Why isn’t the time value of money applied to currency in terms of purchasing power? Let’s say I have a dollar from 1930. I should be able to exchange that dollar today anywhere based on its present value, right? Doesn’t make any sense to me but I’m slow
it’s present value is $1. It’s a dollar. doesn’t matter if it was printed in 1930 or 2023. A dollar is a dollar. The value of the dollar changes in comparison to other currencies, not to itself over time.
Because that would just make money insanely complicated for no reason, and cause people to hoard money even more than they do now. If I have a dollar, but if I hold onto it for two years, it’ll be worth more than a dollar, why would I spend it? The best choice would always be to not spend your money. If people don’t spend their excess money, all the businesses that are based on fun things like tasty food, nice clothes, games, tourism, etc. would all fail. All the people that work for those industries would lose their jobs and stop spending money, causing even the basic necessities industries to start collapsing, causing them to have to lay off workers, making it even worse. You have an economy collapse. All of a sudden all of the countries that rely on American goods and services start having economic troubles. Domino effect. Great depression round 2.
Because the time value of money is very specifically not *directly* about money. It’s about what you could do *with* that money.
It’s all about the potential earning you could make if you put that money to good use. Both from “basic” stuff like stocks and bonds that have an interest rate but even from the idea that you could invest that into a business. $10,000 today that lets you buy a second widget maker for your factory is worth more than $10,000 a couple years from now
If you didn’t put that money to use then you lost out on that value. Money itself is worthless until it’s been used to do something, that is specifically what time value of money is about.
Also if older currency itself just…got more valuable over time:
a) that makes the economy *way* more complicated than it needs to be. Can you imagine going to the store and trying to buy something and they need to check the date on every single bill you give the cashier? Even if you use debit or credit the transaction is made way more complicated for no reason.
b) it means people horde money and you get deflation. That would have a huge negative impact on economic growth because people would refuse to buy anything because they would rather save.
Because the idea itself doesn’t make sense?
The idea of the time value of “money” is simply a recognition of the value of OTHER stuff relative to time. Money here is just the measuring stick.
The idea is used a lot in terms of valuing alternative uses of resources. The idea being using a resource today has to return more than the initial resource itself for that use to be justified. That additional return is discounted by TIME. “Money” in this sense, is a proxy for “resource”.
The time value of money is just a rigorization of the principle that we prefer having money now to money later. Would you rather have 100 dollars now? Or a promise that you will receive 100 dollars next week? Obviously we would prefer to have the money now. But how much would you pay for the promise of 100 dollars next week? 90 dollars? 95? This is the time value of money in effect