# The Natural State — full corpus

> An argument about where economies come to rest, told one essay at a time.

---

# Where Money Actually Comes From
Date: 2026-07-15
Canonical: https://thenaturalstate.org/essays/where-money-actually-comes-from/

Most people assume money comes from the government. Mostly, it doesn't. Notes and coins are government-made, but they're a small slice of all money, on the order of a few pence in every pound. Most of the rest is created by ordinary high-street banks, chiefly when they lend. New money is typed into existence when a bank lends, and deleted from existence when the loan is repaid. Behind them all is the central bank, which anchors the price of borrowing. It creates some of the money directly, and in the years it was buying bonds that was a large amount. And it creates money when the system needs rescuing. That's the machine.

The three kinds of pounds

Cash is the notes and coins the state puts into circulation, a tiny fraction of the total.

Bank deposits are the numbers in your current account, and they're what almost all "money" is, an IOU from your bank to you. When you feel like you have £5,000, you hold a bank's promise to pay you £5,000.

Then there are reserves [electronic balances that banks hold at the central bank]. You and I never touch these, and banks use them to settle up with each other, so when you pay a plumber who banks elsewhere, your bank transfers reserves to the plumber's bank behind the scenes.

So "where does money come from" is a question about bank deposits.

The engine: a loan creates money, repayment destroys it

Say a bank approves you for a £200,000 mortgage. It doesn't go to a vault and count out £200,000 of other people's savings. It writes £200,000 into an account and writes a £200,000 debt against you. The bank's books balance. Your promise to repay is what it now owns, and the new deposit is what it now owes. Nobody anywhere lost £200,000. The money is new. Before the loan it didn't exist. Now it does, and it's out in the economy being spent.

You don't need to take that from me. In 2014 the Bank of England published a paper called "Money creation in the modern economy" that says it plainly. Banks don't lend out savers' deposits, lending creates deposits. The Bank is describing itself.

Repayment runs the film backwards. The principal you pay back is deleted the same way it was created. It reaches no saver, and only the interest survives as the bank's income. You owe more than was created. The loan wrote £200,000 into existence, and you'll repay £200,000 plus interest that nobody wrote. It comes out of the wider pool of deposits, money other people's loans made, and the bank pays it back out as wages and dividends, so it circulates rather than disappearing. What it can never do is escape the pile of loans, because the pool it circulates in is made of them. Let the pile shrink and the pool shrinks with it. If every household, firm, and government repaid every debt tomorrow, nearly all the money would vanish with it. Our money supply is the running total of debts not yet repaid.

People call this fractional reserve banking [holding far less in reserve than the total claims outstanding], and the name fits the shape. But the modern engine runs the opposite way round from the textbook story of collecting deposits and lending a fraction out. Banks lend first, creating deposits, and sort out reserves afterwards, because the central bank stands behind the payment system and will supply the reserves it needs to keep settling, at a price it sets. The vault isn't the binding constraint. What limits a bank is whether the borrower looks good for the money, what the regulator demands it hold as a safety buffer of its own capital [the bank's own funds that absorb losses first, not the reserves it settles with], and whether the loan is profitable at the interest rate on offer. A single bank still has to hold a stock of easily sold assets set against the money that could leave in a month, and when it borrows from the central bank it has to pledge something the central bank will accept.

Where this design came from

The design grew by accident, a piece at a time.

For thousands of years, the money that lasted was something scarce you dug up, gold and silver. Gold was heavy, risky to move, and risky to store, so people left it with goldsmiths and traded the paper receipts instead. The receipts worked as money. And issuers noticed that hardly anyone came for the metal at the same time, so they wrote more receipts than they held gold. That's where the shape we still live with starts, with claims multiplying on top of a scarce base.

It came with a built-in way of breaking. Banks competed by holding thinner and thinner reserves. Every so often confidence cracked and everyone demanded the metal at once, a run. After enough of those, the state stepped in with a central bank as lender of last resort [a backstop that creates money to rescue failing institutions]. The losses landed on the public, the borrowing stayed high, and the next crack was bigger.

Then, again and again, the gold promise was tested and the rules changed. In 1933 the United States banned private gold holding, and repriced the dollar against gold the year after. In 1971 it stopped exchanging dollars for gold. Since that day no major currency has been exchangeable for anything scarce at a fixed price. What a pound or a dollar is worth is set by the decisions of the people who manage it, and for a currency tied to another one, by the decisions of the people who manage that one.

Occasionally you see that in the open. Nigeria's central bank had been setting what a dollar cost, and by June 2023 it was calling that about 470 naira. Then it stopped setting the number, and within nine days a dollar cost 770. Nearly 40% of the naira's official value was gone. Seven months later it fell again, to about 1,450. Imports jumped in price, wages didn't move, and people were poorer. Nobody voted on that. It's the loud version of a process that runs unnoticed, at around 2% a year, in countries that manage it more smoothly.

