(Mike Maharrey, Money Metals News Service) In a fiat system, your money is constantly being devalued. That means you are losing purchasing power month after month.
From the government’s standpoint, this isn’t a bug. It’s a feature. Fiat money printing enables governments to spend far beyond what they could if they had to run on tax receipts alone. I have often said the Federal Reserve is the engine that drives big government.
However, this isn’t the only pernicious impact of a fiat system.
Economist Saifedean Ammous argues that the incentives inherent in a fiat system drive significant societal shifts that are overwhelmingly negative.
Fundamentally, a fiat system empowers governments and leads to higher time preferences. This eventually spills over with multiple negative effects, undermining the entire society.
“Time preference” is a fancy economic term describing how much a person values present versus future consumption. People with low time preferences are as concerned about the future as the present. They are willing to put off gratification. They tend to save instead of borrowing and spending.
On the flip side, a person with a high time preference lives in the here and now. A high time preference attitude is more along the lines of “eat and drink for tomorrow we die.” Or to put it another way, “Eat and drink, for tomorrow our dollar will be worthless.”
Ammous argues that the constant devaluation of fiat currency leads to high time preferences. Why save when your dollar will buy less tomorrow? While it might not be readily apparent, this high time preference mindset spills over into many areas of society.
And when you couple high time preferences with the government’s ability to intervene in every aspect of life (because it can print money to spend), you have a recipe for societal decline.
Economic historian Tom Woods highlighted some of the impacts of high time preference living coupled with big government in a recent article.
Family – Having children is the ultimate low-time preference act. A devaluing currency squeezes young adults and makes parenting and investing in a family less attractive. This drives a drop in birth rates and weakens families as “people prioritize immediate gratification over multi-generational legacy-building.”
Architecture – In a low time preference world, people build beautiful structures designed to last centuries. High time preference architecture produces, as Woods described it, “hideous, disposable, repair-prone monstrosities as developers and societies no longer value long-term legacy over quick yields.”
Food – A student of Ammous wrote a book titled Fiat Food. As Woods summarized it, “Government-subsidized debt and distorted incentives degrade soil, favor industrial junk over real nourishment, and promote poor dietary guidelines that serve political or corporate interests rather than human health.” From a practical standpoint, nutritious foods are gradually replaced by cheap, processed foods that are detrimental to long-term human health.
Science – In a high time preference world, long-term research is gradually replaced by sloppy research on shortened timelines. The difficulty in obtaining funding when the public is constantly strapped due to inflation leads to more and more government influence in science. Woods sums up the inevitable outcome. “Government grants and fiat-funded academia reward alarmism, predictions of catastrophe, and calls for state intervention rather than falsifiable, market-tested truths.”
Health – When you combine bad science with bad food, you end up with deteriorating health. “Tied to fiat food and distorted science, public health advice and outcomes worsen. Chronic disease rises alongside the promotion of low-quality diets and medical interventions that benefit from endless monetary expansion.”
Education – Learning is another low-time-preference activity. It takes time and resources to get a good education. If you’re constantly fighting inflation, resources become scarce. A fiat money system coupled with government monopolization of education is a recipe for dumb and debt. As Woods explained, “Centralized funding and credential inflation have turned universities into debt factories churning out politicized and worthless degrees. Real skills and market feedback are replaced by government-aligned research and accreditation games.”
War – As already mentioned, fiat systems allow governments to spend far more than they otherwise could. That means they can fund endless wars and foreign adventurism while avoiding significant taxpayer backlash.
Distorting Markets – Fiat systems distort markets by incentivizing and enabling government intervention. Consider energy. Fiat systems have allowed governments to pick winners and losers by subsidizing certain “green energy” sectors to the exclusion of others. In effect, the government picks and chooses winners based on political considerations instead of allowing markets to function. We have no idea how many breakthroughs never happened because the government, in its infinite wisdom, was incentivizing something else. As Woods summarized it, “Fiat money enables massive subsidies, misallocation, and politicized ‘renewable’ pushes while understating fiat’s own role in soil degradation and resource waste.”
Money isn’t just about economics. As we’ve seen, money has a huge impact on how society functions. This is why we need sound money. I couldn’t have summed it up better than Woods did.
“This is why, to my mind, gold is more than a past and future medium of exchange — it is a symbol of civilization itself.”
Mike Maharrey is a journalist and market analyst for Money Metals with over a decade of experience in precious metals. He holds a BS in accounting from the University of Kentucky and a BA in journalism from the University of South Florida.
