The "de-civilization" effect

The far-reaching implications of extreme monetary interventions

In an excellent analysis earlier this year, my good old friend Jeff Deist, President of the Mises Institute in Alabama, outlined some of the most important effects of our current monetary policy direction and highlighted the dire threats that it poses, not just to our economy, but also to society itself. In this article, he unpacked the concept of “de-civilization”, which I found remarkably apt as a description of the situation we’re facing now. It also gave me a lot of food for thought for the challenges that the Eurozone faces, where, compared to the US, over the last decade, the monetary absurdity is much more intense and the central bankers’ experiments significantly more reckless.

Perverse Incentives

While, by now, many of us may be getting used to the impact of negative interest rates and while even more may take it for granted that the policy is here to stay, it is still important to remember that the real, far-reaching consequences of the policy are only just now beginning to emerge. In the decade that the policy has been around, we only recently saw negative-yielding bonds spread and become “normal”. It also took a while before we saw banks pass the savings penalty down to their customers, by starting to charge for deposits. And yet, I would argue that this still is just the tip of the iceberg. Far more than a mere investing problem, extreme policies like this create an incentives problem, which corrupts the very foundation, not just of basic economic principles, but of societal stability itself.

Of course, it is clear that negative rates and negative-yielding bonds, by definition favor the debtors and punish the savers. However, they also contradict all logical ideas about how money works, and they call into question everything we know about how a rational economic actor should behave. As a result, by sending all the wrong signals down the line and creating perverse incentives, they pave the way for the undoing of socio-economic stability. They actively encourage consumption and the accumulation of debt, while at the same time, they penalize saving and prudent planning. In other words, they reward those without patience, those unwilling to work and build something over the long-term and those who plan for the next generation.

The building blocks of civilization

In stark contrast to the ideas that underpin the current monetary policy framework, stand the values upon which our civilization - and really, any kind of successful civilization - was built. The simple, and largely innate, urge of any human to prepare for a “rainy day”, to set something aside for their old age and to provide for their children, is to a very large extent responsible for the survival and eventual bloom of our society. Especially in Europe, through centuries of conflict, war and economic turmoil, we learned the value of this the hard way.

Saving and planning ahead was essential during times of uncertainty, but it also proved a great economic, social and cultural booster in times of peace and prosperity too. This long-term approach, this patience and the capacity to defer gratification, or “lower time preference”, manifested itself not just in the multigenerational success of many European families and industry leaders, but also in the culture and the arts. Private infrastructure investments that helped establish trade routes still used today, patronage of the arts that resulted in masterpieces still admired and private funding of architectural marvels that took entire generations to complete, are all tangible examples of the vital role that delayed gratification and a focus on the future played in the development of Western civilization.

Devolution

Once we take this basic principle and turn it on its head, we risk unleashing a dangerous domino effect, a chain reaction that has the capacity to deconstruct and take apart all that we’ve struggled to build and maintain for so long.

When savers are punished and borrowers are rewarded, most people, especially those with little understanding of the nature and history of money, will be quick to comply and adapt to the new environment. Thus, they stop their efforts to add value to the economy and to society and they stop saving and accumulating enough wealth for their future financial security. Without this crucial first step, they place their own future in the hands of a third party, be it the government or a lender, and fail to attain financial independence. By being placed in this position of dependence, their weakness is then easily exploited and used as political leverage to introduce even more wealth-destructive policies down the line.

However, the damage is not only limited to the individual, as this deterioration of financial independence is only the starting point of the chain reaction. As people are pushed towards consumption and borrowing, and as saving is actively discouraged, long-term and sound investments are also increasingly off the table. The individual saver, and eventual investor, is thereby no longer able to deploy their capital to help others grow. They are no longer able to support great and innovative ideas, to help fund new companies, to create new jobs and increase other people’s ability to save enough in order to repeat and perpetuate this virtuous cycle.

Instead, everything revolves around the “here and now”, discarding the future for the sake of today. Real value and sustainable growth are irrelevant in our everyday purchases, in our investment decisions and in the economy at large. This is already evident in the spike of consumerism in society. It can also be plainly seen in the environmental damage and pollution that is caused by this mentality of “the next guy will clean it up”. It is also quite clear in the stock markets too, where only in the last couple of years, we saw dozens of loss-making so called “unicorn” companies reach incredible valuations. The promise of a quick buck has hordes of investors lining up to pay insane prices for a piece of a business that has never made one.

Looking ahead

Overall, in these times of monetary absurdity and of seriously misaligned incentives, it is important for the mature and prudent investor to resist the wave of irresponsibility. For those who understand monetary history, it is clear that the present system and the policies that are currently in place are as irrational as they are unsustainable. It is therefore a mistake to adapt to them and to shift one’s long-term investment strategy accordingly, to prioritize consumption and to turn to reckless borrowing. For when it all comes to screeching halt, they would find themselves in the same boat as everyone else, with nothing saved, nothing built and nothing to pass on the next generation.

It is true that conservative and rational investments are all but extinct at this stage, however, precious metals still provide a time-tested and reliable way to protect one’s wealth and to hedge against both economic and monetary risks.

Claudio Grass, Hünenberg See, Switzerland

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