The state's part: the central bank and the Treasury

The Bank of England sets Bank Rate, the interest it pays on reserves. That anchors the price of borrowing across the economy. It doesn't write the loans. Banks and borrowers do that. But it isn't a bystander on how much gets lent, because it sets the price of borrowing, stands behind the system, and can cap lending directly. Those three set the room inside which banks and borrowers decide the quantity.

When it wants to push prices up harder, it creates money directly. That's quantitative easing [QE], and the central bank creates new money and uses it to buy bonds, mostly the government's own, which raises their prices, pushes interest rates down, and weakens what the currency buys. Strip the acronym away and the loop is stark. The government funds itself by selling gilts [the IOUs the UK government issues to borrow]. Pension funds and insurers buy them. And the Bank of England creates money and buys them itself, close to £900 billion of bonds by the end of the QE years. One arm of the state issues IOUs, another arm creates the money that buys them. That's the logic at the end of that road. If nobody wants your IOU at the price you need, you start buying your own IOU.

In 2020 the before-tax profits of every company in the United States came to about 2.5 trillion dollars. In the first year of the pandemic response the country's stock of money, cash and bank deposits together, grew by about 4 trillion dollars. You could have taxed every company's profit at 100% and not covered two thirds of it. Money creation isn't presented as a tax and doesn't show up as revenue, but it works as a hidden tax, because it takes purchasing power from whoever holds the currency. It bridges the gap between what the state promises and what tax raises, and in a rescue it moves sums tax couldn't reach. Tax is the part you can see.

Why the machine can't idle

Almost every debt is fixed in pounds, and that one fact connects this machine to everything else. Your mortgage payment doesn't shrink because prices fall. A system built on those debts can take a slow fall that comes with better tools. In that fall it's the cost of making things that drops, and pay drifts down slowly behind it, so the money to meet a fixed payment is still there. What it can't take is a sudden fall in the prices credit pushed up, houses first, because then the losses spread through the banks. In that fall it's the lending that has stopped, so incomes and the house fall together and at once, and the fixed payment is hit from both sides in the same year. Houses come first because people buy them with borrowed money. The debt takes a bigger bite of every income, yours, your employer's, the government's. And where the loan was written against a house, the house is worth less too, so the bank stands to lose more on that loan. Push that far enough and defaults cascade through the chain of promises.

And a fall like that makes itself worse. Money is destroyed when a loan is repaid. In a downturn, new lending dries up while old loans keep being repaid, so the money supply itself starts shrinking. Defaults bite from the other side, eating the bank's own capital until it can lend less still. That drops prices further, which makes the remaining debts heavier still. The system spirals. In late 2008 some fully backed trade guarantees between banks froze for days, and containers sat on the docks, because banks stopped trusting each other's promises. Across the whole of trade, banks wrote fewer letters of credit [a bank's promise to pay for shipped goods] and lent each other less, but most of it kept moving. So every time a sudden fall in the prices credit pushed up threatens, the system is rescued with new money, and the rescues keep getting bigger.

In between the rescues, the central banks of the rich world target rising prices of about 2% a year, forever. They publish why they aim there. They want room to cut interest rates in a downturn, they know wages resist falling, and they say the official measure of prices overstates the rise. Those are the reasons they give, and the debts aren't among them. The debts show up in the rescues, not in the everyday 2%.

But technology is pushing the other way. Under a money nobody can add to, the natural direction of prices is down, because people keep getting better at making things and competition passes the saving on. So when a central bank targets 2% inflation, it doesn't need two points of push. It first has to cancel whatever better tools would have taken off prices that year, then add two on top. How big that fall would be is about how fast output per hour of work grows, which is what the productivity figures measure. On the published figures that's a point or two a year. No statistic records that fall, because it never happened. And the push behind that fall keeps getting stronger, because the tools are improving faster than they did, so what policy has to cancel out keeps getting bigger. The yearly pace of new money hasn't trended up. What the record shows growing is the stock of debt and the size of each rescue. That's why the numbers look deranged.

Between 2000 and early 2018, the world added roughly 185 trillion dollars of new debt to buy about 46 trillion dollars of growth. That's four new units of debt for one of output, and each new unit buys less than the last. The total stock of claims runs into the hundreds of trillions of dollars. It won't be repaid in full in honest money, because it can't be. The remaining choices are to default openly, or to default quietly, by holding the interest that lenders are paid below the rate prices rise, so the debts shrink against what money buys. That route has a polite name, financial repression. It's a quiet default on every pound and on every claim fixed in pounds, so the loss falls on what a person holds in pounds. Whether a particular person ends up worse off also depends on what they owe.

