VT or VTI for Stock Allocation?

Discussion of the Stock portion of the Permanent Portfolio

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VT or VTI for Stock Allocation?

Post by hrux » Tue Apr 26, 2011 1:20 pm

After reading articles like the attached whereby everyone is predicting that China will overtake the US as the world's powerhouse, as an US based investor I am struggling with the concept of having the majority of the stock allocation committed to the US market.  Would one be better served by investing in a global based index like VT?

Perhaps Medium Tex, Craig and others could advise why one should not be more globally diversified?

http://finance.yahoo.com/blogs/daily-ti ... et=&ccode=
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Re: VT or VTI for Stock Allocation?

Post by fnord123 » Tue Apr 26, 2011 1:36 pm

I feel similarly to the way you do.  The gold component of the PP is 25% diversification already. 75% in dollars was too much for me however, so I have in my VP the equivalent of 25% of my PP in VEU (Vanguard all-world except US ETF) and the Fidelity International stock fund (401K investment).  So you could say I am really running a 5-way modified PP - 20% cash, 20% treasuries, 20% gold, 20% US equities (VTSAX - more tax efficient than the S&P500), 20% international.

P.S. If everyone is predicting China will overtake the world, then contrarian investment wisdom holds one should run away from China as it is most likely in a bubble.  This squares with my own personal beliefs as well.
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Re: VT or VTI for Stock Allocation?

Post by MediumTex » Tue Apr 26, 2011 1:45 pm

Are we talking about communist China?

The China that doesn't respect property rights?

The China that doesn't protect human rights?

The China that has no reliable mechanism for enforcing contract rights?

The China that has communist bureaucrats making capital allocation decisions?

The China that will in coming decades have the largest demographic bulge in the history of the world due to the one child policy?

Sounds pretty risky to me.

VTI is the way to go for PP purposes.  Throw 15% in an international equity index and go take a nap.
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Re: VT or VTI for Stock Allocation?

Post by craigr » Tue Apr 26, 2011 1:48 pm

The reason for this approach is that Browne designed the portfolio to be linked, as much as possible, to your economy where you actually live. It is entirely possible that an area where you are concentrating your money goes through a bad crash whereas the local economy is doing quite well. So diversifying outside of where you live does have risks. If I was in a very small country with concentrated industries (e.g. Iceland) I would be more inclined to worry about diversifying globally, but US companies have massive exposure to international markets already.

Also, be careful about economic growth numbers coming out of a government, especially a communist government like China. I am not denying that the Chinese economy is growing. But there could also be some hyperbole involved in the reports. Also their currency is tightly controlled and this could have its own impacts going forward.

Funnily enough Harry Browne had some thoughts on this as recounted by Peter Brimelow after Browne passed away:

http://www.marketwatch.com/story/harry- ... -megatrend
I first met Browne in 1975, when he was living in a magnificent waterfront home in West Vancouver. I was interviewing him for Canada's Financial Post.

Browne was depressed, because of a woman, he said with his disarming frankness. His house was being remodeled and the corridors were lined with hundreds of opera records. (He was a particular fan of Viennese operetta and years later presented my late wife with tapes of his favorite arias, culled from his record collection).

I was naturally drawn to his economic analysis. But I felt obliged to ask him my standard question for free-market types: if markets were so necessary, why was the Soviet Union showing such extraordinary growth rates?

I knew about these growth rates so because my college economics text book had reported them. The author, MIT's Paul Samuelson denounced as a "vulgar error" the idea that command economies could not be successful. (Samuelson was later awarded the economics Nobel Prize, presumably not for this).

Browne's response was unhesitating.

"I don't believe it," he said.

I was taken aback by this apparent dogmatism. But years later, when the Soviet Union, collapsed, it turned out that its economic output had indeed been systematically over-estimated by Western "experts" - that it was really, as someone said, "Upper Volta with nuclear weapons."

