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Thursday, March 25, 2010

Money For Nothin'



I've been thinking it would be nice to have a solid currency, one that wasn't subject to inflation, one that held it's value year in, year out, so you could establish some kind of base line for comparing prices. Gold used to be the old standby, and to some extent still is, but gold goes in and out of favor and the price reflects it. As recently as 1920 one ounce of gold was worth 20 US dollars. When I was a kid, the government was holding the line at $35. This week it's closer to a thousand. Next week it might drop to $500. Too volatile, not what we need.

So then I got to thinking, maybe what we need is a made up currency, one not backed any government, one that maintains some consistency. You could price all other currencies in terms of this one new, imaginary currency. It would give you a baseline for all other valuations. All it really needs is a name.

I was thinking we would set it's value by averaging the price of several commodities. For instance:
  • a day's manual labor
  • a ton of coal
  • a ton of steel
  • a quantity of oil
  • a quantity of water
  • a ton of flour
You might actually need a list of a couple of hundred items to get some kind of stability. And then you are going to have different prices in different parts of world. Still, if we set the value of one kookaburra (to pick an arbitrary name for this new currency) to be one ton of steel delivered in Chicago, then you have some kind of benchmark. It might be that one ton of steel delivered in Tokyo might be two kookaburras.

Prices have gone up by roughly a factor of ten in the last 40 years. That means they have doubled about 3 and a third times. 40 years divided by 3 & 1/3 is 12, which means prices have doubled every 12 years. Using the Rule of 72, that means inflation has been running about 6 percent. So if you have not been making an average 6% on your investments, you are losing money.

Once again, this post has just been an excuse to post a tune. Definitely a blast from the past.

Dire Straits - Money For Nothing

Update April 2015: Replaced graph from Wikipedia that Blogger lost.
Update March 2021 replaced missing video.

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1 comment:

  1. Bulfinch's SociologyMarch 27, 2010 at 11:16:00 AM PDT

    I think that's the right answer but, but this is a situation where the only people who would understand and use the kookaburra are the ones who understand why it is nessecary and they aren't the ones who really need to use it.

    Like going into a college bar at last call and explaining why everyone should have a designated driver. At that point only the designated drivers can understand what you're saying and they don't really need it. Everyone else will either just vomit, hit, punch, or cry on your shoulder.

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