Investopia

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Investopia

Postby Tailsteak » Fri Jan 15, 2016 12:57 am

Okay, people who know more about finances than I do... tell me what's wrong with this concept.

Imagine there is a country called Investopia. And every citizen of Investopia, when they are born - or when they immigrate and gain full citizenship - is given a special bank account with a million Investopian dollars in it.

(The actual amount is pegged to inflation, but for simplicity's sake, we'll call it a million bucks.)

Now, this money does belong to that citizen, but what they can do with it (or what their parents or guardians can do with it, if they're underage) is limited. The money in that bank account can be invested however the citizen likes, but only in Investopian funds that are managed by Investopian financial institutions that are, in turn, insured by the Investopian government. You can select different types of investments from different private institutions and banks, but they all have to be strictly within the country, and what you invest in is required to be diversified - no more than 50% in any one place.

(Most people, presumably, don't manage their own portfolio - they just wave their hands and some computer program shuffles their money into index funds, GICs, bonds, etc for them.)

At any time, the citizen in question can take money out of their bank account - of course they can, it's their money! - but they can never reduce the balance of the fund to less than a million dollars. You can leave the money in your account and allow compound interest to do its thing, or you can skim the interest every month and hey - if you're thrifty and your investments do well, that's enough to live off of!

(Of course, it's not impossible for a diversified portfolio of index funds to lose money, so your balance can drop below a million that way... it just means you won't be able to withdraw anything until it builds itself back up.)

Once the citizen dies, the government simply takes its initial million dollars - the money that was invested in that citizen - back. Whatever's still in the account, of course, is property of the deceased's estate. So, presuming a zero population growth, the government never loses money on this program - they put in a million when you're born, they get a million back when you die.

And, of course, the citizen is still free to spend money elsewhere normally - normal bank accounts and riskier markets exist outside of this structure.

Functionally, Investopia has a Basic Income, but it's not tax-payer funded - the government just makes an one-time interest-free loan in each of its people, and collects the seed amount back post-mortem. While those people are alive, they're investing that money in Investopian companies and resources, providing plentiful capital for new business opportunities.

Now, I admit, I know nothing about finances. I don't invest (I don't have a million dollars to invest with), and I haven't taken any sort of classes in the subject. So I'm asking you guys - what is wrong with this model? When and where and how and why will it inevitably break down?
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Re: Investopia

Postby DanielH » Fri Jan 15, 2016 1:56 am

EDITED TO NOTE: I occasionally refer to US figures in this. This is because I am from the United States. Canadian figures are probably only slightly different; Investopian figures are probably much different. They can still give useful ideas.

The model works well for individuals. If you manage your money well, have cheap hobbies, and have average luck at the right things, you can do this for less than a million USD (if you can live on $20,000 per year, you would need an investment of half a million; if you can’t live on that much, keep in mind that this is per person instead of per household, that you probably could live more frugally than you currently do, and that this is almost twice the US poverty line). If you do this correctly and don’t get massively unlucky, you can still make things work if your bank account dips below the starting amount, because it will probably go up again. In markets that work the way US ones do currently, 3 to 4 percent of the initial deposit is what’s called the “safe withdrawal rate”; you are unlikely to ever run out of money if you invest in index funds and don’t withdraw more than that amount of the initial deposit, adjusting for inflation.

If the entire society did this, it would probably break down. What I see as the most plausible failure mode, which you could still tweak into a slightly different success, is as follows: With that much capital in the system, prices would be high. That safe withdrawal rate would be much lower than the current 4%. (EDIT: Simply adding more to everybody’s account might make this problem worse for the investors but bettor for the investees in a tragedy-of-the-commons sort of way.) It’s possible that with this much capital more people would try to start businesses, but you’d still probably be in a situation where capital is no longer the most scarce resource for businesses and instead labor or natural resources would be the limiting factor. If it’s labor, great: then the average citizen might need to work some, but wages would be high so they probably wouldn’t need to work 40 hours a week or at a company they didn’t like. If it’s natural resources, that means that you have more people than your country can physically support; either you need to invent better methods of farming/housing/etc., people will need to live more frugally, or people will leave (either by emigration to other countries or emigration to any afterlife that might exist). Depending on social factors, it might be that enough people voluntarily work jobs that require human labor that citizens don’t need to work; this is probably a lot easier to balance correctly in fiction than in real life.