Who gains and who pays

New money doesn't arrive everywhere at once. It enters somewhere specific, usually through bank loans and central bank bond purchases, so it goes first to houses, shares, and bonds, and into the accounts of whoever sold them. The first receivers spend it at today's prices. By the time it has passed through enough hands to reach a payslip, prices have already moved, so say a physiotherapist gets a 3% rise and calls it progress while her rent and food bills rise 8%, and the house she rents is worth more to her landlord than it was. Nothing about the worker's effort changed. The money changed, and it moved value from her side of the table to the other one. Part of the saving from better tools does reach her as higher pay, late and unevenly. The rest goes to whoever got the new money first, through house and share prices. That early-receiver advantage has a name, the Cantillon effect [those closest to new money benefit first, before prices adjust for everyone else], and the issuer's own cut has a name too, seigniorage [the profit made by whoever creates the money]. It's why inflation is wage deflation. Her real pay [what her wages actually buy] fell while the number on her payslip rose. It's the same coin, read from the worker's side.

What's said in the machine's defence

"A little inflation is healthy. We need it or people won't spend."

People buy phones, food, and winter coats even though next year's version will be cheaper or better, because they need them now. The claim underneath is "if we don't erode your savings, you won't participate", and it answers itself. Growth comes from productivity, from getting better at making things. Borrowing to put up an empty showroom counts as growth too, in the figures, but nobody got better at making anything. What can't take a sudden fall in the prices credit pushed up is the debt structure, not trade between people. The reasons the central banks publish for the target are other ones, and the debts aren't among them.

"Deflation is a catastrophe. Look at the depressions."

Two animals share the word. Deflation from a credit collapse, wages and prices falling against fixed debts, is lethal, and it's what the early 1930s were. Deflation from productivity, things getting cheaper because we got better at making them, is the reason your phone is a miracle. Inside this system the first kind of deflation, from a credit collapse, is one policy mistake away. A policy mistake is only one of many triggers that could start it, because the fragility sits in the system itself. That's the indictment. We built money that cancels the thing technology naturally does.

"It's managed by experts. They can steer it."

Each rescue has been bigger than the last, hundreds of billions of dollars of government spending and bond-buying in 2008 and trillions in 2020, and markets now wobble at the hint of support being withdrawn. Support can be pulled back part of the way for a time, as it was from 2022 to 2024, when rates rose and bond holdings shrank. But each place the pull-back strained got new support within days, the Bank of England's in September 2022 and the Federal Reserve's in March 2023, and the promise to step in was never withdrawn. A system that needs a larger dose each round to get less effect is doing the steering.

"Without elastic money we'd lose credit and innovation."

Early-stage innovation runs on savings and equity, people backing founders for a share of what they build, so the extra pound of bank credit isn't what starts it. Where a firm is young and has little to pledge, a fall in local bank lending does cut its research spending and its patents, so the extra pound changes how fast and how widely innovation spreads. Credit would still exist under hard money. It would just be priced honestly and used more carefully.

The one money that isn't born as debt

So the question about any money is where it comes from and who can make more of it. Every money before this one has given the same answer. Someone could always make more, and the route varied with the money. Some issued a fresh promise. Some wrote more claims than there was metal. Some made the coin for less than the value stamped on it and kept the difference. And where the money was metal that nobody could print, the route ran through the vault that held it, where the claims could be multiplied. Whoever controlled the vault could then suspend the promise to hand the metal over when those claims came due. There's now one exception. Every pound is born as someone's debt. Every bitcoin is born as someone's cost.

New bitcoin comes only from mining [computers spending real electricity to win the right to add the next batch of transactions, collecting the new coins as the prize]. There's no loan behind it, no promise, no committee. The issuance runs on a fixed schedule, halves roughly every four years, and stops at 21 million. Those rules are enforced by everyone who runs a node [software that checks every transaction against the rules and rejects any coin created outside them]. Bitcoin's supply answers to a rule counted in blocks, kept by the people who run nodes, rather than to policy. Energy is what a new coin costs to win and what makes the record expensive to rewrite. It isn't what sets how many coins there are. All of that holds on more than one condition. The rules have to stay beyond any one party's reach, the network has to stay costly to attack, and bitcoin has to come into use as money rather than only be held. And staying costly to attack is work that has to keep being paid for, not a state the network sits in.

With the two answers side by side, the rest of the thesis follows on its own. Money that's born as debt keeps expanding, so the price falls technology keeps trying to hand you never reach you as lower prices. Money that's born as cost puts no requirement on the system to expand, so prices can fall and nothing has to push them back up. Whether they fall quietly depends on how much credit gets written on top of it and on whether those lenders are rescued when they fail. Today we print money and not goods. The world we're heading into prints goods and not money.

## Sources

What this essay rests on, as checked on 2026-10-10.