On another megatrend, Browne had been right.
But you know if someone wanted to use VT instead of VTI I don't have that big of an issue with it really because there are just so many worse things you can do. Yeah there is some currency risk, but as far as the fund goes it's very broadly based and the expense ratio is still within reason. The biggest risk really is market tracking error.

[EDIT: Tex beat me to the more blunt point on China]
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Re: VT or VTI for Stock Allocation?

Post by Lone Wolf » Tue Apr 26, 2011 2:13 pm

While the US has its share of problems, I am extremely skeptical of China.  The chief problem that China faces is that they still operate under lots and lots of central planning.

Many apparent good things that China has going for it get squandered.  For example, Peter Schiff loves China's high savings rate.  It's true that a high savings rate creates opportunity for capital investment and thus more productivity.  But I think that much of this advantage is wasted because this savings is poured into state-controlled banks and then centrally planned (aka pissed away) on state-favored projects.

Under a normal free market economy, successful entrepreneurs grow their capital and receive more capital.  Losses are recognized and capital is moved away from foolish investments and foolish investors.  When this isn't allowed to happen (due to central planning, bailouts, or other interferences) resources are wasted.

In China, bank interest rates are capped so that banks won't compete with one another for savings.  In the cities, gas is rationed.  The government decides where you can live (or at least where you can live if you want your kids to go to school.)  GDP targets are centrally planned (and malinvestments undertaken accordingly to meet these targets.)

I found this Australian video report on China's ghost cities fascinating.  The level of malinvestment is just incredible.

A society of 1.25 billion smart, hard-working people and a high savings rate clawing its way out of the dark ages of Communism does set the stage for meteoric growth.  But once you look past the headline, I think there's enormous cause for skepticism.
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Re: VT or VTI for Stock Allocation?

Post by AdamA » Tue Apr 26, 2011 4:29 pm

hrux wrote: After reading articles like the attached whereby everyone is predicting that China will overtake the US as the world's powerhouse, as an US based investor I am struggling with the concept of having the majority of the stock allocation committed to the US market. 
Remember reading the same articles about Japan 20 years ago?
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Re: VT or VTI for Stock Allocation?

Post by Indices » Tue Apr 26, 2011 10:49 pm

My brother lived in China for several years and speaks fluent Mandarin. He visited the countryside for several months before he left. You cannot imagine the poverty. In parts of China they still use steam engines to transport coal. The country's per capita income is half that of Mexico's. Anyone who thinks this country is going to be the next world power is deluded.

The US has not been the world's largest economy for several years. The world's largest economy is the European Union. Did the US collapse when the EU took the lead? Of course not. Being the world's largest economy means absolutely nothing.
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Re: VT or VTI for Stock Allocation?

Post by MediumTex » Tue Apr 26, 2011 11:26 pm

Indices wrote: My brother lived in China for several years and speaks fluent Mandarin. He visited the countryside for several months before he left. You cannot imagine the poverty. In parts of China they still use steam engines to transport coal. The country's per capita income is half that of Mexico's. Anyone who thinks this country is going to be the next world power is deluded.

The US has not been the world's largest economy for several years. The world's largest economy is the European Union. Did the US collapse when the EU took the lead? Of course not. Being the world's largest economy means absolutely nothing.
Great post.

Thanks.  

I feel like when people talk about China they are often talking about the top 1% of the population.  As far as I can tell, China doesn't have a large middle class (and doesn't appear to be close to getting one).

China reminds me of a large Asian version of Mexico.
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Re: VT or VTI for Stock Allocation?

Post by Indices » Tue Apr 26, 2011 11:40 pm

MediumTex wrote:
Indices wrote: My brother lived in China for several years and speaks fluent Mandarin. He visited the countryside for several months before he left. You cannot imagine the poverty. In parts of China they still use steam engines to transport coal. The country's per capita income is half that of Mexico's. Anyone who thinks this country is going to be the next world power is deluded.

