Princeton University Is the World’s First Perpetual Motion Machine

Every once in a long while, a Writer will disclose a hidden truth without ever spelling it out.  It is up to us to follow the trail of crumbs he leaves. and yes, accusing the Princeton Endowment fund of been a PONZI scheme, just like Bernie Madoff's scheme would attract criminal charges pushed politically from on high.  So we are not going to do that.

It is noteworthy that the high consistent yield of ten percent compares exactly almost to Bernies yield profile and that triggered my suspicions from afar long before Bernie was finally called out.

It is wonderful to know that this fund has investments able to maintain this yield.  Perhaps they care to tell us their secrets?  Perhaps Malcolm can do an expose on those investments.

Princeton University Is the World’s First Perpetual Motion Machine

If you had a car that could run forever, would you still stop for gas?

Malcolm Gladwell

Sep 21

The holy grail of scientific inquiry in the Middle Ages was the perpetual motion machine. Was it possible to create a mechanical apparatus that could run—forever—without any external power source? One elaborate mechanism after another was created. Eccentric inventors devoted their lives to this question. To this day, the patent offices of the world receive submissions from people claiming to have solved the puzzle.

But of course a perpetual motion machine is impossible: the concept will always violate either the first or second law of thermodynamics. “Oh ye seekers after perpetual motion, how many vain chimeras have you pursued?” Leonardo da Vinci famously said. “Go and take your place with the alchemists.”

Well, I have news for Leonardo da Vinci. It turns out that there is such a thing as a perpetual motion machine. It’s called Princeton University.

This breakthrough happened quietly, as many epochal events often do, buried in a press release issued by the school on October 29, 2021. Why was the breakthrough ignored until now? I cannot say for certain, except that perhaps few observers of America’s educational system are as unhealthily obsessed with the fine print of Ivy League press releases as I am.

But when I read the news, I will tell you in all candor, I gasped in shock. For years I’ve been quietly predicting that this moment would someday come. And now it has.

Here is the short version. (Because, believe me, there is a much longer version, too.) Universities fund their operations largely through three sources of income: government grants, student tuition, and distributions from their endowment. The proportion drawn from each of these three buckets varies from school to school.

If you are a school that does a great job of winning federal research grants, like Johns Hopkins, then the first bucket counts for a lot. If you’re an elite school that takes in lots of full-tuition-paying rich kids and doesn’t give out a lot of financial aid—like, say, Washington University in St. Louis—then the second bucket counts for a lot.

But the third bucket is tricky. The purpose of an endowment is to subsidize a university’s annual budget. But nobody wants to dip into principal unless absolutely necessary. So standard practice is to divide the annual return from an endowment into two parts—returning one portion to the principal, so the endowment keeps growing, and using the rest to supplement the annual operating budget.

A university that relies on those three buckets to fund its operations is not a perpetual motion machine. It’s a normal machine. It requires an annual influx of money, from as many sources as possible, to keep going. If the annual influx of funds from tuition and research grants goes to zero and you have to dip into principal to keep things going, pretty soon you have no principal left. And before long the school is bankrupt. When you hear about small liberal arts colleges that have shut their doors in recent years, that’s what happened. Shrinking enrollment means overreliance on the endowment, and no endowment has ever been large enough to make up that difference.

That is, until now—in the leafy, gothic cradle of financial alchemy known as Princeton University.

After a stellar year in 2021, Princeton University has an endowment of $37.7 billion. Over the past 20 years, the average annual return for the endowment has been 11.2 percent. Let us give Princeton the benefit of the doubt and assume that at least some of that was luck and maybe unsustainable, and that a more reasonable prediction going forward would be that Princeton can average a return on its investments of an even 10 percent a year. That puts Princeton’s endowment return next year at roughly $3.77 billion.

Now—what is Princeton’s annual operating budget? $1.86 billion. The arithmetic here is not hard. $3.77 billion in investment income minus $1.86 billion in operating expenses leaves you with $1.91 billion.

Princeton could let in every student for free. The university administrators could tell the U.S. government and all of its funding agencies, “It’s cool. We got this.”

They could take out the cash registers in the cafeteria, hand out free parking to all visitors, give away Princeton sweatshirts on Nassau Street, and fire their entire accounts receivable staff and their entire fundraising staff tomorrow. They could say to every one of the hardworking professors on their staff: “You never have to spend even a second writing a grant proposal again.” Free at last! Free at last!