1. "Notes and coins are government-made, but they're a small slice of all money, on the order of a few pence in every pound."
   Bank of England, Explainer, “How is money created?”: "banknotes and coins only make up 3%", with the breakdown printed as "3% Notes and coins, 18% Reserves, 79% Bank deposits". https://www.bankofengland.co.uk/explainers/how-is-money-created

2. "Most of the rest is created by ordinary high-street banks, chiefly when they lend."
   Bank of England, Quarterly Bulletin 2014 Q1, “Money creation in the modern economy”, published 14 March 2014: "the majority of money in the modern economy is created by commercial banks making loans". https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy

3. "New money is typed into existence when a bank lends, and deleted from existence when the loan is repaid."
   Deutsche Bundesbank, Monthly Report, April 2017, “The role of banks, non-banks and the central bank in the money creation process”: Banks create deposits when they extend credit, and repayment eliminates those deposits. https://www.bundesbank.de/en/publications/search/the-role-of-banks-non-banks-and-the-centralbank-in-the-money-creation-process-654284

4. "It creates some of the money directly, and in the years it was buying bonds that was a large amount."
   Bank of England, Quarterly Bulletin 2014 Q1, “Money creation in the modern economy”, published 14 March 2014: "The central bank can also affect the amount of money directly through purchasing assets or 'quantitative easing'." https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy
   Bank of England, Explainer, “Quantitative easing”: "Instead, like other central banks, we can create money digitally in the form of 'central bank reserves'. We use these reserves to buy bonds." £895 billion total (£875 billion gilts, £20 billion corporate bonds); QE began March 2009. https://www.bankofengland.co.uk/monetary-policy/quantitative-easing
   Bank of England Independent Evaluation Office, Evaluation of the Bank of England's approach to quantitative easing, January 2021: £200 billion of gilts bought in the first programme, 2009 to early 2010; £895 billion total authorised by 2021; gilt holdings "peaked at around £875 billion in 2022". https://www.bankofengland.co.uk/independent-evaluation-office/ieo-report-january-2021/ieo-evaluation-of-the-bank-of-englands-approach-to-quantitative-easing

5. "It writes £200,000 into an account and writes a £200,000 debt against you."
   Deutsche Bundesbank, Monthly Report, April 2017, article on the role of banks, non-banks and the central bank in the money creation process: Banks create deposits when they extend credit; repayment eliminates deposits. https://www.bundesbank.de/en/publications/search/the-role-of-banks-non-banks-and-the-centralbank-in-the-money-creation-process-654284

6. "In 2014 the Bank of England published a paper called "Money creation in the modern economy" that says it plainly."
   Bank of England, Quarterly Bulletin 2014 Q1, “Money creation in the modern economy”, published 14 March 2014: Page titled "Money creation in the modern economy"; printed as Quarterly Bulletin 2014 Q1, published 14 March 2014. https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy

7. "Banks lend first, creating deposits, and sort out reserves afterwards, because the central bank stands behind the payment system and will supply the reserves it needs to keep settling, at a price it sets."
   Bank of England, Quarterly Bulletin 2014 Q1, “Money creation in the modern economy”, published 14 March 2014: “Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower's bank account, thereby creating new money. Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits.” https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy

8. "A single bank still has to hold a stock of easily sold assets set against the money that could leave in a month, and when it borrows from the central bank it has to pledge something the central bank will accept."
   Prudential Regulation Authority, PRA Rulebook, Liquidity Coverage Ratio (CRR) Part: “Chapter 2 of the Liquidity Coverage Ratio (CRR) Part of the PRA Rulebook lays down rules to specify in detail the liquidity coverage requirement provided for in Article 412(1) of CRR.” https://www.prarulebook.co.uk/pra-rules/liquidity-coverage-ratio-crr
   Bank of England, Eligible collateral, Sterling Monetary Framework: “The collateral must be of sufficient quality and quantity to protect our balance sheet from any risk of a counterparty failing to repay what is owed.” No haircut schedule or figure was read from the page. https://www.bankofengland.co.uk/markets/eligible-collateral

9. "For thousands of years, the money that lasted was something scarce you dug up, gold and silver."
   University of Haifa, Press release, 2023, “New Study reveals earliest use of silver coins as currency in Israel some 500 years earlier than previously believed”: “traced back the use of silver coins as a method of payment in the Levant as early as the Bronze Age – 3,600 years ago.” It covers silver in the Levant and earliest known use, not a continuous span. https://pr.haifa.ac.il/2023/02/new-study-reveals-earliest-use-of-silver-coins-as-currency-in-israel-some-500-years-earlier-than-previously-believed