The US has not been the world's largest economy for several years. The world's largest economy is the European Union. Did the US collapse when the EU took the lead? Of course not. Being the world's largest economy means absolutely nothing.
Great post.

Thanks.  

I feel like when people talk about China they are often talking about the top 1% of the population.  As far as I can tell, China doesn't have a large middle class (and doesn't appear to be close to getting one).

China reminds me of a large Asian version of Mexico.
Thank you for moderating and commenting on this great forum. I've learned a tremendous amount from you and Craig.

After watching the video above I think China is beginning to look a lot like Dubai where I used to live. They built tons of luxury apartments that are empty to this day. Even though I was earning the equivalent of 70k a year I could not afford my own apartment. Most apartments were owned by investors and kept empty in the hopes that they could be flipped. The US stock crash caused a global chain reaction that blew up Dubai and caused it to have a sovereign default. Dubai is fortunate that most of its poor laborers are from South Asia, so they could just deport unemployed and unhappy peasants. China can't deport its citizens anywhere (though it may wish to do so).
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Re: VT or VTI for Stock Allocation?

Post by murphy_p_t » Wed Apr 27, 2011 7:49 am

Lone Wolf wrote:

Under a normal free market economy, successful entrepreneurs grow their capital and receive more capital.  Losses are recognized and capital is moved away from foolish investments and foolish investors.  When this isn't allowed to happen (due to central planning, bailouts, or other interferences) resources are wasted.

I'm not sure if you're describing commie China or the USA under the current regime...bailouts, bank rescues, GM bondholders getting burned, AIG, waivers from Obamacare for unions, the Bernanke put, cash for clunkers, homeowner tax credit, crony capitalism, central planning of interest rates (read: Federal Reserve)...oh, combined with an (extremely expensive) aggressive foreign policy of meddling in sovereign states.
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Re: VT or VTI for Stock Allocation?

Post by Lone Wolf » Wed Apr 27, 2011 8:43 am

murphy_p_t wrote:
Lone Wolf wrote:
Under a normal free market economy, successful entrepreneurs grow their capital and receive more capital.  Losses are recognized and capital is moved away from foolish investments and foolish investors.  When this isn't allowed to happen (due to central planning, bailouts, or other interferences) resources are wasted.
I'm not sure if you're describing commie China or the USA under the current regime...bailouts, bank rescues, GM bondholders getting burned, AIG, waivers from Obamacare for unions, the Bernanke put, cash for clunkers, homeowner tax credit, crony capitalism, central planning of interest rates (read: Federal Reserve)...oh, combined with an (extremely expensive) aggressive foreign policy of meddling in sovereign states.
That's exactly right.  Whether it's through bailouts or some other misguided central planning Charlie Foxtrot, governments the world over feel duty-bound to interfere with the market-clearing process.  The result is invariably waste of resources and capital, sometimes on a grand scale.  Those bailed out banks can't be purchased by their wiser, smarter competitors and instead remain in the hands of those who took excessive risks.  And rather than working to build homes where people need them or grow food for their families, workers in China are building ghost cities.

Politicians as a profession are willfully blind to what Bastiat called "that which is unseen".  No matter how many times central planning fails, they will never, ever let it go.
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Re: VT or VTI for Stock Allocation?

Post by moda0306 » Wed Apr 27, 2011 8:56 am

I tend to wonder if when the possible vast disparity of wealth as a result of a diminished government were to finally rear its head, whether "misallocation of resources" would even be a relevant term as 90% of our resources would be going to support the Plutocrats.

I am skeptical of a vastly diminished government for that reason.  I find that too many resources going to support the few is in-and-of itself a misallocation of resources.

Just my 2 cents with a dash of Devil's Advocacy.
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Re: VT or VTI for Stock Allocation?

Post by AdamA » Wed Apr 27, 2011 9:09 am

moda0306 wrote: I am skeptical of a vastly diminished government for that reason.  I find that too many resources going to support the few is in-and-of itself a misallocation of resources.
I agree, Moda.  To me, this is the paradox of this Libertarianesque thinking that is becoming more and more popular these days. 

