Immortals and Compound Interest

A number of people have asked, both in comments and in emails, why compound interest isn’t the solution to all of our immortals’ money problems. It’s not a bad question, and it’s shown up in a number of places.

It turns out that this isn’t nearly as workable a solution in practice as it is on paper. There are two main reasons for this. The first is historical, and the second economic, but together they conspire to make living off your interest a little harder than it sounds.

I. The History of Banking

Deposit a thousand dollars in a bank today, make 3% a year, and in a hundred years you’ll have $19,218.63. Not bad, eh? That’s the theory, anyway. But there are a couple of historical problems with this. The first is that the oldest currently-operating bank is Monte_dei_Paschi_di_Siena, founded in Siena, Italy, in 1472. Which is a long time ago, to be sure, but for someone like Apocalypse or Mr. Immortal, that’s not actually a very long time. There is one other bank that’s been around for that long–also Italian–but the modern banking system really only seems to have gotten started in the seventeenth century.

The other main historical problem is long-term stability. The financial industry is remarkably stable over a period of a few years, and the past few decades–2008 notwithstanding–have shown that they can be pretty stable over the intermediate term, but over the really long term? Much, much rarer. There were periods further back in history that did have something like a financial sector to the economy–Roman banks seem to have been pretty sophisticated in historical terms–but they have all, for one reason or another, collapsed. Since deposit insurance is a creature of the twentieth century, this means that if you were an immortal who lived through the end of a major civilization or even a decent financial panic, there was a good shot that you’d lose everything. So if you were depending on your deposits to keep you going, well, that’s maybe okay for a few decades, but not on the century timescale, let alone millennia.

To make matters even worse, for a huge chunk of history, the charging of interest was considered ethically problematic. The prohibition against usury still applies in the Muslim world, which is why Islamic banking looks so deeply strange to Western audiences. Western banks used a rather complicated legal arrangement to get around usury prohibitions in the Middle Ages, but the plain fact is that interest-bearing savings accounts the way we think of them really didn’t exist until the twentieth century. You could certainly invest your money, but now we’re talking about something different from simple compound interest.

II. Inflation

But even if there was an unbroken continuity of depository institutions that has existed or is likely to exist for more than a few centuries, there’s another problem: inflation.

To make a reference outside our normal genre, consider Mr. Darcy of Jane Austen’s Pride and Prejudice, who is said to have had an income, i.e. money he didn’t have to work for, of £10,000 annually. Which even in current terms is pretty cool, but most Brits with a job make way more than that. But when the book was published in 1813, that represented a sum closer to £6.5 million in today’s currency. Which is substantially cooler. But it also goes to illustrate just how badly individual units of currency have deflated over the years. One observer suggests that the effective inflation rate from 1913 to today is about 3.5% a year, something in the neighborhood of 1929% over the whole time period. So someone trying to live purely of interest is going to have one hell of a time keeping up with that. They’d need to make 3.5% just to break even, so they’d need to make about 7% total just to have something to live on.

If you can find a relatively safe investment (i.e. a place you can put money that will give a return without you needing to work at it, that makes 7% a year), consistently, for more than a few years in a row, please, please tell us what it is. Our portfolios, such as they are, are looking pretty sorry these days. The only way to make more than that is to either 1) own stuff yourself, be it land, a factory, IP, whatever, or 2) get a day job. Rich people choose the former; most people choose the latter. But the idea that you can just have a bunch of money, let it essentially sit, and expect to make a decent living for any serious period of time is problematic. Throughout history, the people in the world that have gotten rich have done so not on the basis of interest. Inflation, combined with long-term instability, makes that kind of thing truly implausible.

Don’t believe us? Think about the ancient royal houses of Europe. If compound interest works the way it’s supposed to under the myth, they should be the richest people in the world. And make no mistake: the royal houses that have managed to survive are pretty well off. But they’re far from being the richest people in the world, and a lot of their current wealth comes from marrying people who got wealthy in other ways, e.g. oil barons, shipping magnates, etc. One might realistically ask if they’d be wealthy at all if they’d had to rely solely upon their own fortunes. Others are officially supported by national governments, which is an awesome gig if you can get it, but does tend to preclude the kind of hiding-in-the-shadows, living-a-life-without-obligations thing that Duncan MacLeod and most other immortal characters tend towards.

One might be tempted to say “ah, but what about the stock market?” Unfortunately, it presents many of the same problems: stock markets haven’t been around much longer than banks (the NYSE only goes back to 1817), they suffer the same long-term instability problems, and positive returns on one’s investment are impossible to guarantee. Inflation applies to securities exchanges too. Adjusted for inflation, the DJIA would currently be trading around 900, and in the early 1980s would have actually been at a level deep into the plunge of the 1930s! What’s more, stock markets and their participants tend to be even more heavily scrutinized than banks these days–complying with SEC regulations is a significant burden on publicly traded corporations and their directors–so in some ways they’re an even worse choice for an immortal trying to lay low. You can open a bank account without attracting any regulatory scrutiny, but securities trading is a lot harder to disguise for very long. No, buying stock on public exchanges is no substitute for private ownership, nor is it a plausible way of putting compound interest or something like it to work.

III. Conclusion

So how are we to advise immortals on how to set themselves up so that they don’t have to work any more? A number of possibilities present themselves, the most obvious of which is to start buying real estate, don’t stop, and periodically fake your own death, reappearing as your own adopted child, so you can “inherit” it. This has its problems, but it’s not impossible, particularly if you aren’t terribly scrupulous about trying to stay within the bounds of the law. But simple deposits probably won’t cut it.