Fiat Society, Time Preference and Bitcoin
*This article is a more fleshed out version and extension of a tweetstorm I did a while back on the effects of fiat money & inflation on the time preference of individuals.
In Austrian Economics there is the concept of time preference, in short: “the ratio at which individuals value the present compared to the future”. As aptly put by The Bitcoin Standard author @saifedean. It’s an internal trade off between consuming or to save, only to consume later. Money offers the ability for people to store the fruits of their labor in a liquid store-hold that will, hopefully, hold its purchasing power over time until they want to consume it. This offers insight in two functions of money: Medium of Exchange (to do payments) and Store of Value. Money is a good MoE when it’s widely accepted (most liquid all goods) and easy to exchange. A SoV is good or ‘hard’ when its owner can reasonably expect to receive a similar, or even higher, price for it than he paid for it. I will leave a discussion of value vs price as it is outside the scope of this paper. In short, value is always subjective and a good can have proporties that makes a good a better candidate as an SoV than others.
Over time, owners will use the SoV as a measurement of value if it holds up successfully and base future calculations on it, effectively making it a Unit of Account (UoA). This is the third function of money. For a deeper discussion, I strongly suggest reading Nick Szabo’s Shelling Out.
As for time preference: When spending money, one makes a conscious decision to consume now and consequently to have less later.
Lifetime Dynamic Time Preference
Humans, like all animals, are born with positive time preference because of our finite lives. We value “immediate satisfaction of needs” over future satisfaction. Time preference is different per individual and it changes over time as we go through different stages of our lives.
In general, time preference of a human lifetime could be schematically seen as below. We come into the world kicking and screaming for immediate satisfaction with almost infinitely high time preference. A baby relies on its mother for everything.
As we grow older, we are able to think and fend for ourselves and will make conscious trade-offs with our future self. For instance, we get a job or go to school for an education. One invests their time and/or money now in order to have something later, like a paycheck or a degree.
As we mature, our time preference lowers even further; we find a partner and settle down and start a family.
As a parent, you sacrifice your needs for those of your kids. You work and save money to provide for others. Elderly, ironically, at the end of a long life we tend to approach zero time preference, though it still remains positive.
Journey into fiat society
Now, follow me towards a fiat world. The premise of human time preference is the same, except we introduce debt and fiat money inflation. For inflation, I’ll use the classical Austrian definition of the inflation of the monetary base (money supply). In a fiat world, Central Banks can expand their balance sheets (add more money) at the stroke of a pen by taking on more debt. Commercial bank credit, however, is where the rubber hits the road. This is where the money creation hits the ‘real economy’ as banks extend credit to businesses for production.
Let me add some more colour through our boy Bob Ross (RIP):
We are born at the peak of Time Preference Mountain. One’s time preference is now expressed as how fast moves down this mountain towards the Valley of Maturity.
As a baby we slide down uncontrollably fast, still kicking and screaming. As kids we learn to stand up, but can barely control our speed. Over time, as the mountain levels off when we get to the foot, we are able to slow down, and walk instead of run/slide: our time preferences lowers. We go to school, get a job, have a career and at some point in life you’re comfortable to think about settling down and start a family. It’s difficult to put one’s foundations down on steep (and icey) ground, so usually people unconsciously wait until they find level ground in their lives. People usually find this level ground in what I call the Valley of Maturity.
Now, enter fiat inflationism and personal debt. As you frolic at the peak of TP Mountain certain choices trigger a snowball reaction: you spend all of your savings and/or get indebted. You don’t control your spending, decide to borrow money for that education that will get you a good job, you move out early/ buy a house, or simply because there’s an emergency. Mainstream and social media incite a consumerism mindset. Banks play into this by extending credit. You enable them to ‘mine’ more fiat. It’s inescapable. We all start debt free, but over time the pressure mounts: slowly you accumulate more debt and/or have less savings. Your dollars don’t go as far as they used to and you have the next pressing purchase looming. Sometimes by accident, sometimes just to keep up with peers, sometimes because you’ve reached a new stage in your life.
Instead of gradually slowing down, the playing field is rigged for you to speed up as your debt and spending habits chase you. What is the point of accumulating all this debt?
