Time-value of money: a brief lesson in economics.

• Author: Jordan, Darryl
• Position: ECONOMY

"I fear that we must confess to a failure of ice as an element of territorial wealth, as least as far as this immediate region is concerned. I find that the Russian-American Company, whose monopoly was abolished by the treaty of acquisition, depended for ice exclusively upon the small lake or natural pond which furnishes power for your saw-mill in this town, and that this dependence has now failed by reason of increasing mildness of winter," said William Seward, Secretary of State, at Sitka August 12, 1869. For many years, Alaska salmon was packed in ice and sawdust at Sitka for its sale in California.

While some will laugh at "ice" being a territorial wealth, others will see the irony of "Seward's Icebox" running out of ice. Yet, others will not believe that global warming had already begun before the industrial age. The real story is that most people will remember Seward for the Alaska purchase price of $7.2 million dollars and forget the real cost was much higher. In 1867, $7.2 million could buy a lot of goods and services in the "Lower 37 states." By 1909 the cost to mail a one-ounce letter dropped to two cents, about the per acre cost of Alaska in 1867. The fact that a first class stamp costs twenty-four times more today is significant to all Alaska businesses--as is the fact that one would be lucky to find land at two cents an acre.

Relative Terms

The harsh reality is that the dollar of 2017 cannot buy as many goods and services as it could in 1867. Using historical inflation rates of 3.5 percent per year as the discount factor, Alaska's cost of $7.2 million in constant dollars (1867) becomes more than $1.25 billion in inflated 2017 dollars. Increase the discount rate to 7 percent and it becomes more than $184 billion. Still a great deal, but it is important to talk about money in relative terms such as time and discount rates.

Time erodes the buying power and in Alaska, the projects developed here must not forget about the erosion of buying power. On projects where all the materials and services can be bought in a relatively short period of time, prices probably will not change substantially and the reduction in buying power can be safely ignored. What is different about Alaska is that we are collectively at the end of the supply chain, the available labor is in short supply, and infrastructure is non-existent outside of a very small envelope. The net effect is that Alaska projects are vastly more expensive and take that much more...