In the previous installment of this series, I argued that sound money in general, and Bitcoin in particular leads to a more prudent society that cares about its future instead of one that lives for now. In this article, I’m going to explore the second cardinal virtue of temperance and how it’s affected by the monetary system.
When Government Has Unlimited Money
At the heart of state control of money is the idea that money can cure all manner of societal ills, whether it be poverty, health or terrorism. When government can print money, governments presume they can help their citizens against these societal ills through spending.
Such acts are seen as compassionate, perhaps even justified. What these programs do is they provide guarantees which otherwise can’t be made. Entitlement programs like Medicare and Social Security in the US and Pensions and universal health care in other countries are also often financed through the central banks essentially printing money. Usually justified by a need to establish peace, wars are financed these days almost entirely through deficit spending.
The lack of sound money is what gives the government the ability to give these “guarantees”, which are essentially good until the government collapses.
Guarantees Cause Bad Behavior
The guarantees governments give have some consequences on the behavior of their citizens. For example, if you were guaranteed a job no matter what you did, how would you perform? Suppose further, that because everyone else is guaranteed a job, it would be hard for you to make much more than they do, no matter how good a job you did. How would you perform?
This was the situation during the communist era in many countries, where jobs were guaranteed. Motivation had to be supplied through other means and that often didn’t align that well with societal well-being.
Similarly, if you knew you were going to get bailed out because you are “too big to fail” no matter what financial risks you took, how would you behave? You would probably take extraordinary risk and shoot for tremendous upside because downside risk, or failure, would not be a concern. That’s exactly what happened with the housing market that culminated in bailouts in 2008.
Guarantees, particularly by government, reduce the need for temperance. That is, a skill in doing the right amount of something, not too little and not too much. Reality has a way of punishing laziness and excess with consequences. If you’re a lazy farmer, you’re not going to be in business very long. If you take too many risks as an options trader, you’re also not going to be in business very long. Each results in failure and government guarantees eliminate failure and consequently, remove participants’ skin in the game, which ends in devalued temperance.
The market rewards the right amount of risk as this is the sweet spot for productivity and this is a mechanism that works very well. What guarantees do is they socialize the risks of doing too little or doing too much. The government essentially takes on the costs and makes being temperate less attractive.
When Temperance Lacks
When you have a significant portion of a population that’s got a skewed sense of risk, that is, on the one hand too risk averse (“lazy”) and on the other hand, excessively risky (“greedy”) all the burden of their failures are socialized to the people that can assess risk properly; that is, the people that have temperance and are actually productive. Government guarantees through fiat money result in a tax on productivity and cause a downward spiral where the productive people become more lazy or greedy as a result of having to support the lazy and greedy.
A fiat money system that results in government guarantees produces a society that has a hard time assessing risk in other areas of life. This in turn leads to an authoritarian nanny state that tries to protect people from themselves as people’s sense of risk become more and more skewed.
The possibility of failure, that is, skin in the game, is what causes people to assess risk more carefully. Government increases systemic risk by taking away the possibility of failure and skin in the game, with guarantees.
Enough systemic risk entering a system will cause civilizations to become more fragile. Fragility will result in collapse eventually, as long-tail events will shock the system. Thus, removing systemic risk is the key to civilization surviving.
A lack of sound money leads to a lack of temperance and a lack of temperance leads to systemic fragility that leads to collapse.
A more temperate society is more productive because people are motivated to assess risk properly. A society where risks are socialized and thus, skin in the game are lowered, creates a less temperate society and therefore makes society more fragile.