The Only Money You Can Trust
Followers of my Daily Prophecy will be familiar with my concept of money as time. They will also have encountered the Tupy-Pooley abundance factor based on Marion Tupy and Gale Pooley’s concept of the time price.
As I discussed yesterday, in the Tupy-Pooley formula, the time price of anything is the hours it takes to earn the money to buy that thing. To any ordinary wage-earner in a store or at a gas tank, this is the price that matters. When you run out of money, it is because you ran out of time to make more.
Time prices register how many hours it takes to earn the money to buy something. Using the time metric, Pooley and Tupy show that as the world population has grown by 71 percent since 1980, the time cost of the 50 most crucial commodities of life has dropped 72 percent. As population grew, it became drastically more “sustainable.”
To dramatize their point, they offer an intriguing riddle.
The Real Test of Affordability
Say it’s 1980 and you invite 100 guests for a fine dinner. It costs $10 per guest, for a total bill of $1,000. With 1980 a bad year for the economy, soaring interest rates, inflation of 13.4 percent, and worsening unemployment, a thousand dollars was a big hit on your wallet. But you managed it.
Then decades pass, and in 2018, you are feeling generous once again. But by this time the number of your friends has grown. Someone posts the invite on Facebook. 171 guests show up to share in your feast.
What do you do? What will be your bill? Can you afford it?
Pooley and Tupy have your answer. They show that since 1980 your real cost per guest has dropped by over 72 percent. That would mean that your total bill has dropped by over 52 percent despite 71 more guests. In 1980 dollars, that would translate into a total of just $478.80 in 2018.
However, you point out, because of “inflation,” the purchasing power of the dollar has dropped about two thirds since 1980. You would actually have to pay nearly $1,500 in 2018. That is pretty good, you say. Despite “inflation,” you only have to pay an extra 50 percent or $500 to accommodate 71 more people.
The Information Theory of Economics, though, would explain that this “inflation” measure merely reflects a crude index of how much the Federal Reserve has debauched the dollar.
It has little to do with the actual burden on you as the host. That burden is gauged by the amount of time you have to work to pay for the dinner. In 2018, you can earn your dinner party with 52 percent fewer hours than it cost in 1980. That is the real test of affordability.
What matters to the host is not just the money he has to pay. What really concerns him is how much time he has to work to pay it.
Although the Fed can always print more money, it cannot print more time. Only a Fed economist could argue that the nominal dollars created by the Fed are more real than hours of work.
There remains a further enigma…
Money is a Measuring Stick
Our hypothetical host turns out to be a hard money man. “To heck with 2018 paper dollars,” he says.
Since 1980, he has been reading Steve Forbes, Lew Lehrman, and Jim Grant and piling up savings in gold. He decides to use some of his gold to pay for the feast.
He read in my books, most recently Life After Google, that gold actually measures time. Time is what remains scarce and constant when everything else becomes more abundant under capitalism.
However, when he consults the markets he discovers that gold is a bad deal. The time price in gold has dropped less sharply than the time price of the commodities he has to buy for the dinner.
While the time price of most foods has dropped around 80 percent, the time price of gold — measured by how many hours it takes to earn the money to pay for it — has dropped just 58.6 percent. That means it costs him nearly 15 percent more to pay in gold than to pay in hours of work.
Somehow, the gold price is not the same as the time price. What is going on here?
When our host buys gold, he pays in hours of work. But this calculation assumes that gold is a commodity like the rest. But gold is unlike all the other commodities in that all the gold that has ever been mined remains available to be used as money.
Money is a measuring stick – not a magic wand for central bankers. A measuring stick cannot be part of what it measures. Like all the other measuring sticks — from the meter to the ampere to the kilogram — it must have an anchor in a physical constant outside of what it measures.
As Jude Wanniski explained in the 1990s, gold cancels capital and technology. Thus, it can serve as a measure of both these factors of production.
As people devote more capital to mining gold and deploy more advanced gear for exploration and extraction, the gold lodes to be mined become more remote and the deposits more attenuated.
The result is that the time to mine an incremental “Troy ounce” of gold has scarcely changed in millennia. While two centuries ago, people panned for gold from rivers and could deliver it in days, today it takes between ten and twenty years before a gold mine is ready to produce material that can be refined.
Even though the mine will be far more productive than the man with a sieve, overall it will take around the same amount of time to deliver an additional increment of gold.
The Long-Lasting Power of Gold
Gold is money, which is a measuring stick. It is not a commodity to be measured by money. A measuring stick that is part of what it measures becomes a largely meaningless self-referential loop.
The message of the gold price is that overall GDP – which is used by Tupy and Pooley to represent total production – may be a poor gauge of real value. Much of GDP is waste, or government transfer payments devoid of incremental real goods and services. Much of GDP is devoted to litigation to stop production rather than labor to increase it. As a measuring stick, the gold price signifies that perhaps 15 percent of those hours worked are not producing real wealth.
Regardless of the vagaries of GDP, gold has survived the millennia as money for a reason.
In a new financial crisis, when currencies everywhere succumb to inflation and chaos, businessmen and women around the world will come to understand that the only money that you can trust is anchored in time: the Tupy-Pooley factor.
Editor, Gilder’s Daily Prophecy