The economic problems caused by unsound money are well known and well discussed amongst financial commentators who understand the problems in our monetary system.
What is not discussed quite so widely is the social harm.
Unsound money or fiat money causes distortions in the economy and gives us the boom-bust cycle.
The steady debasement of our currency is a transfer of wealth from savers and wages earners to those who own assets. It destroys the middle class.
But it also inflames consumerism, reduces the length and quality of life, elevates the state at the expense of the family and creates a generational and class divide.
I think the reason the social harm of unsound money isn’t discussed as much is because it is not as immediately obvious as the economic harms.
It is also less fun to talk about because you can’t make investment gains from it. Talking about the economic cost of unsound money is exciting if you are making gains hand over fist in Bitcoin.
I’ve even seen people gloating on Twitter about how much they enjoy high inflation because it’s good for their portfolio.
Talking about the social problems can sometimes just be plain depressing.
However, this is something I care deeply about. Because I feel the effects personally and I can see it in the lives of my family and friends and in wider society. Just as, I’m sure, you do also.
The effects of unsound money are incredibly frustrating.
I have to remind myself from time to time not to despair too much and be grateful.
Because now is still a great time to be alive.
Despite the unsound money I live in a developed country in the 21st Century. I have a great job, a great family and a great standard of living by historic and world standards. But with sound money, things could be so much better!
This post looks at seven ways that unsound money hurts society.
Unsound Money Disincentivises Savings
When money grows in value over time then it encourages you to hold it. By holding onto it you are increasing your purchasing power.
This requires exercising restraint and delaying gratification for a future reward.
Unsound money diminishes in value over time. Therefore there is little incentive to hold onto it for the long term if you will have a reduction in purchasing power in the future.
The incentive is to consume and to spend the money now.
Unsound money also leads to lower interest rates which incentivises borrowing.
As a society we no longer value savings and financial prudence. Instead we have become a society where borrowing and spending is the norm.
This applies to households and it also applies to governments. Neither spend within their means and are happy to accumulate high levels of debt.
This works in the short term term. But in the long term it destroys capital.
Forgoing savings for consumption makes us less virtuous.
Temperance is a virtue where we exercise moderation and self-restraint. Prudence is a virtue where we exercise good judgement and caution.
In the financial sphere unsound money destroys these virtues by disincentivising virtuous behaviour and encouraging financially reckless behaviour at both the personal and government level.
Unsound Money Creates a Consumer Society
As mentioned above, unsound money disincentivises savings and incentivises consumption.
This tendency towards consumption is something that many people intuitively find uncomfortable.
And they are right to. There is something wrong with the wastefulness of this behaviour and mentality.
But many people find the wrong answer and draw the wrong conclusion when it comes to digging deeper into the issues of consumption.
They either swallow the Marxist lie that consumption is caused by the excesses of capitalism or the Keynesian lie that we should all consume because consumption is what drives our economy.
These have become the standard explanations in our culture.
Yet neither is true at all.
Capitalism requires capital accumulation and capital accumulation requires saving. Consuming beyond one’s means leads to a destruction of capital, which is the antithesis of capitalism.
So not only does unsound money create a consumer society, a lack of understanding of the nature of the problem leads people to look for the answers in the wrong places.
Economically and socially destructive philosophies proliferate and teach people that capital and wealth is wrong when in fact building capital to invest in the future is a virtuous act.
As Saifedean Ammous points out:
“It is an ironic sign of the depth of modern-day economic ignorance fomented by Keynesian economics that capitalism—an economic system based on capital accumulation from saving—is blamed for unleashing conspicuous consumption—the exact opposite of capital accumulation. Capitalism is what happens when people drop their time preference, defer immediate gratification, and invest in the future. Debt-fueled mass consumption is as much a normal part of capitalism as asphyxiation is a normal part of respiration.”
The intuitive disdain for consumerism is right. The answer is to save but to save in sound money that will retain its purchasing power.
Unsound Money Reduces The Length and Quality of Life
It is a well accepted fact that there is a strong correlation between life expectancy and economic factors such as employment, income and the development levels of a country.
The wealthier a nation is the longer its people live. The reverse is also true.
So it stands to reason that if unsound money makes a nation poorer, it also leads to a lower life expectancy.
Hard money retains its value or gains in value over time. Fiat money does the opposite. It’s constantly declining value makes you poorer over time, reducing the quality and length of your life.
Sometimes fiat money’s value erodes slowly, perhaps at a rate of 2-3% per annum. At other times it erodes rapidly with rates in the double or even triple digits.
As the value of your money declines, your purchasing power reduces. This means that the same amount of money will buy you less over time.
