Join my newsletter by subscribing below. Discover a different perspective on macroeconomics and global financial markets. I'm here to help you make sense it of all through an Islamic perspective.
You’re probably familiar with Einstein’s theory of general relativity.
The idea that gravity affects the passing of time.
The stronger the gravitational pull, the slower time feels.
For the Christopher Nolan fans who enjoyed Interstellar as much as I did, you’ll remember how time on Miller’s planet went by more slowly than time on Earth.
For every hour spent on Miller’s planet, 7 years went by on planet Earth.
A supermassive black hole close to Miller’s planet made its gravitational pull insanely strong. This warped spacetime considerably, leading to huge time dilation relative to Earth.
But there’s another intangible force that affects time.
Not exactly in the same way. But at least how we view time.
And that, my friends, is inflation.
When I speak about time I’m really talking about time preference. Choosing between the present and the future. Now versus later.
Someone with high-time preference will prefer consumption today rather than tomorrow. They can’t delay pleasure. They give in to their immediate needs.
High inflation forces you to have high time preference.
High inflation usually comes from an increase in the money supply. If money is being printed in large amounts, it’s losing its value. Why would you want to keep it? You’ll want to either spend or invest it.
Inflation doesn’t come from nowhere. I’m not talking about “demand-pull” inflation either. The notion that a product in high demand will see its price increase as supply takes time to catch up. Those are natural market dynamics. Inflation is a general term for price increases across the economy.
The same can also be said regarding “supply-push” inflation. Sometimes supply-side factors make it so that prices go up. For example, a shortage in labour means businesses need to increase wages to attract new workers. This eats into their costs which they pass onto consumers by increasing prices. Again these are market dynamics. They eventually level out.
Inflation is mainly the result of an increase in the money supply. If you increase the amount of currency in circulation, there’s more money chasing the same amount of goods and services. Prices go up. Simple.
But this is strictly for bad money. Unsound, rubbish, fiat, unbacked money. If it’s not backed by anything then you can create as much of it as you want.
That’s the money we use today.
It’s worthless.
We know it is.
Well most of us do.
But you still use it and rely on it and transact with it. Because everyone else does. You’ve got no choice.
You trust the government in power when it comes to the money they issue. They tell you that they know better. That money should be controlled by the government. So you listen. Like a good law abiding citizen.
This worthless money is backed by nothing other than a promise.
The governments and central banks are in charge of issuing this money. They’re able to increase its supply at will. Alongside government policy.
It doesn’t take a PhD in economics to know that increasing the money supply leads to inflation.
Even though central bankers around the world will blame every reason under the sun for the inflation we’re currently experiencing. Everything but the stupid amount of money printed as a reaction to the economic shock due to the Covid-19 virus.
If you’re increasing the amount of money in circulation, there’s gonna be more money chasing the same number of goods and services.
Simple maths proves the price of these goods and services will eventually go up.
But what does that mean for the rest of society?
If bad money is forced upon you, and you’re forced to have a higher time-preference, how else does this affect society?
You’re a consumer and you're incentivised to spend your money today because you know that your money will lose its value over time. Just look at what $100 or £100 gets in you at the supermarket today compared to 2 years ago.
You could also invest your money. In the stock market for example. Or maybe buy Bitcoin.
But if you’re on a median salary, you don’t have much to invest. You’d have to be invested for years to reap the rewards. Sadly you’re just about making ends meet.
It doesn’t help that society pushes you to consume beyond your limits. You want to enjoy life today and not in years to come.
You’re inundated with advertisements. You’re made to feel that your level of happiness is proportional to how much you spend on inanimate objects. It’s almost sickening.
So manufacturers are incentivised to push out new products quickly. Because they know the consumer feels as though they need to get the latest product.
It’s almost as if obsolescence is built into the products you buy. What’s the point of making something that lasts many years when you’ll just replace it in a year?
You replace them so quickly. Because you’d rather spend your money today. Consciously or unconsciously.
What incentive do you have to fix your broken phone and save that money instead?
None.
So manufacturers will ramp up production.
The products you buy today don’t last as long as they used to.
Or maybe they do. But rarely do you keep them long enough to test their longevity.
You’re happy to replace them as soon as the latest model comes out.
You’re not the only one.
We’re all like that.
You’ve got 2 forces pushing you towards this kind of behaviour:
On top of that, society is obsessed with using Gross Domestic Product (GDP) as a measure of success.
GDP, the amount of output a nation produces, is all that matters.
You’re constantly bombarded with GDP numbers and we compare countries based on their GDP growth.
But as the sociologist William Bruce Cameron once said:
Not everything that can be counted counts, and not everything that counts can be counted.
You can very well calculate GDP. But our obsession with ‘number must go up’ has led us to ignore many other aspects of society.
What about measuring the quality of your relationships? Your mental state and happiness? Your physical health? The feeling you get when watching the sunset?
With GDP, all that matters is the number and value of transactions taking place. The more exchange value increases, the higher GDP.
But what about experiential value?
It’s not easy to quantify experience but you know it’s something important.
Take the example of a forest that I’m gonna borrow from economist and author, Yanis Varoufakis.
A forest, standing in its natural state, brings no exchange value. It doesn’t contribute to GDP.
But if there’s a forest fire and it burns down, we have another story. We need to mobilise firemen and workers to stop the fire, clear the forest and clean it all up. All this costs money. The exchange value increases. GDP increases. That’s seen as a good thing.
But is it?
Sure exchange value increases, but what about the experiential value of having a forest? Why don’t we consider the feeling we get from walking through this forest?