It's easy to take for granted how much protection our government gives us.  If it were to "diminish" (at least in certain ways) I'm not sure that it would be the utopia here that some think.

This is not to say that our government hasn't perhaps gotten excessively large, just that it's kind of an imperfect balancing act.
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Re: VT or VTI for Stock Allocation?

Post by moda0306 » Wed Apr 27, 2011 9:21 am

Yeah Adam... Government can misallocate resources probably more easily than any other entity hands down, so naturally this happens all over the place.  I see this as a flaw of an apathetic and/or uneducated public... which will lead to just as many poor private-sector decisions.  I may not trust the future of SS and medicare, but I also don't trust:

- 90% of car salesmen
- 90% of financial advisors
- 90% of insurance salesman
- 90% of realtors
- 70% of auto repair shops
- 80% of airlines
- 50% of doctors

Yes, an educated consumer should dive in and weed out the bs in these industries, but the fact is people don't because they aren't educated, don't have the time, or it's just simply too difficult.  I can honestly say I would NOT be able to properly weed through and educatedly bargain a health insurance arrangement.  Without safety nets most people would still fall victim to all the market noise out there.  The PP reinforces this to some degree.  I think most of the private sector is trying to sell you snake oil you don't need, and many would agree, but then they act like any form of social insurance or minimum need transfer of wealth is absolute blasphemy (ok, getting a little straw-man going here).
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Re: VT or VTI for Stock Allocation?

Post by MediumTex » Wed Apr 27, 2011 9:23 am

I like the idea of state and local governments shouldering a lot more public functions, just as the Constitution prescribed.
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Re: VT or VTI for Stock Allocation?

Post by moda0306 » Wed Apr 27, 2011 9:27 am

MT,

I too like that idea... I wonder how this would function in the real world, though.  Would all the people with enough wealth & market influence just move into Plutoville where there's no social insurance of any kind?  It's a little easier to vote with your feet now than in 1776... not saying that it's a bad thing or putting the idea down... but as always I like to think through the logical conclusion of certain ideas.
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Re: VT or VTI for Stock Allocation?

Post by MediumTex » Wed Apr 27, 2011 9:49 am

moda0306 wrote: MT,

I too like that idea... I wonder how this would function in the real world, though.  Would all the people with enough wealth & market influence just move into Plutoville where there's no social insurance of any kind?  It's a little easier to vote with your feet now than in 1776... not saying that it's a bad thing or putting the idea down... but as always I like to think through the logical conclusion of certain ideas.
This has actually been happening for years in Texas.

Look at all the companies that have moved their headquarters to Texas.

Low taxes, low cost of living and nice weather are powerful draws.
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Re: VT or VTI for Stock Allocation?

Post by moda0306 » Wed Apr 27, 2011 9:50 am

One additional thing... I tend to take the "misallocation of resources" argument to what most people would argue are proper government functions.  Pretend for a second that our military actually practiced DEFENSE and not occupation... even then, having an active police force and military is redistributing from those that are properly equipped to defend themselves to those that aren't, and thereby creating a "moral crisis" of "I won't own a gun and take proper precautions."

I'd rather have police and a military, own 1 gun, and call my bets hedged at that point.

Another item, roads.  The government's slicing and dicing of communities into convenient organisms for transportation may be seen by some to be a trampling of their rights and a completely arbitrary organization of private property that is a misallocation of concrete, land, etc.  No market discipline was used in deciding when roads are fixed or how they're organized, only "arbitrary central planning."  But I'd argue that after looking at some of the creative efforts to create more efficient intersections (roundabouts) and freeway interchanges (there's a massive new one that's supposed to decrease congestion but looks like a maze and probably involves a learning curve) that it's worth the cost of a government monopoly in roads and the misallocations of resources that may occur to have a standard transportation system not subject to different tolls, widths, weight tolerances, and awkward transitions (not to mention market manipulation) that would accompany a privately run road system.

