example of an asset, we could consider a share of General Electric. GE is a good example of an asset because it is fairly long lived, has a fairly long operating history (since 1892), and is well documented and easily searchable for verification of facts. Founded out of operating companies by Thomas Edison, GE has a history of attracting and exploiting inventive talent. (It also have a history of abusive practices, but the ethics of the company is merely noted here). Because of the durable nature of the asset, it has earned and re-earned a status as a "blue chip" company, a memeber of the "Dow 30" for over 100 years, while all the others have either faded in esteem or existence, or been merged into other entities.
The graph above shows the history of a (2011) share of GE, in dollars. Another definition: a dollar is a unit of money that varies in its ability to purchase other assets or items, because there is an entity that has the ability to create them out of thin air. The exchangeability of dollars is generally tracked by an index, the CPI. Conveniently, over the 25 year period shown in this chart, this index tells us that, roughly speaking, 110 dollars in 1986 is convertible for the same amount of some common everyday items in cities in the US as 220 dollars can be exchanged for equivalent items in 2011.
The graph also tells us a few items in its history. About four times a year, GE shares pay a dividend, a form of rent whereby GE agrees to pay you some variable amount that they decide in exchange for you having invested your money in their asset, marked with a "D" along the X axis. Also, there are times that they change the nature of your shares, called splits, whereby a share of the company is split into 2 (1987,1994,1997) or 3 (2000) new shares. So GE was trading, exchanging for dollars, at about $72/sh in 1985 shares, which were then divided up into 24 new shares as of 2000, hence is shown as a price of about $3 per current share.
So, moving on to the myth.
Why do I call this a myth? This assumes something about the directionality of time, something that is akin to perfect knowledge- if I know with absolute certainty that in 25 years I can trade something for $18 which was bought for $3 today, and that $3 today would have the same purchasing power as $6 in 25 years, I have effectively tripled my purchasing power by owning the productive output of a share of GE. The myth rests on a number of fallacious assumptions:
First, there is the assumption that time travel is possible, but you don't necessarily need to invoke time travel to gain the benefit of owning GE as an asset. But without that perfect knowledge gained by time travel, I cannot be certain what may happen in the future. For example, starting in 1998, I might manage to turn $30 into $18, reducing my purchasing power. So the time travelling dollar requires either the ability to time travel, or knowledge of the future, or some other guarantee of the outcome.
Second, in order to guarantee that outcome, some effort/energy must be expended. That effort is translated into income by our second definition, so the act of performing time travel must be less costly than the gain collected. To some extent, this can be thought of as a frictional cost, akin to the second law of thermodynamics: it is impossible to extract more energy, in total, from a system than is put in. Time travel, in this sense, is envisioned as a perpetual motion machine. (It is my opinion that careful formulation of this argument could lead to a clear proof of why time travel to the past is impossible, something which I might attempt later if people engage me personally on it.) But also, in this example we don't need to invoke time travel to find an equivalent- you could expend the effort to know everything about a share of GE, and hedge away all of your risks, but the likelihood that those expenses would exceed the gain to be made is high. There are all sorts of frictional costs involved.
Third, there is the problem of the money itself. If you look at a dollar bill, you may notice a date stamped on it. If you took the bill into the past beyond when it was dated, almost certainly it would be treated as counterfeit and would not be able to be exchanged for something in the earlier time. Again, you will need to expend energy/effort to devise a means to find convertible items, and another frictional cost is introduced. And, also, you don't need to invoke time travel to find a parallel concept. We have already established that there is an index that shows over time, the purchasing power of that dollar is constantly fluctuating, and that the price at any instant you can exchange things depends on a functioning market in which to make these exchanges, either in collective or by barter. Both sides have to agree, and secret knowledge is corrosive to the trust of market participants. As soon as someone gets a whiff that time travel is possible, they can no longer trust in the value you are presenting when you offer an object, an asset, or money for trade.
