INTEGRAL ECONOMICS

Temporal Conundrum
Daniel O'Connor | Integral Ventures, LLC

A growing distortion in the temporal dimension of our

market economy, driven by the monetary policies of our
central banks, has implications for our economic future.
Temporal Conundrum
Daniel O'Connor | Integral Ventures, LLC
We finally did it. This past year, for the first time
since the pit of the Great Depression, we in the
United States managed to drive our annual personal
saving rate below zero. What this basically means,
on the surface, is that all of us together, as a
group, spent every dollar of household income we
had leftover after taxes, plus another half a cent
that we must have borrowed. Of course, some of us
did manage to save something last year. But all of
this saving was more than offset by all the
dissaving the rest of us did. Of course, this wasn't a
great surprise. The trend has been clear for a good
many years and I've even discussed it in some
previous essays, like Saving Ourselves1 and Saving
Themselves?2
What does it mean on a deeper level?
To answer this question, let's review some just-in-
time theory. The personal saving rate is a derivative
of the fundamental trade-off for every household—
consumption versus saving—and it reflects house-
holders' preferences for allocating their scarce
resources over time. Given a flow of after-tax
income, householders can either use the money for
current consumption or save it for future
consumption.
This temporal trade-off is known as time preference
because it expresses a preferential relationship
between a particular good in the present versus
that same good in the future. It is considered
by economists of the Austrian School to be the
subjective origin of the interest rate, because the
greater our valuation of a good in the present
relative to our valuation of the same good in the
future—i.e., the higher our time preference—the
greater the implied interest rate in our value
Page 1
function and the greater the interest rate must be
to induce us to defer enjoyment of this good
through saving.3
Time preference may also have a neurological
connection, as I proposed in The Neuroeconomics of
Time.4 According to recent research into the idea of
time inconsistency, people use completely different
parts of their brains to process decisions in the
present versus the distant future.5 When it comes
to making decisions about the distant future, people
do so in a relatively rational way using the
prefrontal cortex. But when making decisions about
the present that entail a choice of whether to
consume something now or later, the emotional
limbic system takes over and prefers immediate
gratification. Whether this neurological time incon-
sistency causes psychological time preference or
the other way around is uncertain, so perhaps we
can just think of them as mutual causal.
On one hand, the trend in personal
saving suggests that we place so
little value on our economic future
that we'd rather just consume
everything we possibly can
in the present, without regard
for future consequences.
So how can these ideas help us interpret the
negative personal saving rate?
When we see householders as a group choosing to
save none of their current income, preferring
instead to use it all for current consumption, we can
infer that they do not value the future enough to
save for it. Perhaps they imagine that they do not
need to save for the future because they already
have enough savings in the form of assets (like
home equity) or because someone else is doing it
for them (like a government or corporate pension).
Perhaps they have carefully planned to save for the
future using their prefrontal cortexes, but then
when they must make their monthly decisions to
consume now or save for later, their limbic systems
undermine their long-term plans. Either way, it's
pretty much the same implication: no saving
implies no future.
When people lower their valuation of the future or
the goods they might buy in the future, they are
expressing what is known as higher time
preference, which is consistent with the higher
interest rate that is required to induce them to save
enough to satisfy investors' demand for funds. To
see what I mean, just think of how we compute the
present value of a future cash flow by applying a
discount rate. The higher the discount rate we
apply, the lower the present value of the future
cash flow. Thus, the lower our present valuation of
our collective economic future, the higher is the
implied interest rate that should prevail in the
markets for money, credit, savings, and
investment. This is how markets work, like a
dynamic system seeking a reasonable balance. In
this case, the balance being sought is that between
the supply of funds and the demand for funds being
saved by households.
But if there is one thing to which we've all grown
accustomed in the past several years, it is lower
interest rates. According to the theory of time
preference, lower interest rates imply lower time
preference and therefore a relatively higher
valuation of the future in relation to the present. A
lower discount rate applied to the future cash flow
in our example will generate a higher present value
of that future cash flow. So the relatively low
interest rates in recent years would seem to be an
indication that we householders value our collective
economic future rather highly—as if we are saving a
great deal more than we really are.
On the other hand, the trend in
interest rates suggests that we
value the future rather highly and
therefore save a significant portion
of our income so that businesses
can invest in the creation of the
economic product that we
expect to enjoy in the future.
Thus, we have a sort of temporal conundrum.
On one hand, the trend in personal saving suggests
that we place so little value on our economic future
that we'd rather just consume everything we
possibly can in the present, without regard for
future consequences. On the other hand, the trend
in interest rates suggests that we value the future
rather highly and therefore save a significant
portion of our income so that businesses can invest
in the creation of the economic product that we
expect to enjoy in the future.
How can we resolve this temporal conundrum?
By recognizing that the monetary policies of our
own central bank and the central banks of our
trading partners have been distorting market
interest rates to such an extent that we
householders are literally behaving as if we can
consume all our income today, while simultaneously
Page 2
saving enough for the future we value—consuming
our cake and saving it too.
In recent years, the Federal Reserve's inflationary
monetary policy of lower short-term interest rates
has been met by similarly inflationary policies of
some other central banks (e.g., China) who, in
order to support their respective export sectors,
have attempted to stem the dollar's natural
depreciation in relation to their own currencies by
aggressively purchasing US dollar-denominated
Treasury securities. By increasing the demand for
US Treasury bonds, notes, and bills, these foreign
central banks have bid US interest rates down to
levels that would not have existed in the absence of
the policy interventions.
This multi-lateral strategy of
competitive currency devaluation
has produced lower-than-market
interest rates, which, in turn, have
created valuable incentives for
households to save less, borrow
more, and consume more.
This multi-lateral strategy of competitive currency
devaluation has produced lower-than-market
interest rates all along the yield curve, from short-
term rates to long-term rates, which, in turn, have
created valuable incentives for households to save
less, borrow more, and consume more. These
lower-than-market interest rates have resulted
in higher-than-market rates of borrowing through-
out the economy and higher-than-market rates of
appreciation in the prices of many assets—stocks,
bonds, houses—which are often touted by govern-
ment-paid economists as the increasing savings
balances that more than offset any downside
associated with the decreasing saving rates. To the
extent that the value functions among householders
have remained relatively stable, we can be sure
that we have all saved less, borrowed more, and
consumed more than we would have if the central
banks had maintained policy neutrality.
Therefore, the inflationary monetary policies of the
Fed and other central banks have induced
progressively higher time preferences among US
householders, who have responded with a predict-
ably emotional rationalization that appreciating
stocks, bonds, and houses, even in the absence of
any saving from year to year, can somehow
compensate for excessive borrowing and spending
in the present.