I'm not trying to patronize you guys or anything and say that military = social engineering.  Just that it may help to try to look at things from outside the prism that government MUST be somehow effing up the allocation of resources and more importantly that a privately run system would lead to a better result.
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Re: VT or VTI for Stock Allocation?

Post by Lone Wolf » Wed Apr 27, 2011 9:56 am

MediumTex wrote: I like the idea of state and local governments shouldering a lot more public functions, just as the Constitution prescribed.
Precisely right.  In response to the question of how small government should get, Harry Browne answered, "I want a government small enough to fit inside the Constitution."

The most successful systems are robust and flexible.  We have only one federal government.  If we want maximum flexibility, this component of our government should be as small as possible.  The more "features" that are glommed on to it trying to meet every need of every person in a vast nation, the more complex it gets and the harder it becomes to predict the side effects of such interactions.  In the software development world, this anti-pattern is so common that it has a name: the Big Ball of Mud.

One day you wake up with a system that is so complex that even though you know it is filled with waste and garbage, you're too afraid to change it because you don't know what will happen.

The Framers foresaw this problem, specifically enumerating a very limited set of governmental functions.  The 10th Amendment specifically insists that everything else was reserved to the states or to the people.  Interestingly, when Madison proposed it, many thought that it was so obvious that it ought to be unnecessary.  (They hadn't considered how inconvenient politicians in the 20th century would find this design feature of the Constitution.)

It's fascinating to read these arguments being played out in the Federalist Papers.  These men really knew how to design a system of government.  We as a country completely lucked out in the "Founding Fathers" lottery.
moda0306 wrote: I see this as a flaw of an apathetic and/or uneducated public... which will lead to just as many poor private-sector decisions.  I may not trust the future of SS and medicare, but I also don't trust:

- 90% of car salesmen
You don't need to fear the used car salesman.  He can't use force on you or confiscate your wealth.  Just walk away from him.  The government exists to protect you from force and fraud.  The rest is down to who you choose to associate with.
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Re: VT or VTI for Stock Allocation?

Post by moda0306 » Wed Apr 27, 2011 9:57 am

MT,

I see that.  I wonder if you eliminate SS, Medicare, and welfare and hand it 100% to states & cities how much more instantaneous the effect would be.  Do you really think Texas or their best suburbs would take on social insurance of that degree?

I think our country would dissolve into some very nice, wonderful free-market communities that the poor can't afford to live in with great private schools and everyone saving for retirement properly, and in contrast absolute cesspools (think Detroit x10) where the free-market is having the opposite effect, and the desperation that was supposed to get people to make themselves better people is actually making them shallower, weaker, and greedier.  
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Re: VT or VTI for Stock Allocation?

Post by moda0306 » Wed Apr 27, 2011 10:08 am

LW,

My point about the marketeers is that people NEED certain products from our society, and when desperation and poor regulation grips business and individuals the fine print and half-truths come out in spades, and consumers are left with the choice of either not participating in the market (kind of difficult in many of the areas mentioned) or trying to determine the best businesses in the market and properly weigh their options.  The fact is, if I want to be able to get anywhere efficiently, I DO have to trust some salesman at some point, whether an individual or car-lot.  I may be protected by fraud, but am I protected from omission?  More importantly, it's not so much a call to individual regulation of those markets as a sign that the private sector is SO full of lies, half-truths, fine print, legalese, and sales-pitches that it could hardly be argued that a system largely based on transactions within that market is going to be a "proper allocation of resources."
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Re: VT or VTI for Stock Allocation?

Post by murphy_p_t » Wed Apr 27, 2011 10:11 am

Adam1226 wrote:
moda0306 wrote: I am skeptical of a vastly diminished government for that reason.  I find that too many resources going to support the few is in-and-of itself a misallocation of resources.
I agree, Moda.  To me, this is the paradox of this Libertarianesque thinking that is becoming more and more popular these days. 