Fourth, there is the problem of identifying where to pick up the asset on the other side of the time tunnel. In our example, we are using a sufficiently small time frame and a well known and durable asset, that not only grows but is throwing off money every quarter at a rate of about 3%. The most common form of the time travelling dollar myth is immediately recognizable by the usage of 5% as a number- at one time, it was common to be able to place your money in a bank and get what was called a "guaranteed" 5% on your "passbook savings", and it might be assumed that this was always the case. But there are problems with this guarantee:
Four, part A: the guarantee is not forever, and you have to periodically make options to renew at the best rate. So there is a frictional cost, whereby you cant just travel back to an arbitrary point in time, but have to shepherd at multiple points, each with transactional, frictional costs.
Four, part B: the institutions change. When I got my first savings account around 1993, it was, to my memory, with First Jersey Bank. Later, this became Summit Bank. After a series of mergers, this bank eventually became Bank of America. If you leave an asset with an entity, there can be no guarantee, again without perfect knowledge, that the rent you collect will be in a neat little pile when you come back, or if the entity will have moved on or handled the details correctly. I might get lucky to see that a Bank of America still stands where First Jersey once did, but more likely, I have little hope of navigating intact the small intestine of corporate finance.
Four, part C: even if you find a totally reliable entity over the time period involved, using GE as an example, the rent may not stay the same. In absolute terms, GE has managed to grow the amount provided as a dividend over time, with some notable exceptions. In September 2000 near its height, GE paid a dividend of $0.16 per share, while in 1998 it paid $0.30 per share, or only $0.1 per split adjusted share. Relative to its price at the time, between 1986 and about 1995, it paid about 3% of its price, but between 1995 and 2000 the relative amount began to drop even as the price increased, to about 1% by 2000. As the price dropped and the absolute dividend grew, it was back to 3% by 2007. But in March of 2009, GE was forced to cut its dividend, the circumstances of which probably account for the precipitous drop in price, bottoming out at about $8 a share. However, by the current time, it is back earning abut 3% again.
Summarizing the fourth point: when someone tries to apply a flat rent over long periods of time, they are likely speaking hypothetically, and it is increasingly likely that over a increasing time periods of time you will have less ability to earn a fixed rent (it may go up or down, but it will not be the same continuously). A fixed rent is one of the hallmarks of the idea of a time travelling dollar, and a good indication that the participant is engaged in the mythos.
Fifth, the ability to accumulate a large share of wealth is hampered by the corrosive effect of time itself, another restating, perhaps, of the second law of thermodynamics. Looking at the list of the top wealth accumulators is instructive to this point. While many of the billionaires listed did not come from exactly modest means, if you make an effort to trace the source of each, you will find that most leveraged their knowledge or that of others to create the stores of wealth listed from modest starting means within the last 100 years or so. While there is truth in individual critique, as a class it is much harder to treat groups of the wealthy to clear generalizations. Furthermore, as cited earlier, GE is one of the only "blue chips" which are still "blue chips" after 100 years. It is often asserted that corporations can never die, and that because of this immortality they have improved ability to take advantage of what is, in effect, a time travelling dollar, to accumulate vast stores of wealth. Evidence shows that very few companies have been demonstrated to live past 100 years, and they do age, most not gracefully, by scandal, malfeasance, or neglect. Even GE was not listed as a Dow index component at one time, dropped between 1899 and 1907, and all others listed at the beginning of the index have shrunk, aged, diminished in wealth. Nothing lasts forever.
The conclusion, in part, is left as an exercise for those reading this.
First, I invite people to critique the foundational discussion of the time travelling dollar myth. Flexing at its periphery has been really helpful in many areas of my life, from decisions about investing to formulating ethics and philosophies.
Second, if you're willing to accept my premise, if you've seen evidence of the myth in the wild, do let me know if you think this is a rare species or one that is extremely common. I find myself I often have to bite my tongue when I begin to say something that sounds like the myth, and I have seen this myth in abundance, growing ferally in the tone and tenor of political debate these days in every corner.
Third: do you think it is a worthwhile effort to stand up, name the myth, and in doing so, attempt to banish it forever? I think it would be instructive and exciting to tell the biography of the myth. Particularly, in putting the myth to bed for good.
I believe that one can participate fruitfully in value-added discussions on issues of money and wealth if one is willing to let go of their belief in such a thing as the myth of the time travelling dollar. But doing so, and recognizing all the ways it creeps back into our lexicon, is not a simple task. It becomes a nagging straw man, too easily kindled.