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Wednesday, August 18, 2010

Money In The Bank

I heard about the rich guys plot to give half of their money to charity, and I got to wondering just how much is tied up in charity now. Rocky gave me a couple clues and I took the data and put it in a spreadsheet to see just how much is there. One list is of the 100 largest foundations in the US, the other is a list of universities with endowments of over one billion. The total for each comes to just over $200 billion, which is nothing to sneeze at, but still, each one is just one tenth of the missing two trillion dollars.

There are two kinds of charities (that I know of). Charitable Trusts and the other kind, which I'll call Pay-Cash-Now Charities. A Trust takes their donations and invests them and then uses the interest and/or dividends to make grants to "worthy" causes. The Pay-Cash-Now (United Way, etc.) kind takes their donations and immediately turns around and distributes them to "worthy" causes. They each have their own definition of what is a worthy cause.

The rich guys plan to give away their money is really just a scam to relieve them of the responsibility of managing their money. There is no way they can spend even a fraction of their holdings. They can't even spend the interest their holdings generate. So they turn over their holdings to some foundation and some nameless, faceless committee gets to figure out where to invest it. It's important that it goes to a trust and not one of those other charities because that way the wealth will remain concentrated and invested and nothing will really change. If it goes to one of those other charities, well who knows where it will go. They will probably just fritter it away on one of their foolish social programs, and the sharks will be in there skimming the top 90 percent into their own pockets. No, Pay-Cash-Now charities are not the way to go.

Trusts depend on corporations making money. Their main goal is preservation of capital. If they truly want to preserve the value of their capital, they have to allow for inflation. To do this they need to reinvest a portion of their proceeds. If you don't allow for inflation, real value of your capital will decrease year after year until all the money you earn will only buy you a six pack at the local 7-11.

Say they have one billion dollars at their command. If they are making ten per cent on their investments and there is no inflation, then they would be able to distribute all of their earnings, or a hundred million dollars. If they are only getting a five percent return, and inflation is running at four percent, then they can only distribute ten million dollars. If inflation is higher than your returns, well, you are losing money and you better hope it doesn't go on for too long.

I see three kinds of situations where charity could be used. One is where you have a natural disaster and a great deal of the infrastructure of a community is destroyed. Another is an unlucky person who is disabled and can no longer support themselves. Those are usually good causes. The third situation is where you supporting people on a long term basis because . . . who knows why? Not a good situation. This is where there is a lot of conflict over welfare, unemployment and jobs.

Remember the old Roman maxim: Bread and Circuses. As long as you keep the people fed and entertained, you can do whatever you want.


Anonymous said...

Surely Bill gates money should be given to people who have suffered nervous breakdowns from frustration at using MS products ? ;-)

Rocky Humbert said...

Most so-called "501C3" are required to distribute 5% of their net assets each year to retain their tax free status. This is regardless of inflation or investment returns.