Bret Piatt

The idea of a social safety net is great, nobody wants to see others homeless, hungry, and in need.  The drawback is it eliminates the need for people to really give it their all.  If you could go to work and take an entry level job, if it pays you the same as the safety net – why do it?

This does have an upside.  True entrepreneurs can risk everything without fear of being left with nothing.  If they go bust, wait a few years again building up another nest egg and try again.  Just like buying a lottery ticket, you keep swinging for the fences until you get it and if not the safety net isn’t a bad place to be until then.

For tech related Web 2.0 style startups with access to utility style computing they may not even have to wait between attempts.  As long as the safety net gives them enough money for Internet access, food, and shelter they can keep trying idea after idea without the need to wait between ventures.  Eventually one of those ventures pays off and they skip right over the middle class.

It is horrible for marginal entrepreneurs because they won’t commit everything to success as they know they have a safety net to catch them.  This may cause businesses on the edge to fail as the thoughts of 100 hour weeks trying to save your business sounds worse than relaxing on the safety net.  This is where the safety net robs people of success, if given no other option for support they would have overcome.

When the safety net put you in a shelter or a public housing development most people were willing to work as hard as they needed to improve their quality of life.  If the safety net moves up to saving the $800k home of a bus driver most people will be perfectly happy relaxing on the safety net not trying to improve their life or if they do try for improvement they’ll swing for the fences.

Through this the middle class workforce will slowly be eliminated and in order to attract people to the jobs that really keep everything running we’ll have to start paying significantly more.  While on the surface this sounds good dramatic shifts in the average wage will cause hyper-inflation.

Inflation isn’t just the government printing money increasing the money supply.  A significant increase in the velocity of money is how we’ll end up in hyper-inflation, not through the printing of money alone.  If the M3-M2 money only fractionally changes hands each year it doesn’t have a lot of purchasing power; it doesn’t drive the prices of goods and services.  If those large pools of investment dollars now have to be paid out to workers in salarys to attract personnel capable of performing the job M1 and M2 will increase as the average worker doesn’t save — they spend what they make.

So if you are in control of those M3 dollars do you spend them on higher salaries to attract workers, knowing it will lead to hyper-inflation, causing your fortune to diminish in purchasing power? Or instead, do you instead let the economy fail causing deflation as unemployment increases and the M2 supply decreases which in turn increases the power of your fortune?