Nation State Fiat-ism: Cantillon Effect and taxing the poor by inflation
Countries feel the same pressure in order to keeping increasing ‘GDP’
The fiat money we use is the playing field, and a credit economy and inflation is how the game is rigged against ordinary people. Central banks can expand the money supply by issuing debt and then to purchase assets to hold on their balance sheet. This is exactly what Quantitative Easing is: the central bank purchases ‘troubled assets’ from financial institutions and pays with the proceeds from the issuance of the new debt. This ‘takes the pressure off’ these otherwise fragile financial institutions (makes them more profitable) by freeing up their capital from bad investments. Central Banks hope that commercial banks use this capacity to extend more loans. In crises, commercial banks tend to tighten their lending standards to lower the risk of not being paid back.
New money is now in circulation, but it has only changed hands once: into the hands of financial institutions with the best financial profile. Nobody has picked up on the increase in the money supply and banks are free to use the new and indistinguishable money at their discretion. Financial institutions get the full benefit of the new money because through a mandate, central banks are only allowed to use its funds to purchase financial assets. This is also called ‘being close to the money printer’. Insidiously, people that are desperate for money in a crises will likely not fit the tightened lending requirements.
As the first receivers start spending the money (more credit, more investments, but also wages & bonuses), the money slowly permeates the economy. Current central bank ‘money printing’ is stuck at this point, as can be observed from the Velocity of Money. This is a metric that observes how many times money changes hands. Central banks have increased their balance sheets ‘X’ amounts, but Velocity of Money has dropped to an all time low. New money comes into circulation as credit and goes directly into financial assets. There is hardly any consumer price inflation (CPI) because that metric doesn’t track financial assets or housing.
Central Banks
Velocity of Money
S&P 500
People last in line get the same amount of money, but its value has been diluted as people have slowly picked up on money ‘flooding’ the market -at the speed of a glacier. When the tide turns favorably, banks will use all of their pent up capacity to extend credit and flood the real economy with fiat.
Goods seem to gain value over time versus the money used, and this is expressed by raising prices and therefore the CPI(the economist type of inflation). But actually, this is the money losing value versus the goods.
New money only has a specific point of entering circulation. Everyone close to that point gets to benefit from the new money the most. This benefit is called the Cantillon Effect.
In times of crises, everyone feels pressure as their status-quo is threatened. Taxes are raised to pay interest on national debts from previous spending. People without debt don’t have much to run from, but due to inflation feel the pressure to keep speeding in order to pay for the higher prices (lower value of their paycheck).
Even people with a university degree feel the pressure: even though they earn enough money to either decrease their exorbitant debt or outrun it, they pay more in taxes and are seduced to more lavish spending habits. TP Mountain is always slippery. lower uni return
Monetary inflation is evil because a small group close to the money printer (bankers) get to spend the freshly ‘printed’ money first. People down the line don’t know that the value of the money they accept has been diluted to a lower standard. This is the Cantillon effect. QE has been described as socialism for the rich (those that own assets).
Inflation is an undemocratic redistribution of wealth from everyone to the people closer to the money printer. Fiat is “taxation without representation or due process of law” (ht @TraceMayer). All in name to ‘spur the economy’.
Strugglers in the fiat society
Back to TP mountain. People that have enough money or are positioned close enough to the money printer to enjoy “dat sweet Cantillon Drip” slow down first and start buying up the real estate in the Valley of Maturity. They can settle down and start thinking about preserving their wealth for their offspring earlier, and therefore better. People further away from the money printer or burdened with debt don’t have the (lending) capacity to buy real estate or financial assets. They live with their parents longer, rent instead of own everything.
The evidence is overwhelming
Picture: Years working to buy a house
Picture: Amount of hours needed to buy stonks
Graph: Multi generational houses/ millennials living in with parents
Picture: you’ll own nothing and be happy
The pressure mounts so high that some people lack the positive outlook for themselves or the world and decide not to have kids at all or take inbred dogs as proxies. NB. ‘Climate change’ invokes High Time Preference.
