When Money Is “Free,” Discipline Evaporates; When Discipline Evaporates, Decisions Are Disastrous

Whatever is free is squandered. When water is free, it’s freely wasted. When electricity is free, there’s no motivation to use it wisely.

The same principle holds true for money. If money is free, or nearly free, there is no motivation to invest it wisely, or consider the opportunity costs of spending it versus investing it or preserving it as savings.

Money that can be borrowed for next to nothing is essentially “free” because the costs of interest are negligible. Money that can be borrowed in virtually unlimited quantities is also “free,” as whatever funds are squandered or lost to malinvestment can be easily replaced with more borrowed money.

Nothing enduringly productive can be built without discipline and a steady focus on the bottom line of production costs, revenues, overhead expenses and opportunity costs, i.e. what else could have been done with this capital and labor?

These dynamics are scale-invariant, meaning they apply to individuals and households as well as to companies, institutions and nation-states.

Thus we see the same poor results in trust-funders whose income is “free” (pouring in monthly whether the individual was productive or not) and national governments that can simply borrow another trillion dollars (or $10 trillion, hey why not?) when they’ve squandered all the tax revenues.

We intuitively grasp the necessity of discipline to corral impulses and desires that are self-destructive in the longer term. Eating chocolate cake and ice cream might appeal to our immediate cravings, but longer term the consequences of unbridled consumption of this kind of sweets are dire.

We also grasp the role discipline plays in learning difficult subjects/tasks and in accomplishing long-term, often arduous projects.

If there is any commonality to genius, it is a prodigious work ethic based on a highly disciplined schedule of daily productive effort.

All of which leads us to ask: what precisely have we accomplished by borrowing and blowing $9 trillion in additional national debt over the past eight years?With interest rates near-zero and the credit line of the nation essentially unlimited–recall that the central bank created $3.5 trillion of money out of thin air and used much of it to buy federal bonds–there was no need for any difficult choices or trade-offs–that is, discipline.

The trillions could be borrowed from future taxpayers painlessly, and squandered on propping up unaffordable entitlements and programs that were each immune to discipline.

So a pharmaceutical company raises the cost of a pinworm medication from $3 to $600. When money can be borrowed in endless quantities for “free,” there’s no need to ask if this predatory piracy is justified or necessary for the good of the nation; just borrow another trillion to pay for Medicare and Medicaid costs that are largely skims, scams, fraud or unproductive paper-shuffling.

As long as the money spigot is “free,” there’s no need to ask why the F-35 fighter aircraft is four times as costly as the aircraft it replaces.

As long as the money is “free,” why should any politico risk telling a National Security agency such as the CIA “no more money for your agency until you can account for the tens of billions you’re spending on gosh knows what.”

Lowering interest rates to near-zero has reduced the need for fiscal-political discipline to near-zero. Politicos of all stripes are only too willing to borrow trillions from future generations–why not borrow and blow the money now to assure my re-election, and let future taxpayers figure out what to do about the crushing burden of debt we’re leaving them?

High interest rates were basically the only mechanism of discipline imposed on short-term, free-spending politicos. Once the cost of interest was reduced to signal noise, politicos were freed of the burdens of discipline: of having to reckon the burdens of future interest, of opportunity costs, of trade-offs and the difference between productive investments and cronyist pork-barrel spending on marginal (but highly profitable) “infrastructure.”

How disciplined will your gambling be in the casino when all your losses are covered by future taxpayers? Why hold back from risky gambles when any losses will be paid by others? Go head and gamble wildly–any lucky wins will be yours to keep, and all the losses will be covered by nameless others.

This is how “free money” leads to disastrous decisions. With the need for discipline eliminated, there’s no motivation not to gamble wildly, fund every special interest group’s demand, and grease the palms of every insider, every crony and every oligarch.

This is how a great nation will self-destruct. The only possible output of a system lacking any discipline is self-destruction.

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  • elmysterio

    While I agree with the general premise of this article that the “debt” is out of control and has been squandered, I take exception to the opening bit of the article talking about “free” water and “free” electricity. This seems to imply that something only has value if it has a dollar amount associated with it. I very much dislike that mindset.

    • David S

      Please explain how one puts “value” on something that is freely available, freely given, or without cost (be it time, money, effort, etc.)? It doesn’t always have to be about “dollars” to be free. You may dislike the mindset, but that does not change the truth of the argument.

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  • diogenes

    The questions are whose discipline, for what purposes, and what kind. Equating the rule of private banks with “discipline” per se is deceit or stupidity or both. Typical for this source.

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  • jadan

    “Whatever is free is squandered. When water is free, it’s freely wasted. When electricity is free, there’s no motivation to use it wisely.” This premise is not some wise assessment of human nature, it is an expression of Smith’s fundamental assumption about human nature. People are naturally sinful. Smith is your traditional Christian personality. He pretends he’s an economist, but he’s a moralist trying to save sinners from their own fallen natures. Smith’s people arrived in America and almost immediately all the natives tribes on the east coast, about nine million souls, died of the disease he gifted them, all the while he was trying to save them from their savagery. All that these native people had was given to them free of charge and yet they didn’t squander anything. White Europeans like Smith did the slaughter and the squandering. And here we are today with Smith still trying to save others.

    • David S

      So what he said is wrong because of smallpox and European slaughter of native peoples? Hardly.

  • It is the distorted view that interest is the price of money that comes with the economic profession which makes such blatantly ignorant statements appear common sense. The price of money is what you can buy for it, and not the difference between what you can buy for it next year and what you can buy for it today.

    If there are too many savings and to few investment opportunities, interest rates should go lower, and even negative if needed. There may be not enough savings in the US, but markets are global, and the world is awash of savings. And if there was a tax on currency, interest rates could go negative, and central banks didn’t have to print money, because the preference for cash would disappear.

    Lower interest rates make more investments possible. The introduction of fractional reserve banking and central banks in England coincided with the Industrial Revolution. It was the abundance of credit at low interest rates that made these investments possible. At the prevailing interest rates of the Middle Ages, the Industrial Revolution would have been a dramatic malinvestment.

    So lower interest rates allow for more capital to exist as more projects become profitable. And by the way. if interest rates were negative, the future is discounted a higher value than the present, and it might become possible to make the economy sustainable as it will make economic sense.