In today’s fast-paced world, immediate satisfaction has become the norm. Austrian economist Ludwig von Mises defined this tendency as “time preference,” which refers to individuals’ inclination to prefer achieving their goals sooner rather than later. With current trends leaning towards instant gratification, the significance of savings and investing is often overlooked.
Today, the desire for immediate rewards is prevalent. Mises described this phenomenon as a high time preference. Yet, people also aspire for more — be it luxury items, a larger home, or exotic vacations. However, attaining these desires necessitates production, which requires both time and sacrifice. This willingness to sacrifice immediate gratification for greater future rewards defines what Mises called a low time preference, ultimately leading to increased savings.
Individuals with a low time preference, or savers, play a crucial role in wealth creation and the health of capital markets. Without their contributions, money would be quickly spent, leaving little capital available for production improvements. Businesses would struggle to access the credit they need for expansion and innovation.
Improving Upon the Business Cycle
Mises also highlighted how the expansion of bank credit creates distortions within the economy. When banks issue more credit based on savings, it falsely suggests that there are greater resources available for production than can be sustained. As a result, a boom emerges, with businesses responding to seemingly heightened demand. However, this initial excitement is often followed by a downturn when the economy becomes overextended.
While the bust phase may be disruptive, it serves an essential purpose by keeping the economy aligned with its capital base. This correction helps rectify the missteps and misallocations that occur during the preceding boom period.
Central bankers, however, often believe they can refine the business cycle. They seek perpetual growth without downturns, aiming for a universe devoid of night, a spring that never transitions to winter, and consumption without corresponding sacrifice. This desire manifests as an attempt to eliminate busts from the economic cycle.
When banks overextend credit to individuals pursuing unsustainable ventures, central bankers frequently step in to rescue these banks. Even when loans fail, banks continue to operate, as they receive virtually free money from the Federal Reserve, which they then lend to the government through Treasury purchases. This cycle gives the illusion of stability without addressing the underlying issues.
Yet, there are undeniable consequences.
Open Season on Savers
Currently, it’s a challenging time for savers—not only in Cyprus, but right here in the United States, where savers are metaphorically hunted like wild game. They find themselves cornered with limited options.
The Federal Reserve has decreased the yield on the 10-Year Treasury note below the inflation rate, effectively turning Treasuries into instruments of guaranteed loss. Furthermore, when interest rates do eventually rise, Treasury investors will face significant losses.
Certificates of deposit (CDs) offer little relief as well. For example, a 12-month CD from Bank of America yields a mere 0.2 percent annually, while the consumer price index increased by 2 percent in the same timeframe, resulting in a negative real yield of 1.8 percent.
Furthermore, standard savings accounts provide an even more dismal yield, with a regular savings account from Bank of America currently at 0.01 percent annually. After accounting for inflation, keeping money in such accounts results in losses comparable to hiding cash under a mattress.
This situation underscores the plight of savers, who are being unfairly targeted for their prudence. They are losing not only their financial assets but their time as well.
Savers aim to accumulate resources not just for future consumption but for greater independence and freedom. Their sacrifices represent investments in their future quality of life, made not out of greed but a desire for autonomy.
For those trading time for money, the grind can be exhausting. Engaging in unfulfilling work to serve others can sap one’s energy and joy. Instead of enjoying time with loved ones, individuals find themselves attending meetings that drain their spirit, embarking on business trips instead of vacations, and reading tedious reports rather than inspiring literature. Many yearn for a lifestyle driven by passion and purpose, rather than obligation.
The act of saving transcends mere financial planning; it symbolizes past sacrifices and exchanged time aimed at achieving future freedom. When the Federal Reserve expands the money supply and the Treasury dilutes the dollar’s value, they are not merely depleting savings—they are eroding personal property, freedom, and ultimately, time itself.
In essence, they are robbing individuals of their lives.
Sincerely,
MN Gordon
for Economic Prism