It's easy to take for granted how much protection our government gives us.  If it were to "diminish" (at least in certain ways) I'm not sure that it would be the utopia here that some think.

Adam,

I'm curious...what gov't protection are you grateful for?

Ironically, It seems to me that the examples I cited above largely benefit the plutocrats aka too-big-to-fails. For example, attempting to prop up the housing market helps builders, bankers, real estate agents to the detriment of renters who would like to buy a house @ a reasonable price. The orig manipulation is also to be condemned, which led to the bubble in the first place (Greenspan keeping rates so low, etc)

Another example is Obamacare...designed to greatly increase the market size available to the insurance companies thru gov't mandate.
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Re: VT or VTI for Stock Allocation?

Post by moda0306 » Wed Apr 27, 2011 10:21 am

Murphy,

Eventually a benefit paid to someone (even direct poor-person-welfare (as opposed to corporate)) is going to end up in the hands of a corporation.  That doesn't mean that every government dollar spent on welfare is in effect a distribution of wealth from the middle-class to the Plutocrats.

While certain government policies definitely help the Plutocracy, I don't believe that the market is self-balancing in that the removal of things like medicare, medicaid, welfare, SS, universal education, antitrust laws and Obamacare is going to result in a flatter distribution of wealth and income.  I think the effect would be very much in the opposite direction, despite any flaws in the individual programs mentioned.
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Re: VT or VTI for Stock Allocation?

Post by Lone Wolf » Wed Apr 27, 2011 10:22 am

moda0306 wrote:Yes, an educated consumer should dive in and weed out the bs in these industries, but the fact is people don't because they aren't educated, don't have the time, or it's just simply too difficult.  I can honestly say I would NOT be able to properly weed through and educatedly bargain a health insurance arrangement.
Don't think too much about what it takes to make a "perfect" decision.  It won't happen and can't happen in a fluid world.

For example, I know jack about cars.  Yet still, somehow even an ignoramus like me can find a good deal on a car with just a little research.

The pricing system holds incredible power to perform much of this work for you.  No central planner will understand the effect that a surplus of leather in one part of the world has on the price of chaps in my corner boutique, yet the pricing system fluidly and reliably transmits this tiny nugget of information around the entire planet.  If you've never read I, Pencil, it's a great illustration of how prices collate information in ways that planners never could.  It's an incredible thing.
moda0306 wrote: military is redistributing from those that are properly equipped to defend themselves to those that aren't
The military is very much a proper function of government, prescribed in the Constitution.  It's a completely legitimate and completely necessary extension of our natural right of self-defense.

Police, on the other hand, are a function of local government.  I recommend living in an area with the level of police protection that you approve of.  I also recommend having a backup plan in case they are unable to protect you.
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Re: VT or VTI for Stock Allocation?

Post by moda0306 » Wed Apr 27, 2011 10:46 am

A car is one thing, but insurance & investing ones wealth is another, is it not?    Further, if we privatize our schools as well, what's the mechanism for maintaining proper consumer skepticism in transactions when the very entities educating our children are products of a private sector that they are to be effective judges of.

I have a feeling that our public-sector schools do a better job of instilling us with some skepticism of government than a private-based system would be of instilling us with the proper consumer/contract skills necessary to navigate as young adults.

I guess I simply don't see these market forces working the way you think they will.

One last thing, as much respect as I have for the founders (this isn't simply lip service... I have am dumbfounded by their wisdom, courage and selflessness) I wonder if the size and scope of government would have looked a bit different if non-white, non-male, non-landowners had more political say during that time.  I mean we almost literally allowed the Plutocracy plus some mid-income individuals have the initial say in what our government should do... Maybe there would have been an 11th amendment for a system of social insurance guaranteed to every individual in the country.
"Men did not make the earth. It is the value of the improvements only, and not the earth itself, that is individual property. Every proprietor owes to the community a ground rent for the land which he holds."

- Thomas Paine
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