Gross Individual Product: A long term measure of value

Friday 26 February 2021 - Filed under Default

In Feb 2021 in San Francisco, a Crunchwrap Supreme combo which includes a Crunchy Taco (upgraded to Supreme for $0.80) and a large Diet Pepsi is $8.73. Due to unfortunately high personal transaction volume, fast food is where I feel inflation most. Taco Bell, the purveyor of the aforementioned items, has lagged other restaurants in raising prices but seems to be getting with the program.

The dollar and money in general, are interesting in that they hide a lot of complexity. Most people know that currencies fluctuate but have no idea why. Anyone can Google around to get educated but it was only after getting involved with cryptocurrency, that I had a reason to think and learn about this element of economics.

Eventually you realize that currencies like everything else don’t last forever, that the dollar like others before it is headed for trouble. It also becomes clear that most wealth isn’t stored in currency, but scarce or productive assets like stocks, bonds and real estate. In the process of investing, the aforementioned assets are often priced in dollars because dollars have recently served as the best simultaneous unit of exchange and stable measure of value.

Let us consider the possibility that Bitcoin may replace the dollar as global reserve currency. This is akin to predicting that the internet would displace the post office, retailers, and taxis in 1990. Controversial, not impossible, and to some inevitable. In that process, one would expect the dollar to lose value in an accelerating manner, finally ending in a cycle of hyperinflation and redefinition.

That’s a problem. If dollars are fail to maintain stable value we’ll need an alternative. One option, to keep score in Bitcoin has the opposite problem. The practical value of a limited issuance currency like Bitcoin grows with the size of its user base and if it keeps on its path of exponential growth, it would make investments that rise more slowly appear to be losing propositions.

Traditionally, metal-based currencies like gold and silver provided a useful backdrop to evaluate fiat currency but here Bitcoin is also having an impact. By being easier to transport, verify, and divide, Bitcoin may draw some of the clientele away, changing even the market value of an ounce of gold.

So here’s the question: If the dollar inflation increases and Bitcoin’s value continues to grow in real terms, affecting gold and silver in the process, what is a better standard of value?

A good standard would be stable, fluctuating less than any currency, and perhaps mirror the glacial march of macroeconomic factors like population and GDP. It would depend on the largest markets in the world for its magnitude and universality. It would not be controlled by any one government or organization and would behave sensibly when changes occur which affect humanity.

Keeping this as simple as possible, let’s consider the two factors I mentioned: GDP and population. Dividing one by the other would give us a measure of the average economic output per person. Gross Individual Product would summarize in its denominator every birth and death, and through the numerator, the results of all technology and production. We could improve this first version by refining measures of production as well as including non-human energy users such as AI. In any case it’s hard to argue with the simplicity of this first version.

Here are the GDP (in 2010 dollars) and population according to the World Bank since 1960.

Global GDP and Population

If we divide the two we get the line in blue below, GIP. We can see that it seems like a more stable gold, tracking its exponential rise as production has outpaced population.

Gross Individual Product and Gold

Bitcoin is the new kid on the block and looks like a blip here as one would expect.

Gross Individual Product and Bitcoin

Finally, here are gold and bitcoin expressed in terms of GIP up to 2019 which is the last year for which the World Bank has published their GDP and population numbers.

Gold and Bitcoin in terms of Gross Individual Product

The GIP is $11,441.73 (in 2010 dollars) as of 2019 which isn’t terribly convenient for daily transactions. My combo is only 0.000763 GIPs. When GIP is accepted into the SI international system of units, we could use milliGIPs. 0.763 mG works but yeah, I wouldn’t call fast food an investment, even though on certain time scales it performs better than some.

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2021-02-26  »  David Sterry