Even if you manage to outrun your debt and feel comfortable to settle down you are faced with a higher price to settle down or conserve wealth. i.e. Valley of Maturity real estate is already owned. Better all rush to the Valley behind it. Oh wait.. And it is not just housing: Most hard assets have been acquired by people with relatively lower (and with access to capital). Stonks, Bonds, Real Estate, Gold are ALL better than fiat. Strugglers have to pay a higher price to ‘get in’. Everyone flocks to ‘degrees’ while they provide less value (job security) for the price that you pay. The increase of people with an university degree has outpaced the available jobs, therefore increasing the competition for these jobs and leaving people without a job of their educational level.
Welcome to Satoshi’s World
Enter Bitcoin. Bitcoin, with the best monetary properties we’ve ever seen, has the potential to put a stop to rampant fiat inflationism and reverse the effects of the debt fueled spending habits. For money details on Bitcoin’s monetary properties, please read @real_vijay‘s Bullish case for Bitcoin.
Bitcoin’s Scarcity is unique to anything we’ve seen so far. Bitcoin has a predetermined dissemination schedule of the 21 million supply. The flow of ‘new’ bitcoin halves roughly every 4 years (the so called ‘halvenings’). Bitcoin’s inherent monetary policy is protected by individuals that run nodes. These nodes serve as a register through which data verifiability of the integrity of the bitcoin blockchain data can be confirmed by anybody with access to the internet.
Miners ‘mine’ Bitcoin, but they do this as a paid service to the network (nodes). All actors ‘entering’ Bitcoin agree to certain Terms of Service (Consensus rules). If miners violate the ToS, their block will not be accepted by the network and they don’t get paid the block reward in Bitcoin.
Nodes protect the network protocol (their own Bitcoin), Miners provide the security of the history (UTXO set) by expending energy and compute power to mine Bitcoin. For so far
Bitcoin Fixes this
Back to TP mountain. Strugglers are not able to invest in Bitcoin. They either simply don’t have the money, don’t have the time to wait (speculate) or have more pressing earthly matters to deal with: health, food, kids, etc.
If enough people put their foot down, curb their spending and opt –out, I believe the individual and the societal ‘debt snowball’ can be stopped. Quite the Sisyphean task, but the monetary policy will do the work if your time preference is low enough = NUMBER GO UP.
At a certain stage of monetization, Bitcoin matures (reaches market cap that’s high enough) and will have less volatile swings. Bitcoin is a fully fledged SoV (for hodlers), so people will start to ask to get paid in Bitcoin (or opt-out): Bitcoin will start to become a Medium of Exchange for payments.
I believe that at this point, low income earners could enter Bitcoin and slowly save the fruits of their labors for the future. Instead of having to use unreliable fiat that will inevitably ‘leak’ value in the pockets of (central) bankers via opaque inflation.
Existing altcoins are ages behind on market liquidity or have made trade-offs for more transaction throughput at the cost of trust minimization or censorship resistance. i.e. Pre-mine, hard to run a full node, centralization. All High time preference design trade-offs.
Valley Of Maturity in the bitcoin era
Now back to the Valley of Maturity. With a new means to effectively Store Value, old money and high earners will slowly allocate to this new hard money. Plus, there’s no Cantillon-drip. This takes the pressure off prices of all other ‘hard assets’: Stocks and Real Estate.
These will become more affordable for everyone because they lose their SoV-premium. Everyone is able to better store the fruits of their labor into the future, have to gradually pay less for their day-today, and housing is more affordable.
People don’t have to run as fast anymore. Instead, they will feel that they can settle down earlier and enjoy their lives more. Everyone just wants to live a happy and relatively care-free lives with their little families in the Valley of Maturity.
Bitcoin is the biggest shot we have at fighting the debaucherous fiat inflationism by central banks. Bitcoin inhibits the governments’ means of taxation. Both direct, by levying income tax, as indirect via inflation. We will need trust minimization and censorship resistance.
Unfuck the money first. One sat/node at a time. Marketed altcoins are high time preference distractions of this. Cheap trade-offs that could cost you dearly later. If they’re not outright scams.
Thanks for the patience in editing this piece Daniel Bar, Ivan Sucharski and Edwin Kinoti