Another potential problem is that a crash of some kind (which would still be possible, I believe) would render the balances of a large segment of the population at less than 1 million Investopian Dollars. Then a large segment of the population would all simultaneously be unable to access their basic income because they can’t withdraw at all. This might be avoided by changing the minimum balance based on the riskiness of the investments; if you are making risky investments you need to keep more balance so that in hard times you can switch to lower risk/lower reward investments and still get something; this especially works if there is some specific riskless investment somehow guaranteed by the government, which should only fail if there are already bigger problems with the country. This will cause a large portion of the population to angrily yell at the system that no, their strategy isn’t risky, the estimate is bad and they could never lose money with what they are doing. These people should be sent to remedial courses in “sometimes bad stuff happens, and yes it could happen to you too”. Some of them might be right that the system judges risk too harshly, but in that case they will have higher rewards and lower risks than the system expects and in a few years should have no problem keeping the overestimated minimum balance; this is better than if the system underestimated risk, which it probably would still do in some cases because estimating risk is hard.

Oh, and the US has about 300 million people, and a million dollars each is about 300 trillion USD, several times the size of our national debt. (EDIT: Combine this with my first listed failure mode, where citizens might need more money to invest if everybody is doing it, and the ratio gets worse.) It wouldn’t be as cheap for the government as you imply, but they could probably get away with phasing it in slowly somehow and issuing government bonds as one of the accredited options in order to recapture a lot of that money.

I am not a macroeconomist; there are probably reasons I missed that my scenarios are unlikely and other scenarios I missed. The specific areas that I am most unsure about are what would happen if the limiting resource became something other than capital, and whether a government-backed riskless investment would actually be a good idea or cause worse problems. In case of the former, the thing to look up is Factors of Production; in case of the latter, it probably depends on other details of how the government works in practice.
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Re: Investopia

Postby CartesianDaemon » Fri Jan 15, 2016 3:57 am

Interesting idea!

First thoughts. Where does the money come from? It's a lot cheaper to provide a guaranteed basic income directly than to save up to start with a 1m lump sum.

The right to choose where to invest is a bit like "choose what your taxes are spent on". I'd like to see some more of that. But not too much. Problems like, "can I invest in 'squander money on the CEO, me, LTD'?" and "what if people are gullible to scams". And more importantly, lots of problems need an overview, people choosing individually can end up with just a mess, c.f. NIMBYism.

Also, there may be a glut of investment if it can't go abroad. Lots of the best investment for government are things that increase the tax base later like education and good transport links, but that don't produce money immediately. Ring fencing the money to each person stops that sort of investment, everything had to be invested in a private company.
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Re: Investopia

Postby DawnPaladin » Fri Jan 15, 2016 8:36 am

CartesianDaemon wrote:The right to choose where to invest is a bit like "choose what your taxes are spent on"... Problems like, "can I invest in 'squander money on the CEO, me, LTD'?"


Yeah, if people can choose to invest the money wherever they want, that's not really different from letting them withdraw the entire sum. OTOH, if the investments are entirely government-controlled, then for the citizen, the million dollars might as well not exist--they're just getting a payment from the government every month, and the situation becomes almost indistinguishable from a Basic Income scenario.

A middle ground is needed--maybe the government maintains a list of things you're allowed to invest your money in?

But the only difference between this and Basic Income is that your stipend gets modified by the stock market and your personal skill with investing. Many people (myself included) would be better off with Basic Income.
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Re: Investopia

Postby Satinavian » Fri Jan 15, 2016 2:37 pm

What money is worth is linked to industry output and assets. It might happen over some corners, but the link is always there.