This might sound like some socialist rant but it isn’t.
Just consider the fundamentals of how we measure economic progress. It might look good on paper but it leaves us feeling as though something’s amiss.
But ask yourself why?
Why is our society obsessed with ‘GDP numbers must go up’?
I’ve explained in previous articles that our money is debt.
Commercial banks have the power to create new money every time they lend.
So every time you take out a loan, new money is printed. With every purchase you make using this magic money, GDP numbers go up.
If you, as a government, are pushing for an increase in GDP, aren’t you incentivised to boost lending?
Credit creation, the increase in lending, is the main fuel for economic growth.
It’s why central banks push interest rates to low levels when facing a recession. Low interest rates make lending cheaper. Borrowing appears more attractive. It boosts consumption and investment.
The problem is governments are addicted to this stimulant.
They keep increasing the amount of debt. But productivity levels (i.e. how much output the economy creates for a given level of input) doesn’t increase as fast. They end up with more and more debt that they’re unable to pay back because income isn’t catching up.
So they keep rolling over the debt by issuing more debt to pay back previous debt.
Yes, it sounds like a ponzi. Because it is.
This isn’t too alarming. What really matters is the cost of debt. The interest you pay on the debt.
Having trillions in debt is manageable when interest rates are low. Your interest expense isn’t too high relative to your income. But what happens when interest rates are raised because inflation is high?
The new debt is going to be a lot more expensive.
This is all a massive experiment that we’re living through.
No one knows how it’s going to end.
But one thing is for certain: this debt will never be paid back.
The US government is set to pay an interest bill of 1 trillion dollars this year. That’s close to 20% of the US government tax revenues. Do you realise how insane that is?
For every $1000 a US citizen pays in tax to the government, $200 goes to paying the interest on government debt.
It’s easy to spot the losers here. The losers are the general population reliant on the public institutions that make a country what it is. It becomes extremely dangerous when these can no longer serve their purpose effectively.
My previous article touched upon the advantage the US has over other nations. The global demand for US Dollars gives it an unfair advantage. The whole world is ready buy US government debt (i.e. US treasuries).
But what happens if the supply of US treasures is too great?
We haven’t experienced that yet.
But that would be a disaster.
If there aren’t enough buyers of US debt what do you think happens?
Easy. You make the offer more attractive by increasing the rate of interest on that debt. But that’s problematic for the US government who’s gonna have to pay interest. Higher interest payments means less spending on public services.
But whatever happens, more debt means more printing. More printing pushes our time-preference even higher because of inflation.
Governments need to boost GDP to make sure they can keep servicing this debt.
Fitch Ratings, a credit rating agency, has this week downgraded the credit rating of the US government. Why? Because of the high amount of debt the US government has. It doesn’t see it slowing down anytime soon. This could be the start of something.
I know I’m going against the modern day mantra to focus on the present. But when it comes to financial decisions, that’s generally bad advice.
Having a higher time-preference makes you short-sighted. You’re focused on the short-term. On maximising immediate returns or pleasure. Companies are focused on boosting profits for the next quarter.
Think about how that affects inventiveness and innovation.
When you favour the present to the future you’re less likely to prioritise a long-term project that will bear its fruits in many years to come.
How many investors are willing to accept a large public company burning a ton of cash on a project that might take 10 years to bear fruit? I’m sure many would prefer immediate dividends instead.
It’s one reason why it sometimes makes a lot more sense to remain a private company rather than going public. You can focus on your business and building for the long-term without having to deal with the pressure of making sure your quarterly numbers look good. As long as you have the right backers of course.
Now what about you as an individual?
If you’re focused on the present, you’re more likely to borrow, take on debt and consume today. Not only that, you’re less likely to take a long view on your health. You’ll make poorer choices when it comes to your diet and how you spend your time.
No wonder Allah emphasises patience numerous times in the Qur’an:
“O believers! Seek help (from me) through patience and prayer, verily Allah is with those who are patient” (2:153)
“Indeed, Allah is with those that are patient” (2:153)
“And We will certainly reward the steadfast according to the best of their deeds” (16:96)
“Only those who are patient shall receive their rewards in full, without reckoning” (39:10)
There’s many more references to patience, (sabr, in Arabic), in the Qur’an but you get the gist.
Naturally, the Muslim should have a very low time-preference given that this whole life is seen as a test and that the real reward is the eternal life in paradise in the hereafter.
The worst thing you can do is take on debt to buy something you don’t need.
But what about inflation eroding the value of your money?
Invest it. Even if it’s little. If it’s not for your future, think about your children’s future. This might not be the answer you’re looking for.
But if humanity started to think about future generations rather than our own, we might be able to sort out many of the issues we’re facing today: overconsumption, over-polluting, waste etc.
RIght now, humanity is locked in a mechanism of choosing the present over the future. When you are indebted, that’s all you can do. You have borrowed money from your future self and it’s time to pay up.
And if you can’t? Well just borrow more.
This financial ponzi incentivises you to keep spending. To keep pushing your time preference even higher. To spend today. To keep the ponzi machine going.
It’s looking impossible to get out of.
Past civilizations didn’t fare well. History doesn’t always repeat itself but it sure does rhyme.
In my next article, I’ll discuss in more detail how inflation is actually welcome by the central banks and governments. The real enemy is deflation.
I manage a $100m private investment fund and I explore Islamic finance and economics through a personal lens. I help simplify financial markets from a Muslim perspective.
Subscribe below for more insights.
Letting curiosity guide me to help you make sense of our economic system and how Islamic principles provide equitable solutions.
