Time preference is how much you value the future versus the present or vice versa. The more you value your future, the lower your time preference is and inversely, the more you value the present instead of the future, the higher your time preference is.
Time preference is the degree to which we are willing to forgo current consumption in order to save and invest for the future.
Money is an essential tool that allows us to cooperatively save and trade. It is a medium of exchange and your earnings represent someone’s evaluation of your work, whether that’s your boss or the market more broadly.
Think about it, you spend your finite time and energy working to earn money. Depending on your skill set, in relation to the amount of others who have similar skills and how many people currently demand those skills, you get a competitive price for your work through a wage, invoice or salary.
Money is the tool facilitating our trade and commerce. It’s more than just that, however, it also affects how we perceive time.
High time preference individuals prioritise the present and are more likely to engage in immediate consumption, while low time preference individuals focus on the future and are willing to sacrifice present consumption for greater long-term returns.
In the past, people had to rely on bartering and other forms of exchange that made it difficult to engage in immediate consumption.
For example, if someone wanted to purchase a good, they would have to exchange it for another good or service of equal value. This would require finding a willing party with the desired good or service, negotiating terms of exchange, and overcoming any logistical challenges.
Money has made the process of immediate consumption much easier. With money, people can quickly and easily exchange their wealth for goods and services, without the need for bartering or negotiating. This has led to an increase in the availability of goods and services and has made it easier for people to satisfy their immediate wants and needs.
However, the ease of immediate consumption facilitated by fiat money has also led to an increase in high time preference behaviour, as the inflation rate is higher than the compounding savings rate. People have become more focused on satisfying their immediate wants and desires, rather than thinking about the long-term, due to high levels of inflation disincentivising savings.
Moreover, money has enabled the creation of financial instruments that encourage high time preference behaviour. For example, high levels of inflation, credit cards, personal loans, and payday loans offer easy access to credit, but at variable and usually high interest rates. These financial products encourage people to engage in immediate consumption, even if they cannot afford it in the long-term.
Fiat (Latin for by decree) money influences high time preference behaviour by making immediate consumption more accessible and attractive through the manipulation of interest rates and money supply.
It incentivises risk taking and current consumption by lowering interest rates to zero interest rate policy (ZIRP) while saying there will be no rate hikes in the near future. This punishes people with cash savings through inflation – the loss of the dollar’s purchasing power. This incentivises people to take on “cheap” debt.
After lowering interest rates and pumping the economy with money, people start losing confidence in the system as inflation rises. This causes the central banks to start hiking interest rates, to ensure that trust and confidence is not lost.
Central bankers and politicians say inflation is transitory while they pump the system with money and then say it will be a soft landing when the arsonists start playing firefighter and hike interest rates to try and tame the inflation they caused.
These centrally manipulated financial cycles make it difficult for people to plan for the future as people start to use investments as savings, increasing their risk in search of yield. This leads people to more high time preference behaviour as they try to stay afloat.
Sound money, one where the supply can’t be tampered with, fixes this feedback loop that perpetually hands down higher prices and more debt as a burden to future generations. It offers a way to honour the social contract again – to save, plan and give a better future to our children.
In conclusion, money has revolutionised the way we interact with the world, fiat money has also influenced high time preference behaviour by punishing prudent savers while financialising the housing, equities and/ or bond markets.
If inflationary and monopolised money creates or exaggerates these exploitative boom and bust cycles, does sound money fix the issue or minimise the externalities?
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