Real World Finance or How did a piece of paper become our pay?

Posted on May 17, 2013


Where does money come from? Supposedly it comes from the value of owned objects – an object is worth such and such because the market will bear it. So let’s start with a new country. We start with 100 gold bars at 1 oz for each person. As the government setting up currency, we want to split the ‘assumed value’ of the national gold into enough coinage to allow day to day financial events to occur. Buy a piece of gum. Buy a sandwich, buy a car, buy a house. Let’s start out with 1 oz. gold = 1 blammy (or doozy or tapay or..) BUT since gold is so rare and we need to split it’s value amongst the people, we set up 1 blammy = 10 deciblammys = 100 centiblammys = 1000 milliblammys. Now we’re dealing with 1/10 oz or 1/100oz of gold. Since we have 100 gold bars worth 1 blammy each, we have 100 X 10 deciblammys (1000 centiblammys) or 100 x 100 centiblammys  or 100 x 1,000 milliblammys (100,000). Depending on how many people we have, this might work.

If we have 10 people, that’s an awful lot of millblammys in everyone’s hands. Who needs 1000 coins? Maybe 100? So our blammy setup is a little bottom heavy for 10, if we have 100 people then we each have 100 centiblammys. This seems like a pretty good number, I can at least handle keeping 100 coins of something. Let’s up the population. We have 1,000 people that means each person has 1000 milliblammys. Getting a little tight here but we’re approaching a stable point. It’s all relative but the more different prices and items you have, the more the spread of coinage needs to be. If you buy a car for 1000 milliblammys, is a sandwich worth 10 miliblammys? (Remember that’s the lowest coin we have.) Everyone will agree that a new car isn’t as low as 100 sandwiches. You just can’t afford the work of a car for the work of 100 sandwiches. Not even 1000 sandwiches. A house is not worth a car isn’t worth a bike is not worth a sandwich is not worth a stick of gum.  To really work on value, not relative rates (as in the dollar.) In relative value, let’s call a sandwich 10 minutes worth of work or 0.16 manhours. What is a house in manhours? Try 300 manhours in materials and 700 manhours in work? (People are always the expensive thing in business.) Then a house at 1000 man hours is 6250X what a sandwich is worth.

I’m going to use present $ values to see if this is close. In general, you can buy average house for $75,000, and an average sandwich for $5. That makes the house worth 15,000x the sandwich. Whoops I said 6250 not 15,000. Off by 50% there. So let’s leave the value of the sandwich at 0.16mh and readjust the house. To get the 15,000 multiplier, the man hours of the house = 2000mh. Let’s try making our blammys based on the 0.16mh from the sandwich. If we make the blammy based on the sandwich (1 whatever blammy = 1 sandwich) then we would need  6 blammys per hour or 48 blammys a day for pay. Or 240 blammys a week. Or 960 blammys a month. or 11,520 blammys a year. We last had 1,000 as the population. So if everyone works 8-4 5 days a week, then we need 1000 x 11,520 blammys a year. Or 1,152,000 blammys for a years pay for everyone. We are basically saying that a house should cost (2000mh x 6 blammys per manhour) 12,000 blammys. About a year’s pay. Not bad – that may be a little low (it’s probably 2 years for the lower middle class.) To set the value of the blammy, we need to ask, are the hundred bars of gold 1 years income/production, 1 months income/production or 10 years income production or …

Given that one ‘average person’ should never be able to amass (unless using financial games, we are talking = production not usury) the same as the whole country in one year. Or ten years. Or 100 years. So we’re back to the 1,000 population thing. If there are 1,000 people then 1 person should take at least 1,000 years to amass what the whole country has, or 1,000 x 1,152,000 = 1,152,000,000 blammys are a minimum to make sure there is enough coinage for a whole year for the population. Assuming the gold is ALL there is, then that gold should be worth at least (to start with) 1,152,000,000 blammys. Wouldn’t the total value of a country be at least the output of that country for one year?

So we now have a base pay rate of 6 blammys an hour. And the people all work perfectly for one year. If the national value doubled then shouldn’t the nation be worth 2.2 billion bL? Sure. But we’ve only got the same gold. The value of the work vs the gold has changed. There are now assets and growth (technology) that are valued now, not just gold. Has the gold gone down in worth? Or has our Blammy gone up in value?

Let’s jump on the government bandwagon and call government cost “good” at 10% total of GTP. So we have the value of 2,204,000,000 bL BUT the government costs 220,400,000 bL to run. That leaves the NTP of 1,983,600,000bL. Since the gold hasn’t increased, the blammy is worth almost 50% of what it was IF all of the bL HAD been available at the beginning of the year. WTH?

Inflation – some explain it as the process of a coinage/currency becoming worth less work by increased numbers of the currency introduced. What causes inflation? Generally it’s said it’s natural. How so? We have the same coins we had back ‘then’ it’s the same food/item/work why is 2, 3,10, 20,100x more ‘expensive’? That is, why did a candy bar cost $0.01 in 1912 and now costs $1 (100x)? Did candy bars become 100x better? or 100x the cost to create? Shouldn’t the cost go down? Economies of scale and a sufficient supply should drive it’s price down NOT up.

(Note this is both a process and a question.)

Note 2: nowhere in here did we discuss the processes that things go through (ownings) and how that effects the value of our currency. Turning our earned Blammys into physical assets, we deflate the Blammy and end up back at 2.2 billion Blammy’s; the value being stable from year to year. Any time we don’t re-invest our earnings into actual real assets, we are inflating the Blammy and making it worth less; there are more Blammys to go around. In this scenario, ‘saving’s’ in the form of cash are bad for the system; get that money into things.