The expression ‘time is money’ is true not just for individuals and businesses but also for the broader economy. One of the most important (though oft-ignored) factors that determine the health of an economy is a phenomenon called ‘time preference’.

Time preference is the ratio at which someone values the present over the future. So, someone with a high time preference is particularly concerned with their well-being in the immediate future. While someone with a low time preference places more onus on their well-being in the more distant future.

Because humans do not live forever and death can come at any moment, the future for all of us is far from certain. And, as consumption is vital for survival today, people instinctively value present consumption over future consumption. A lack of present consumption could mean the future never comes.

For an individual or company to be willing to delay their receipt of a good by, say, a year, they would have to be offered a clear incentive, such as a larger quantity of the good. The increase necessary to convince an individual or a company to defer their receipt of a good is what determines their time preference.

The lower an individual or company’s time preference, the more likely they are to engage in investment, to delay gratification and to accumulate capital. The gradual formation of capital has fuelled economic development for centuries, boosting labour productivity and the general quality of life.

There are many factors that influence the time preference of individuals and companies. Security of both people and property are among the most important. It is only natural that in societies where the government and/or criminals can expropriate your property or even put your life in danger, its people have higher time preference. These individuals prioritise spending their money on immediate gratification rather than saving for the future.

But there is an even more important factor at work: the expected future value of money. If money in an economy is expected to maintain its value, it incentivises people to put off consumption and instead direct their energy and resources towards production in the future. This sets in motion a virtuous cycle of capital formation and improving living standards. This is generally the case when an economy is based on money that is hard to produce more of. The best known (and tested) example of ‘hard money’ is gold, whose supply increases globally by 1-1.5% per year.

But what happens in an economy where the value of money is in gradual free-fall, as has been the reality for most countries over the past half century?

The result is inevitable. People stop saving for the future, society accumulates less capital, or even begins to consume its capital, and worker productivity stagnates or even begins to decline. People consume more of their income and borrow more against the future. The resulting debt crises grow in scale and severity. Just as centuries of capital formation helped to fuel unprecedented advances in labour productivity, economic development and quality of life, decades of capital destruction threatens to do the opposite. That is why time preference is so important for our economic health.

It means that we’re probably reaching, or have already reached, a tipping point. A point where the total capital accumulated over hundreds of years stagnates and starts to go into reverse. The headwinds of higher price inflation and higher time preference outweigh overall productivity increases. As such, general standards of living fall. Pension increases are unlikely to keep pace with the true cost of living. These negative effects will be felt most in those countries with weaker currencies with high money supply growth. There is likely to be a greater move to hard assets as people act to protect their purchasing power as best they can.

What we have described is a super-cycle that will not be easy to reverse and it can easily be missed if we focus only on the day-to-day detail. There are also huge implications for the level and type of future pension provision in the UK.

Glenn Cameron, Senior Investment Consultant and Head of Digital Assets - Cartwright