The only way to keep ahead of this is to invest and earn a return higher than the rate of currency depreciation. This is the rate of real return.
In an inflationary environment, your salary and wages normally rise as well. But it is also normally the case that the prices of goods and services rise faster than any wage or salary increase. This means that while your pay may rise in nominal terms, it is falling in real terms.
In Weimar Germany it is estimated that wages rose by 200 times between the end of the war and November 1922. But since the cost of living rose by 1500 times in the same time period, people’s real wages fell dramatically.
Unsound money causes you to get poorer.
This is why everything is getting more expensive and it feels harder and harder to keep up. Everything from housing to food to gas to college tuition is rising in price.
Right now, and over the last couple of decades, it has been happening at a slow and steady rate.
But there is no guarantee that slow and steady will continue. There are many financial commentators who argue that we will see an inflation come on that may be like the 1970s or worse.
When things get very extreme living standards can fall so far that life expectancy can drop dramatically.
In Russia between 1987 and 1994, during the peak of political, economic and inflationary chaos life expectancy declined substantially.
That’s because the economy is not an oppressive system that enslaves us but rather something that is life supporting.
Sound money leads to a stronger economy and therefore a higher quality and longer life.
Unsound money destroys an economy and reduces both the quality and length of life.
Unsound Money Creates A Class Divide
The destruction of the middle class is the result of unsound money, as those who rely on salary and wages see their real incomes eroded over time while those who hold assets get wealthier.
The safe haven in an unsound money environment is to hold hard assets. These will also rise in price and this insulates you somewhat from rising consumer prices.
But this phenomenon disproportionately affects the poor and the young and leads to a class divide between those who have assets and can afford rising consumer prices and those who do not and cannot afford it.
It also disproportionately affects retirees or those on a fixed income as the value of that income falls over time. Those on salary and wages at least get some offset from rising pay.
Wealthy retirees with a large nest egg of assets might be fine, but those without significant assets who rely on government superannuation will see their purchasing power and thus living standards erode.
Jim Rickards explains it well in Currency Wars:
The process [monetary debasement] produces undeserving winners and losers. Losers are typically those Americans who are prudent savers and those living on pensions whose fixed returns are devalued by inflation. Winners are typically those using leverage as well as those with a better understanding of inflation and the resources to hedge against it with hard assets such as gold, land and fine art. The effect of creating undeserving winners and losers is to distort investment decision making, cause misallocation of capital, create asset bubbles and increase income inequality. Inefficiency and unfairness are the real costs of failing to maintain price stability.
Then there is the Cantillion effect. This is where an advantage goes to those who have access to new fiat money first, creating a class of insiders and a class of outsiders.
Let me explain.
Money printing does not create wealth in the form of goods and services.
So if everyone was given an equal amount of printed money but the level of goods and services in the economy remained the same then everyone would still have the same level of wealth as prices would rise to reflect the new injection of money into the economy.
And everyone’s relative level of wealth would remain the same as all had equal access to the new money.
But when we do not all have equal access to new money those who receive the newly created money first are at an advantage as they can spend the money before it filters through to the rest of the economy in the form of rising prices.
The two groups who tend to get early access to the money are government and mortgage holders. Those who have a mortgage can often structure it in such a way that they have access to a line of credit where they can take early advantage of low interest rates and easy money.
Those who receive the new money last are at a disadvantage because they receive fiat currency that has had its money supply diluted and prices have already risen. This is primarily the wage earners who own no assets.
Inflation is often described as a stealth tax that transfers wealth from the poor to the rich.
The poor have less assets and spend a higher proportion of their incomes on essential spending such as housing and food. Increased costs due to inflation hurt them more than the wealthy who have more room to tighten their belts and who own more assets.
The increasing class divide is not only bad for the economy but it lowers social cohesion and turns people against each other. It also makes political extremes more palatable to a larger number of people.
Unsound Money Creates Intergenerational Inequality
The Western World has experienced a prolonged economic expansion since the Second World War.
This accelerated in the 1980s as Ronald Reagan, Margaret Thatcher and others threw off depression era New Deal policies and deregulated their economies. China’s change in economic direction under Deng Xiaoping has also significantly contributed to global growth over the last few decades.
Operating in the background to all of this was the abandonment of gold in the global money system and the shift to fiat money, which began when Nixon announced the closing of the gold window in 1971.
The expansion of the money supply since that time has led to a prolonged inflationary boom, albeit with a few short term crashes along the way, most notably in 1987, 2000-2001 and 2008-2009.
Austrian Economics teaches us that the early stages of inflation drives down interest rates and can benefit those who are well positioned to take advantage of the early boom years.