10. "In 1933 the United States banned private gold holding, and repriced the dollar against gold the year after."
   The American Presidency Project, Executive Order 6102, Forbidding the Hoarding of Gold Coin, Gold Bullion and Gold Certificates, 5 April 1933: “All persons are hereby required to deliver on or before May 1, 1933, to a Federal Reserve Bank ... all gold coin, gold bullion and gold certificates now owned by them”; dated April 5, 1933. https://www.presidency.ucsb.edu/documents/executive-order-6102-forbidding-the-hoarding-gold-coin-gold-bullion-and-gold-certificates
   The American Presidency Project, White House Statement on Proclamation 2072, 31 January 1934: “the President today issued a Proclamation fixing the weight of the gold dollar at 15 5/21 grains nine-tenths fine”; gold bought “at the rate of $35.00 per fine troy Ounce,” effective February 1, 1934. https://www.presidency.ucsb.edu/documents/white-house-statement-proclamation-2072

11. "In 1971 it stopped exchanging dollars for gold."
   The American Presidency Project, Address to the Nation Outlining a New Economic Policy: “The Challenge of Peace”, 15 August 1971: “I have directed Secretary Connally to suspend temporarily the convertibility of the dollar into gold or other reserve assets”; address dated August 15, 1971. https://www.presidency.ucsb.edu/documents/address-the-nation-outlining-new-economic-policy-the-challenge-peace
   Federal Reserve, Federal Reserve History essay, “Nixon Ends Convertibility of U.S. Dollars to Gold and Announces Wage/Price Controls”: “On the evening of August 15, 1971, Nixon addressed the nation on a new economic policy”; “The first order was for the gold window to be closed.” https://www.federalreservehistory.org/essays/gold-convertibility-ends

12. "The Bank of England sets Bank Rate, the interest it pays on reserves."
   Bank of England, Bank Rate history and data, Bank of England Database: "Official Bank Rate history"; "See how the Bank of England's Bank Rate changed over time"; rates by change date, for example "05 Mar 09 0.50" and "04 Aug 16 0.25". The page does not state that Bank Rate is the interest paid on reserves. https://www.bankofengland.co.uk/boeapps/database/Bank-Rate

13. "That's quantitative easing [QE], and the central bank creates new money and uses it to buy bonds, mostly the government's own, which raises their prices, pushes interest rates down, and weakens what the currency buys."
   Bank of England, Quantitative easing (Bank of England explainer): "we can create money digitally in the form of 'central bank reserves'. We use these reserves to buy bonds"; "lower government bond yields feed through to lower interest rates"; "put upward pressure on the prices of goods and services" https://www.bankofengland.co.uk/monetary-policy/quantitative-easing

14. "And the Bank of England creates money and buys them itself, close to £900 billion of bonds by the end of the QE years."
   Bank of England, Quantitative easing (Bank of England explainer): £895 billion of bonds in total: £875 billion UK government bonds plus £20 billion UK corporate bonds; QE began March 2009, last increase announced November 2020; "We use these reserves to buy bonds" https://www.bankofengland.co.uk/monetary-policy/quantitative-easing
   Bank of England, Asset Purchase Facility Quarterly Report, 2021 Q4: "As at 31 December 2021, the Bank had reported cumulative asset purchases net of sales, redemptions and repayments totalling £894.7 billion"; £895 billion target stock set November 2020 (£875 billion gilts, £20 billion corporate bonds) https://www.bankofengland.co.uk/asset-purchase-facility/2021/2021-q4

15. "In 2020 the before-tax profits of every company in the United States came to about 2.5 trillion dollars."
   U.S. Bureau of Economic Analysis, published on FRED by the Federal Reserve Bank of St. Louis, Series A053RC1A027NBEA, “Corporate profits: Profits before taxes, NIPAs”, annual: “Corporate profits: Profits before taxes, NIPAs”, “Units: Billions of Dollars, Not Seasonally Adjusted”: 2020: 2,522.924; 2021: 3,368.660. The page carries no figure for money creation, so the comparison drawn in this paragraph cannot be settled from it. https://fred.stlouisfed.org/series/A053RC1A027NBEA

16. "In the first year of the pandemic response the country's stock of money, cash and bank deposits together, grew by about 4 trillion dollars."
   Federal Reserve Bank of St. Louis (FRED), from the Federal Reserve Board's H.6 release, Series M2SL, M2 money stock, monthly, billions of dollars, seasonally adjusted: “2020-02-01,15492.8 ... 2021-02-01,19641.4”, M2 in billions of dollars, seasonally adjusted. That is a one-year rise of about $4.1 trillion, a little above the four trillion the sentence gives. https://fred.stlouisfed.org/series/M2SL