Princeton may have become the first university in human history that does not require external funding for its continued operation. And even better, it can self-fund its own operations and have more than a billion dollars left over.

Do you understand the genius of this? It means that next year, Princeton will start off with almost $39 billion in the bank. And assuming a 10 percent rate of return, they will make $3.9 billion, which means that this time around, they can return $2 billion to the endowment—and on and on, in a never-ending upward trajectory of endowment growth, that will one day leave Princeton with a pile of cash so high that it’ll be visible all the way from Wall Street.

The research team at Oh, MG has even created a handy chart—just so you can visualize the surreal majesty of Princeton’s accomplishment. Take a look: The blue line is the university’s annual operating expenses. The orange line is the endowment’s return on investment.

As you can see, Princeton has been flirting with perpetual motion status since nearly 2002. Until this year, the endowment return was a healthy cushion—ALMOST big enough each year to fund the entire university's operations for the following year—but not quite.

But, man—look at that triumphant spike in 2021! Even if Princeton were now to fall way back down to the average investment return it’s raked in over the past 20 years, we'd still be high above the blue line. The laws of fiscal thermodynamics have officially been repealed. My friends, this is what perpetual motion looks like.

Now, a couple of questions.

First: I suspect that a large contingent of people in Cambridge are crying foul at this point. Hasn’t Harvard also reached perpetual motion status? Harvard has a budget of roughly $5 billion and (after a spectacular year in 2021) an endowment of $53 billion. So, sure. Harvard looks like it can run forever as well. But I have two quibbles. First, a 10 percent return on $53 billion only gives you $5.3 billion to play with, and after paying all the bills with that, Harvard would be left with a margin of just $300 million.

I’m a purist on these matters. Years ago, when I first dared to imagine that perpetual motion was possible in the world of higher education, I decided I would only confer this most prestigious of titles on schools that threw off so much excess cash that returning to the laws of nature would be impossible. I think you need a clean $1 billion annual surplus, after you’ve fully funded your school, before you can qualify. Harvard just isn’t there yet.

Plus, I hear through the grapevine that the Harvard endowment has had a brutal 2022, so I’m not even sure it’s still in the picture. Let us not allow perpetual motion to fall victim to grade inflation, shall we? Surely we need to insist on irrefutable evidence of extravagant and consistent overfunding.

Second question: If Princeton has in fact captured the holy grail of higher-ed finance, why don’t they take all the steps I’ve just described?

I mean—wouldn’t life be a lot easier if you didn’t have to write grants, bother alumni for donations, and impoverish the parents of your students?

Of course it would. When visionaries succeed in defying the laws of nature, those achievements demand some kind of accompanying revolution. After the Wright Brothers first took flight at Kitty Hawk, they didn’t bury the news in a random press release and go back to making bicycles. No! They transformed the world. In the 10 months since I read that fateful Princeton press release, I’ve been patiently waiting for the announcement from the school’s president:

“Leonardo was wrong: We have done the impossible. Princeton has now permanently left the grubby land of the invoice, the grant, and the fundraising appeal. We are post-tuition.”

But instead, there has only been this. An article in the July/August 2022 edition of the Princeton Alumni Weekly, titled “Princeton’s Special Sauce.”

“By many measures, alumni support has never been healthier. Annual Giving brought in more than 68.6 million last year, helping to boost the endowment to a whopping $37.7 billion, and a higher percentage of Princeton’s alumni give back to their alma mater than graduates of any other college.”

Sigh. Princeton, apparently, is still pursuing its alumni for money that it does not need, and its alumni are still dutifully answering the call… to the tune of $68.6 million.

If you had a car that could run forever, would you still stop for gas? Just to drop $80, and pantomime filling an imaginary tank with a substance your car did not require? No you wouldn’t—unless, that is, you were a graduate of Princeton, and you felt that preserving that kind of pointless ritual was central to your identity.

The article continues (and here you can sense that somewhere in the alumni affairs office of Princeton University there is the panicked realization that the job they were set up to do is no longer necessary).

“Still the Annual Giving campaign, which boasted 61.4 percent participation as recently as 2013-2014, drew contributions from only 49.6 percent last year. Participation rates by some younger classes are even lower.

“Is something going on?”

Yes, something is going on. The first and second laws of thermodynamics have been repealed and maybe some of the previously dutiful alumni have taken note.

I have an idea. Why doesn’t the fabled Princeton fundraising machine, now that it no longer has a function, pull up stakes and donate its services to a school still constrained by the laws of nature?