Generally speaking the Baby Boomer and the Gen X generation have benefited from economic growth, an expanding money supply and falling interest rates, primarily through rising real estate and stock prices.
The social expectation of going to school, getting a job, buying a house and saving for retirement worked for those generations.
For millennials, it’s a lot tougher.
This generation is at a different point in the inflationary cycle that began in 1971 and is experiencing vastly different challenges than the previous two generations.
Again, Austrian Economics teaches us that the longer an inflation goes on, the more difficult the economic circumstances become.
The more a government inflates, the greater the temptation is to keep inflating. If it keeps going it will eventually destroy the currency. If it stops it pops the bubble it has blown. Either way there will be economic pain.
The benefits that the early generations accrued have largely stopped and the consequences are starting to bite. Baby Boomers and Gen X got the benefit of the inflationary boom and millennials and their kids will have to deal with the fallout from the bust.
For young people real wages are lower, college tuition is higher, house prices are higher, they don’t have much in the way of assets and they have lots of debt.
The social expectation of going to school, getting a job, buying a house and saving for retirement doesn’t inspire this generation. While most millennials don’t understand economics, intuitively they know that have been dealt a lousy hand.
Part of that is the ideological zeitgeist against tradition. But part of it is this feeling millennials have in their gut that something isn’t quite right with this economic picture. It causes them a great deal of despair because they feel that the life their parents expect of them is out of reach despite their best efforts.
Who would blame them for wanting to work long hours for declining real pay while at the same time asking them to buy a house at a very high multiple to their income with the prospect of rising interest rates on the horizon?
All while paying high tax rates to fund government largesse and the retirement costs of the preceding generations who benefited from the boom.
This is why a lot of young people are putting off marriage and kids. It’s just too expensive.
In Japan, the poster child for unsound money, staggering numbers of young people have given up on the idea of marriage and children, primarily due to economic reasons, and are permanently single.
I was tempted into this way of thinking in my early twenties. Although I’m glad I came to my senses and have pursued the more traditional path of job, house, wife and kids.
But it was only because of my research into the monetary system and the edge it gave me in investing that I felt confident enough to be able to get ahead in this world on a measly teacher’s salary, which otherwise does not keep pace with inflation.
I don’t really blame those who look for an alternative.
What this inflation has done though is entrench intergenerational inequality between those generations who benefited from the boom and those who are going to have to deal with the big bust, when it comes.
The other challenge that sits along side intergenerational inequality is that many Boomers and Gen Xers just don’t understand the problem.
They can’t understand millennials and just see an entitled generation who are afraid of hard work.
There is of course a degree of truth to that, as this generation is arguably much more fragile than those that came before.
But underlying that feeling of entitlement is a genuine feeling that this generation is forced to do it tougher than those that preceded it.
In the normal course of affairs each generation is wealthier than the next, but in times of economic chaos and capital destruction this is not the case.
If the Boomers and Gen X understood the economic problem a bit better then they might understand their kids.
As Saifedean Ammous notes:
“Whether it is housing debt, Social Security obligations, or government debt that will require ever-higher taxes and debt monetization to refinance, the current generations may be the first in the western world since the demise of the Roman Empire (or, at least, the Industrial Revolution) to come into the world with less capital than their parents. Rather than witness their savings accumulate and raise the capital stock, this generation has to work to pay off the growing interest on its debt, working harder to fund entitlement programs they will barely get to enjoy while paying higher taxes and barely being able to save for their old age.”
Unsound Money Increases the Role of the State at the Expense of the Family
The Western Judeo-Christian worldview sees the family as the primary institution of society. While the state has role, within certain limits, the family unit is the primary unit.
Some political extremes will seek to breakdown the social bonds of the family and replace it with the state.
In these worldviews the state needs to be seen as the source of all prosperity and happiness and all human activity is undertaken for the benefit of the state.
An example of this type of thinking was evident on Mao’s communes in 1950s China during the Great Leap Forward.
Families were placed into agricultural communes with men and women sleeping in single sex dormitories. Children were taken care of on the commune as both mothers and fathers would work long hours in the fields. “Marriage rooms” had to be booked if a couple wanted some private time.
There was no family unit.
While not as extreme as Maoist China, unsound money in our society does gradually elevate the state above the family in a concerning way.
Fiat money has given governments more money than they would ever have been able to acquire by taxation or borrowing in a sound money environment.
This has enabled them to spend much more in the name of benevolence than they would otherwise be able to. The effect has been for the state to encroach into family territory and attempt to become the primary caregiver for all.
I am a proponent of the social safety net and do advocate for government to have a role in helping those at the margins of society who need support.
But I see it as wrong for the government to take the role of primary distributor of all goods for the majority.