17. "In a downturn, new lending dries up while old loans keep being repaid, so the money supply itself starts shrinking."
   Fisher, “The Debt-Deflation Theory of Great Depressions”, Econometrica, October 1933, pages 337-357: “Debt liquidation leads to distress selling and to Contraction of the money supply, as bank loans are paid off, and to a slowing down of velocity of circulation.” https://www.econometricsociety.org/publications/econometrica/1933/10/01/debt-deflation-theory-great-depressions

18. "Across the whole of trade, banks wrote fewer letters of credit [a bank's promise to pay for shipped goods] and lent each other less, but most of it kept moving."
   International Chamber of Commerce, “Trade volume and value decline sharply as a result of crisis”, 23 March 2009: “47% of the 122 banks surveyed reported a decrease in export Letter of Credit (LC) volume and that 43% reported a decrease in LC value”; 51% reported trade credit lines for financial institutions decreased, fourth quarter 2007 to fourth quarter 2008. These are shares of the 122 banks surveyed, not a count across all trade. https://iccwbo.org/news-publications/news/trade-volume-and-value-decline-sharply-as-a-result-of-crisis/
   International Monetary Fund; Dorsey, Saito, Khachatryan, Asmundson and Niculcea, Working Paper, “Trade and Trade Finance in the 2008-09 Financial Crisis”, January 2011: “bank-intermediated trade finance fell in value during the crisis, it fell by less than merchandise trade”. The page also prints that “Global merchandise trade sharply declined in late 2008 and early 2009”, and prints no figure for a share that kept moving. https://www.bookstore.imf.org/books/trade-and-trade-finance-in-the-2008-09-financial-crisis

19. "In between the rescues, the central banks of the rich world target rising prices of about 2% a year, forever."
   Federal Reserve, Statement on Longer-Run Goals and Monetary Policy Strategy, 25 January 2012: "The Committee judges that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve's statutory mandate." https://www.federalreserve.gov/newsevents/pressreleases/monetary20120125c.htm
   European Central Bank, Press release, 8 July 2021, “ECB's Governing Council approves its new monetary policy strategy”: "The Governing Council considers that price stability is best maintained by aiming for a 2% inflation target over the medium term. This target is symmetric." https://www.ecb.europa.eu/press/pr/date/2021/html/ecb.pr210708~dc78cc4b0d.en.html
   Bank of England, “Inflation and the 2% target”: "The Government sets us a 2% inflation target"; "If we miss the inflation target by more than 1 percentage point either side of the target, we must tell the Government why." https://www.bankofengland.co.uk/monetary-policy/inflation

20. "They want room to cut interest rates in a downturn, they know wages resist falling, and they say the official measure of prices overstates the rise."
   ECB, “An overview of the ECB's monetary policy strategy”, 2021: "Three additional factors … call for a sufficient inflation buffer", the buffer named for "interest rate cuts", "measurement bias" and "downward nominal wage rigidities". https://www.ecb.europa.eu/mopo/strategy/strategy-review/ecb.strategyreview_monpol_strategy_overview.en.html
   Bank of Canada, “Renewal of the Inflation-Control Target: Background Information”, November 2011: "the risks associated with the ZLB", "measurement bias in the CPI and downward nominal wage rigidities", named as costs of a lower target. The Bank calls neither of the last two a significant impediment to a lower target. https://www.bankofcanada.ca/wp-content/uploads/2011/11/background_nov11.pdf

21. "Those are the reasons they give, and the debts aren't among them."
   ECB, “An overview of the ECB's monetary policy strategy”, 2021: The factors it names for a buffer: "interest rate cuts", "measurement bias", "downward nominal wage rigidities" and cross-country adjustment, as "Three additional factors … call for a sufficient inflation buffer". https://www.ecb.europa.eu/mopo/strategy/strategy-review/ecb.strategyreview_monpol_strategy_overview.en.html

22. "On the published figures that's a point or two a year."
   U.S. Bureau of Labor Statistics, Monthly Labor Review, April 2021, “The U.S. productivity slowdown: an economy-wide and industry-level analysis”: "Labor productivity—defined as output per labor hour". Nonfarm business, average annual growth: 3.3 percent 1998 to 2005; 1.3 percent since 2005 to 2018; 0.8 percent 2010 to 2018; 2.1 percent 1947 to 2018. https://www.bls.gov/opub/mlr/2021/article/the-us-productivity-slowdown-the-economy-wide-and-industry-level-analysis.htm

23. "Between 2000 and early 2018, the world added roughly 185 trillion dollars of new debt to buy about 46 trillion dollars of growth."
   World Bank, World Development Indicators, “GDP (current US$)”, world, 2000 to 2020: GDP (current US$), World: 2000, 33,965,806,441,911.9; 2018, 87,310,840,056,717.8 — a rise of about $53.3 trillion between 2000 and 2018, not $46 trillion. https://data.worldbank.org/indicator/NY.GDP.MKTP.CD?locations=1W

