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
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A finance professor asked us what we thought affected the time value of money. Of course, people said things like inflation or the opportunity to invest. He said those are all secondary to the time value of money. Then he said, “If I tell you I will give you $10,000, but you have to choose if you want it now or the same amount three days from now, would you choose to take it now or three days from now?”
Of course the answer is to take it now every time. Sure, maybe you want to invest or hedge yourself from inflation and that’s why you want it now. Or maybe you want to just spend it on something you’re eager to buy. Or maybe you just don’t want to take the risk of something happening to the money-giver in the next three days that would prevent you from collecting.
Money is always more valuable right now. It is more valuable now than it was in the past, because you cannot spend in the past. A single sum is more valuable now than it will be in the future because time is a real resource that is consumed as you exist, and we sense an inherent value associated with it. Instruments like loans and bonds are built to pay interest or a greater sum later in an effort to justify the time lost along the way.
Your dollar from 1930 is not a savings bond that is built to account for the time value of money. It is not a share of stock in a company that has grown in value over time. It is a static unit of monetary measurement that is always worth one dollar right now.
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