The reason why the government provides so much is because we can’t afford it ourselves. But the reason we can’t afford it is because monetary policy is making us poorer.
It’s a negative cycle.
Those who don’t understand that are grateful to the government for their supposed benevolent distribution of goods that would otherwise be out of reach.
Those who do understand the monetary cause of this begrudgingly accept what they can from the government while working to increase their wealth so they are not so dependent on the state and can provide more for themselves.
In generations past, families would bind together as an economic unit, often intergenerational, and support each other through all the ups and downs that come in the different stages of life.
These days the incentive to invest in family is vastly reduced as the state takes care of most of our needs.
Saifedean Ammous again:
“The well-known phenomenon of the modern breakdown of the family cannot be understood without recognizing the role of unsound money allowing the state to appropriate many of the essential roles that the family has played for millennia, and reducing the incentive of all members of a family to invest in long-term familial relations. Substituting the family with government largesse has arguably been a losing trade for individuals who have partaken in it.”
Unsound Money Makes War More Deadly
Unsound money doesn’t cause war, but it makes it more deadly.
As Ron Paul famously said:
“It is no coincidence that the century of total war coincided with the century of central banking.”
Governments are not restrained in their military spending by the revenue they can raise from their citizenry through taxation or borrowing.
The printing press allows them access to a far greater quantity of funds. The cost of this is hidden from the public under the guise of inflation, which passes the costs on to future generations.
Fiat money doesn’t create more real economic output to be directed to the war effort. Rather it allows the state to direct a greater proportion of the resources of the state towards the conflict than it would otherwise be able to with taxation of borrowing alone.
Unshackled from this limitation, states can fight wars for longer, with more resources and with more devastating consequences.
The best historical example of this phenomenon was World War One.
All the major powers were on the gold standard as war broke out and knew that remaining on the gold standard would limit the amount of funds they could direct to the war effort.
So they abandoned gold and instead financed the war effort through money printing.
The scale of that terrible four year slaughter was only made possible by exchanging sound money for unsound.
Sound money puts a handbrake on government aggression. Unsound money releases it. The price is paid by the blood of the citizens and the future generations who pay the bill.
As Joseph T Salerno explains:
“The costs of war are enormous…and inflation is a means by which governments attempt, more or less successfully, to hide these costs from their citizens. War not only destroys the lives and limbs of the soldiery, but, by progressively consuming the accumulated capital stock of the belligerent nations, eventually shortens and coarsens the lives and shrivels the limbs of the civilian population. The enormous destruction of productive wealth that war entails would become immediately evident if governments had no recourse but to raise taxes immediately upon the advent of hostilities; their ability to inflate the money supply at will permits them to conceal such destruction behind a veil of rising prices, profits, and wages, stable interest rates, and a booming stock market.”
Unsound money doesn’t just affect the economy. It affects the entire social fabric of our lives.
Some who are well positioned get wealthier, while many get poorer as their savings are eroded and their real wages decline. Financial prudence goes out the window and we become only consumers.
This creates a class divide and an intergenerational divide between those who have assets and those who do not. The state then steps in to provide for the people that its own policies are making poorer, positioning itself as the great saviour. The family suffers.
Sadly, a large number of people will not be able to or will not know how to protect themselves and they will suffer in our fiat system.
The only societal solution to this problem is to return to sound money. That will mean a return to the gold standard or perhaps the emergence of a Bitcoin standard.
In the meantime, while this fiat paper money system runs its course, the only response is to take action to protect yourself and your family by owning assets that will gain in value in this monetary environment. Things like gold, bitcoin, real estate and certain stocks.
This the natural and moral thing to do.
Even though society is suffering you are under no moral obligation to disincentivise yourself and become a martyr who makes himself poorer thinking that will be for the good of others.
You should protect your family’s welfare first and foremost.
Ammous, Saifedean. The Bitcoin Standard : The Decentralized Alternative to Central Banking Hoboken, New Jersey: John Wiley & Sons, Inc, 2018.
Chetty, Raj, Michael Stepner, Sarah Abraham, Shelby Lin, Benjamin Scuderi, Nicholas Turner, Augustin Bergeron, and David Cutler. “The Association between Income and Life Expectancy in the United States, 2001-2014.” JAMA 315, no. 16 (April 26, 2016): 1750.
Salerno, Joseph T. Money, Sound and Unsound. Auburn: Ludwig Von Mises Institute, 2010.
Shkolnikov, Vladimir, Martin McKee, and David A. Leon. “Changes in Life Expectancy in Russia in the Mid-1990s.” The Lancet 357, no. 9260 (March 24, 2001): 917–21.
1958 People’s Commune is in the public domain