But why hasn't this increasing time preference
triggered the balancing mechanism of increasing
interest rates in order to induce the higher saving
needed to balance the market?
Because the demand for funds is still being met, not
through the traditional source of household saving
but through the extension of additional credit via
the fractional reserve banking system. In other
words, the banking system, as an extension of the
Federal Reserve, fulfills the inflationary monetary
policy by systematically increasing the supply of
credit to compensate for the decreasing supply of
household saving. This allows the Fed to effect its
policy objectives, which include households saving
less, borrowing more, and consuming more, all the
while rationalizing that their appreciating stocks,
bonds, and houses will secure for them a
comfortable future.
So what?
The wider consequences of these policy-driven
distortions in the temporal dimension of our market
economy extend well beyond the seemingly
mundane world of household finances, contributing
to such challenges as:
• the ominous debt trap, which is rooted in the
design of our monetary system;6
• the recurring business cycle, which is rooted
in the debt-filled gap between decreasing
saving and increasing investment; and
Daniel O'Connor is the managing director of Integral
Ventures, a strategy consultancy committed to foster-
ing more innovative and sustainable ways of doing
business. He has been a pioneer in the development of
integral praxis in business and economics, having
authored numerous articles and essays in this
emerging field.
email: daniel@integralventures.com
website: www.integralventures.com
Page 3
• the depletion of natural capital, which is
exacerbated because excessive consumption
in the present over-uses today's relatively
inefficient, resource-intensive technological
capital base.
It is as if we are all contributing
to a self-fulfilling prophesy that is,
ironically, contrary to the conscious
visions of a better future that
most of us are actually trying
to create in our own ways.
The deeper implications of this temporal conundrum
are more difficult to articulate. It is as if we are all
contributing to a self-fulfilling prophesy that is,
ironically, contrary to the conscious visions of a
better future that most of us are actually trying to
create in our own ways. It is difficult for me to see
a way out of these self-fulfilling, self-justifying, self-
contradicting, and self-destructive dynamics without
a significant transformation in the way we choose to
participate in our market economy.
This February 2006 work is licensed under a Creative
Commons Attribution-Noncommercial-No Derivative Works 3.0
License.
1
Daniel O'Connor. (2005). “Saving Ourselves.” Catallaxis.
http://www.catallaxis.com/2005/04/can_we_save_our.html.
Retrieved February 11, 2006.
2
Daniel O'Connor. (2005). “Saving Themselves?” Catallaxis.
http://www.catallaxis.com/2005/07/saving_themselv.html.
Retrieved February 11, 2006.
3
Ludwig von Mises. (1949, 1998). Human Action: A Treatise
on Economics. Auburn: Mises Institute, 480-534.
4
Daniel O'Connor. (2005). “The Neuroeconomics of Time”
Catallaxis. http://www.catallaxis.com/2005/04/
the_neuroeconom_1.html. Retrieved February 11, 2006.
5
Peter Coy. 2005. “Why Logic Often Takes a Backseat.”
BusinessWeek. March 28, 2005. http://www.businessweek.
com/print/magazine/content/05_13/b3926099_mz057.htm?ch
an=mz&. Retrieved February 11, 2006.
6
Daniel O'Connor. (2006). “Debt Trap.” Catallaxis.
http://www.catallaxis.com/2006/01/debt.html. Retrieved
February 11, 2006.
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