24. "Part of the saving from better tools does reach her as higher pay, late and unevenly."
   Stansbury and Summers, National Bureau of Economic Research Working Paper 24165, 2017, “Productivity and Pay: Is the link broken?”: “over 1973-2016, one percentage point higher productivity growth has been associated with 0.7 to 1 percentage points higher median and average compensation growth”; “other factors orthogonal to productivity have been acting to suppress typical compensation”. https://www.nber.org/papers/w24165

25. "The reasons the central banks publish for the target are other ones, and the debts aren't among them."
   European Central Bank, The ECB's monetary policy strategy statement, 2021: Gives as reasons “space for interest rate cuts in the event of adverse developments”, downward nominal wage rigidities, measurement bias, and cross-country macroeconomic adjustment within the euro area; it gives no debt reason. https://www.ecb.europa.eu/home/search/review/html/ecb.strategyreview_monpol_strategy_statement.en.html

26. "Deflation from a credit collapse, wages and prices falling against fixed debts, is lethal, and it's what the early 1930s were."
   Fisher, Econometrica, October 1933, “The Debt-Deflation Theory of Great Depressions”, pages 337-357: “Debt liquidation leads to distress selling and to Contraction of the money supply, as bank loans are paid off, and to a slowing down of velocity of circulation.” https://www.econometricsociety.org/publications/econometrica/1933/10/01/debt-deflation-theory-great-depressions
   U.S. Bureau of Labor Statistics, Monthly Labor Review, 2014, “One hundred years of price change: the Consumer Price Index and the American inflation experience”: “From October 1929, the month of the famed crash, to the trough in April 1933, the All-Items CPI declined 27.4 percent.” It prints prices only, over October 1929 to April 1933, with nothing on wages. https://www.bls.gov/opub/mlr/2014/article/one-hundred-years-of-price-change-the-consumer-price-index-and-the-american-inflation-experience.htm

27. "Each rescue has been bigger than the last, hundreds of billions of dollars of government spending and bond-buying in 2008 and trillions in 2020, and markets now wobble at the hint of support being withdrawn."
   Federal Reserve Bank of St. Louis, from Board of Governors of the Federal Reserve System data, FRED series WALCL, Assets: Total Assets (Less Eliminations from Consolidation): Wednesday Level: “Millions of U.S. Dollars, Not Seasonally Adjusted”; “2019-12-25 4165591”, “2022-04-13 8965487”; 875 billion dollars on 3 January 2007. The page prints balance-sheet levels, not sums spent or bought in 2008 or 2020. https://fred.stlouisfed.org/series/WALCL

28. "Support can be pulled back part of the way for a time, as it was from 2022 to 2024, when rates rose and bond holdings shrank."
   Federal Reserve, Open Market Operations, record of changes in the federal funds target rate, 2020 to 2025: “March 17 | 25 | 0 | 0.25-0.50” in 2022, “July 27 [2023] ... Level (%) 5.25-5.50”, then “September 19 ... Decrease 50 ... 4.75-5.00”. Rises run to July 2023 and cuts begin September 2024. https://www.federalreserve.gov/monetarypolicy/openmarket.htm
   Federal Reserve Bank of St. Louis, FRED series WALCL, weekly total assets, data for 2022 to 2025: “observation_date,WALCL” with “2022-04-13,8965487”, “2023-12-27,7712781”, “2024-12-25,6885963”, in “Millions of U.S. Dollars”. These are weekly total assets, printed as levels rather than as a decline in bond holdings. https://fred.stlouisfed.org/series/WALCL
   Bank of England, Asset Purchase Facility Quarterly Report, 2022 Q4: “A total of eight gilt sales operations were run between 1 November and 8 December 2022.” “This led to a reduction in the outstanding stock of £7.0 billion over the period.” https://www.bankofengland.co.uk/asset-purchase-facility/2022/2022-q4

29. "But each place the pull-back strained got new support within days, the Bank of England's in September 2022 and the Federal Reserve's in March 2023, and the promise to step in was never withdrawn."
   Bank of England, Bank of England announces gilt market operation, 28 September 2022: “The Bank will carry out temporary purchases of long-dated UK government bonds from 28 September. The purpose of these purchases will be to restore orderly market conditions.” “Auctions will take place from today until 14 October.” https://www.bankofengland.co.uk/news/2022/september/bank-of-england-announces-gilt-market-operation
   Federal Reserve, Press release announcing the Bank Term Funding Program, 12 March 2023: “The additional funding will be made available through the creation of a new Bank Term Funding Program (BTFP), offering loans of up to one year in length to banks, savings associations, credit unions, and other eligible depository institutions”. https://www.federalreserve.gov/newsevents/pressreleases/monetary20230312a.htm

