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the myth of the time travelling dollar [Aug. 10th, 2011|01:24 am]
matt
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.



GE share price, 1986-2011, sourced from Google Finance

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.
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Comments:
[User Picture]From: mlerules
2011-08-10 02:48 pm (UTC)
I'm missing, I think, a chunk of the point of dissing/dismissing this "myth." Would you be so kind as to show s'more of your work and help me bridge the gap 'tween the existence of this myth and how it impacts ethics/philosophies/investing decisions? Until I get a clearer picture of this, the 3rd qx in yr conclusion re: the worthwhileness of thinking 'bout / naming / dealing w/all this remains murky.

You mention (end of point 2nd in conclusion) that you've seen this myth in abundance. We pay attention to different things in the world, as this is not something I've noticed in particular (refs to it/sim ideas, yes, but not how it impacts behavior, which seems to be where you're coming from...I think). How/when does it come up 'n' manifest and what're the results of such? I get the feeling you have very specific ideas in mind, and I'd like to know what they are, but I just don't grok from what I've read so far.

Specific bits and pieces addressed below:

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.

THIS strikes me as key to the whole myth problem. If'n just ONE person could do it, it's one thing. If'n everybody - or even any decent number - could and DID do this, gawd knows what sorta butterfly effects would snowball to change history along the way.

You state that "these definitions may need to be accepted provisionally for the purposes of this discussion...

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 I read these definititions, then, gold is not an asset? Is this really whatcher saying/assuming w/all this? This strikes me as odd. Mebbe in this scheme though gold could be seen as "income" w/the selling of it corresponding to the "expenditure of effort/energy to extract." I guess that'd work, but it's a bit clunky.

Also: the savings def seems to only concern savings accounts, not money/gold tucked away at home under the mattress or buried in a strongbox 4 paces from a particular tree out by the barn.

****

To my mind, a more sensible way to approach the getting rich in the now by messing about w/the past concept/goal would be to go back in time (this assumes that time travel's possible, but I think the whole point of the myth is that this assumption's given, or it just doesn't make sense even to talk about it at all), and bring back as much gold as you can carry. How?

Work for a week/month to earn and get some money (and get rid of counterfeiting problems). Or seduce someone to the same end. Or take some gold from the appropriate era back w/you and use that to finance the next part of the scheme: using horse/form books w/race results from past races, bet appropriately and increase your winnings like mad. Eventually convert all winnings into gold. Step forward in time. Rejoice b'c gold prices are through the freaking roof now!

Other issues you haven't mentioned vis-a-vis the myth of traveling dollar: banks/financial institutions generally want a place to send statements and now and again require paperwork processing. If'n you're not around and don't have something set up for this, it's not gonna work.

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[User Picture]From: hbergeronx
2011-08-10 06:27 pm (UTC)

As I read these definititions, then, gold is not an asset?

Yes, that's correct: gold is not an asset, gold is money by my definition. As soon as one agrees to this definition, the essential flaw behind Ayn Rand's philosophy is absolutely clear to me.

A pile of gold is money, it is only an asset in the sense that one can either expend energy to transform it into other money (jewelry, $XAU, gold notes), or rent it (e.g. seigniorage) (interesting sidebar: that word is not in my e-dictionary and shows as misspelled in ie)

Rand assumes that a rational being will always exchange a fixed weight of gold for a certain creative effort, essentially minting gold as the ultimate time travelling dollar, to my way of thinking. It's like saying if there's a person performing a concert, but I don't want to hear that concert now, I can put that gold in a safe place until I'm ready to hear the performance. Time travel to the future, I can dig up that gold and get an equivalent performance. It's an idealized view but not realistic. Almost all things that are true assets by my definitions are subject to the second law of thermodynamics, subject to expiration.

Gold is only useful to the extent that people are willing to make a market in it. When you limit a market to a physical constraint, such as putting all the gold in the hands of an oligopoly, there are always going to arise black market forces which will create scrip in its absence. A market is limited by the velocity of the money.

If you take gold back in time, you are increasing the supply, thus devaluing the worth. Marginal effort when you have a monopoly on time travel might be high, but time travel into the past cannot be costless. Time travel into the future is a different issue: you can move gold from the present into the far future, but while the marginal decrease in supply might increase the value a little bit, at some point any monopoly is going to seek alternatives- replacing gold with silver or platinum, doing away with the standard, or warfare to prevent you from time travel. Or just outright fraud- gold certificates not backed by physical gold.

Tucking gold away, too, is not a costless effort, and so even if such a thing could happen, e.g. Rand's time travelling gold dollar, all the while the effort keeping that tree safe and the land it is buried on owned, maintained, etc., such that if you come out the other end your net worth is minus all those incremental costs. Plus, one assumes there is a market for gold, and the market makers need to be paid, at minimum the effort to transfer significant weight in gold needs to be paid for, and burly weightlifters that you can trust don't come cheap. In reality, seigniorage is the only known way to counteract that, and voila, inflation is created. It is an essential myth of Rand's philosophy that gold is a hedge against inflation because time induces friction.

