FEBRUARY 26
Incentives Change Behaviour
Why Financial Crises Accelerate Money Creation
The Signal
When the financial ship starts sinking, creating money becomes the emergency pump.
The Reading
In normal times, the fiat system creates money quietly. Banks make loans, borrowers take on debt and new money appears in their accounts. But when markets freeze and debts fail, the incentive changes. Restraint matters less than keeping the ship afloat.
After Black Monday in 1987, the Federal Reserve supplied liquidity. After the dot-com collapse, it cut rates sharply. In 2008, the system nearly broke. Rates moved towards zero, emergency facilities opened and central banks bought government and mortgage securities. Bailouts became the norm.
Then came 2020. Governments borrowed rapidly while central banks expanded their balance sheets. Cheap credit, government support, constrained supply and changed demand pushed asset prices sharply higher. House prices surged.
Owners watched their assets rise, yet life became harder. Food, energy, rent, insurance and other essentials climbed too. Someone wealthier on paper could still feel poorer each month as living costs bled more from their income.
This is the incentive in action: rescue now, deal with the consequences later. When the ship is sinking, governments and central banks are rewarded for pumping harder. Bailouts protect institutions and markets today, while more money and credit push costs into tomorrow. People holding and using fiat can keep paying long after the crisis passes.
Cash is not king in that environment. It becomes financial slavery: the number stands still while your purchasing power gets severely reduced.
The ship was saved, but who paid for pumping the water and patching the holes?
First Principles
Fiat money expands through normal credit creation.
Crises shift the incentive from restraint to rescue and bailout.
Emergency policy protects today while shifting costs into asset prices, inflation and ultimately the future.
Today’s Challenge
Place 5 cups on a table. They represent houses, land, goods and assets.
Place 10 coins, beans or peas beside them. They represent the money competing for those things.
A crisis hits. Add another 10 money pieces, but no more cups.
The things did not double. The money did.
What pressure would you expect on prices?
When a bailout occurs, would you rather own a cup or the items representing money? Why?
Tomorrow’s Signal
Why Fiat Cannot Last Forever