With so much money to invest, you simply lack investment opportunities. There is a limited number of entities wanting money temporarily and pay interest rates. This amount is linked to economic strength and typical lifestyle. If every citicen wants to invest a million, you only have only three at least semi stable scenarios.

a) Your economy is big enough to absorb this investment. But then even those millions are not worth a significant amount, more like lira than dollars. And no one can life from the return of investment

b) Your interest rates go down to zero or even to slight negative numbers for anything even remotely safe. All investment opportunities with positive returns have a high chance of failure. And if the country steps in in such cases, it has basically still to pay for the life financed by investment returns. And yes, negative interest rates have been a thing in real life if contractors are bound to invest in safe options.

c) Pretty much all your economy is a giant bubble that can only be sustained by hyperinflation

So no, it's a really bad idea unfortunately.
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Re: Investopia

Postby DanielH » Sat Jan 16, 2016 2:31 am

DawnPaladin wrote:A middle ground is needed--maybe the government maintains a list of things you're allowed to invest your money in?


That’s already part of the scenario:

Tailsteak wrote:The money in that bank account can be invested however the citizen likes, but only in Investopian funds that are managed by Investopian financial institutions that are, in turn, insured by the Investopian government.


Satinavian wrote:If every citicen wants to invest a million, you only have only three at least semi stable scenarios.


I’m not so sure. I can see how those would be likely scenarios, and I wrote about those problems in my first post, but I’m not convinced they’re the only ones. In particular, scenario b implies that all the low-hanging financial fruit has been taken care of. If something with a low chance of failure and positive expected returns were available, it would have been funded; this implies that all such things were funded. In this case, we get all those positive expected return opportunities. This seems like it would be a good thing. Moreover, as there will always be some such opportunities, then a small percentage of the invested money will still be in there. If the high-risk positive-expected-returns opportunities are appropriately diversified, the expected return remains positive and the risk goes down. The efficient frontier might be much riskier (much farther right) than it currently is, but with all the positive-expected-return opportunities being funded I still think society would be much better off.

EDIT: Formatting
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Re: Investopia

Postby gaeila » Mon Jan 30, 2017 6:20 am

Tailsteak wrote:Okay, people who know more about finances than I do... tell me what's wrong with this concept.

Imagine there is a country called Investopia. And every citizen of Investopia, when they are born - or when they immigrate and gain full citizenship - is given a special bank account with a million Investopian dollars in it.

So I'm asking you guys - what is wrong with this model? When and where and how and why will it inevitably break down?


Might I humbly suggest using your search engine of choice (shorthand = Google for me) to find out more about the countries of Qatar and Kuwait? These are two countries which are comparative to your model. The citizens don't necessarily get a huge stipend, but they enjoy free quality health care, top education (including top education opportunities abroad) free or low cost housing and other amenities. Their standards of living are much higher than the U.S., Canada, or Britain.

Essentially, such a system WILL work IF the country has a HUGE amount of a valuable natural resource compared to its population (in economics terms, per capita.) To clarify, said natural resource is considered highly valuable by OTHER countries.

It wouldn't have to be oil. It could be highly trained craftsmanship, gold, food, anything that people in other countries really want and will pay for. In other words, the creation of what I like to call Real Wealth.

It is likely to eventually break down and not work in a variety of ways if that fundamental condition (Real Wealth backing the system) is not met. The two extremes are runaway inflation, or Great Depression.
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Re: Investopia

Postby Killjoy » Mon Jan 30, 2017 9:50 am

Where does the initial investment come from?

In the US, this would cost approximately four trillion dollars per year.
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Re: Investopia

Postby gaeila » Fri Feb 03, 2017 8:33 pm

This article does a pretty good job of recommending instituting a Universal Basic Income. Instead of granting each citizen a large initial lump sum of $1 million, it argues for everyone getting a basic survival monthly income (as of this writing, about $1,000 per month.) Which makes sense. With an initial huge lump sum, that makes it easier for things to go wrong (people falling for con games, really bad investments, etc.) and losing it all. What I particularly like about the article, is the reasoning is based on things that ACTUALLY HAVE HAPPENED, instead of Ivory Tower theoretical notions.

Why Should We Support the Idea of Universal Basic Income?

http://www.huffingtonpost.com/scott-san ... _hp_ref=tw

Note to Tailsteak: This article also provides support for your economics rant re comic #970 :)
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Re: Investopia

Postby Killjoy » Sat Feb 11, 2017 5:27 pm

gaeila wrote:Why Should We Support the Idea of Universal Basic Income?


We shouldn't.
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