The flaw about concepts of time travel is that they don't account for the cost in energy to the overall system. Sure, if time travel happened costlessly, there could be paradoxes, but I believe that as long as you conserve the total energy of the system, either time travel is impossible, or it accelerates the heat death of the universe, therefore time travel itself would be a form of doomsday weapon.
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[User Picture]From: hbergeronx
2011-08-10 06:42 pm (UTC)

using horse/form books w/race results from past races, bet appropriately

This is another formulation of the time travelling dollar story. Bookmaking is, at its root, a form of market making. A rational bookie will adjust the odds based upon the number of winners and losers to ensure that the house is paid, or will quickly go out of business. The act of making book requires effort, so if you put the bookmaker out of business by placing a huge bet on skewed odds, the cost of funding the recording of the race results may not be funded, and you will not have the record in the future to consult. In fact, the act of finding book results from the distant past is not costless in itself, and leaves a forensic trail. That's a good story idea- time cops as forensic accountants.

Information is a form of entropy (viz the work of Claude Shannon) and sending information back in time from the future increases the total entropy of the present time forward. Hence my heat death comment.
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[User Picture]From: mlerules
2011-08-10 09:15 pm (UTC)

Re: using horse/form books w/race results from past races, bet appropriately

I'm amused/fascinated by the timing re: all this as I recently purchased with an eye to rereading John Crowley's "Novelties & Souvenirs: Collected Short Fiction," which contains, from what I remember from first borrowing and reading a friend's copy several years back, some decent time travel stories.

Shifting from bookie to bookie will ameliorate much of this effect, as there're several/many "houses" from which to choose. The recording of race results will likely continue independent of funding by betting, as many of the folks who see to record-keeping would I betcha do so regardless of the monies involved.

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[User Picture]From: hbergeronx
2011-08-11 01:08 am (UTC)

Re: using horse/form books w/race results from past races, bet appropriately

You have to consider the size of the bookmaking economy relative to the time travelling heist you're attempting to pull. If the market for a bookmaker is a couple hundred thousand per game, then no matter how big a bet you place, your return is bounded by the liquidity of the market. Attempt to withdraw any significant percentage of that market, and you dry up the capital available for future games. A rational bookmaker would never accept bets that would exceed their working capital (which might itself be subject to leverage) and assumes that the winnings paid out over time will be replaced with losses collected from other players. Each game, a bookmaker typically have some other mark to sit on the opposite side of the bet- an equal number of players' dollars on other horses from which the winnings will be extracted, minus the vig. To win at the bookie game, you have to explain where those phantom people on the opposite side of the bet are coming from. If it's the bookmaker, expect to have your legs broken when you come to collect.

Money is a zero sum game. if you win a bet that exceeds the capacity of the bookmaker to pay, or even the economy of bookmakers in total, you corner the market and halt the velocity of money, and the bookmaker cannot pay, even if payment is promised.

Turning to stocks and market making, where transparency shows the actual size of the market on any given day, you don't have to go through the act of guessing the reserves or the total size of the horse bookmaker's economy. There is a bar graph in the bottom 4/5th of the chart above, for volume traded, which is a good proxy for the magnitude of a maximum bet. For example, it peaks in march 2009, when for a one week period the market traded 2.2 billion shares (20% of the company) of GE bottoming at a low of about $7. To make e.g. a million between then and now, you would have to add an additional volume of about 140k shares. Daily average volume is 69m, so this is a doable heist based upon the data available (the market is big enough to support).

To make a billion though, you would need 140m shares, and this exceeds the average daily volume- you are in essence draining the liquidity from the entire market in that time frame, declaring that you are going to take from the trading pool those shares till you return in your time ship. So the energy you consume from the present must be much less than a billion dollars worth to make the time travel worthwhile, or else this heist will not even get started.

The million dollar heist would be potentially doable, but it might not be able to fund the trip profitably with that amount of cash.

You also have to think of the follow on impact of taking those shares offline. The act of buying will raise the price in the midst of filling the order, and later a buyer might not be found at the predicted sell price, which will depress the shares in the middle of filling the order.
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[User Picture]From: mlerules
2011-08-10 09:18 pm (UTC)

Second Law o' Thermodynamics

Tossed out for chewing on (and possibly spitting out ;-) - TMM, the love created 'tween (two or more) people can indeed exceed the amount each person puts in...something more (else?) gets created in the process. Passion, too. But mebbe my knowledge/understanding of the entities/processes involved remains iffy/unfully known and if'n they were known, they'd follow along the law as well, but I don't wanna assume the law/rule makes it so simply b'c it's a/the law/rule. And I don't know how to test this theory either...
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