30. "Where a firm is young and has little to pledge, a fall in local bank lending does cut its research spending and its patents, so the extra pound changes how fast and how widely innovation spreads."
   Nanda and Nicholas, “Did Bank Distress Stifle Innovation During the Great Depression?”, National Bureau of Economic Research working paper 20392: “a negative relationship between bank distress and the level, quality and trajectory of firm-level innovation during the Great Depression, particularly for R&D firms operating in capital intensive industries”. It names capital-intensive R&D firms, not young firms with little to pledge. https://www.nber.org/papers/w20392
   Chava, Oettl, Subramanian and Subramanian, “Banking deregulation and innovation”, Journal of Financial Economics, 2013: “intrastate banking deregulation, which increased the local market power of banks, decreased the level and risk of innovation by young, private firms” and “interstate banking deregulation ... increased the level and risk of innovation by young, private firms”. https://eprints.exchange.isb.edu/285/

31. "Some issued a fresh promise."
   United States Congress, Legal Tender Act, 25 February 1862: “issue, on the credit of the United States, one hundred and fifty millions of dollars of United States notes, not bearing interest, payable to bearer, at the Treasury of the United States”. https://fraser.stlouisfed.org/title/legal-tender-act-1107/fulltext

32. "Some made the coin for less than the value stamped on it and kept the difference."
   John Munro, “The Coinages and Monetary Policies of Henry VIII (r. 1509-1547): Contrasts between Defensive and Aggressive Debasements”, University of Toronto working paper, 2010: “the prince or government derived a fee known as seigniorage”; “‘aggressive’ coinage debasements were undertaken primarily as fiscal policies to increase mint profits”. https://www.economics.utoronto.ca/public/workingPapers/tecipa-417.pdf

33. "Whoever controlled the vault could then suspend the promise to hand the metal over when those claims came due."
   Richard Nixon, Address to the Nation Outlining a New Economic Policy, 15 August 1971: “I have directed Secretary Connally to suspend temporarily the convertibility of the dollar into gold or other reserve assets”. Address dated August 15, 1971. https://fraser.stlouisfed.org/archival-collection/papers-richard-m-nixon-1173/address-nation-outlining-a-new-economic-policy-3390/fulltext

34. "Every bitcoin is born as someone's cost."
   Riot Platforms, Q3 2024 Update, press release furnished as an exhibit to a Form 8-K: “Cost to mine one Bitcoin, excluding Bitcoin miner depreciation $ 35,376” and “including Bitcoin miner depreciation $ 75,506”. These are one miner's figures, from a press release furnished as an exhibit to a Form 8-K, not an annual or quarterly filing. https://www.sec.gov/Archives/edgar/data/1167419/000155837024013957/riot-20241030xex99d2.htm

35. "The issuance runs on a fixed schedule, halves roughly every four years, and stops at 21 million."
   Bitcoin Core, Source file src/validation.cpp, master branch, the GetBlockSubsidy function: "Subsidy is cut in half every 210,000 blocks which will occur approximately every 4 years"; "if (halvings >= 64) return 0"; initial subsidy "50 * COIN". The page prints the schedule, not a 21 million total. https://github.com/bitcoin/bitcoin/blob/master/src/validation.cpp

36. "And staying costly to attack is work that has to keep being paid for, not a state the network sits in."
   Eric Budish, “The Economic Limits of Bitcoin and the Blockchain”, National Bureau of Economic Research Working Paper 24717, June 2018: "the recurring, 'flow', payments to miners for running the blockchain must be large relative to the one-off, 'stock', benefits of attacking it. This is very expensive!" https://www.nber.org/papers/w24717


---

# Why Everything Should Be Getting Cheaper
Date: 2026-07-15
Canonical: https://thenaturalstate.org/essays/why-everything-should-be-getting-cheaper/

Wherever businesses are free to compete, the price of a thing is made of two parts. What it costs to make, and a profit on top. The profit is never safe. A big profit tells other businesses there's easy money to be made, and one of them can take the customers by offering them more for less. So the profit gets competed away until the price ends up just above what the thing costs to make. That's half of the answer. The other half is that the cost of making things is falling as well, and that fall should get faster with time. Competition pushes the price down to the cost, and stops there. Technology pushes the cost down, and doesn't stop.

If prices fall on their own, why does your weekly shop keep costing more? Because almost every price you see has two things pushing on it at once. Technology pushes the cost of making the thing down. New money pushes the price you pay up, because more of it keeps being created, and when there's more money around, each pound or dollar buys less. It takes far less to grow, ship, and brew coffee than it did decades ago, and the price at the till still went up, mostly because the money lost value faster than the coffee got cheaper to make. New money doesn't stop the fall in what it takes to make things. It hides the fall in the price you pay, and how much of it you get to see depends on what's happening to the money.

Technology hasn't made everything cheaper to make. Caring for someone, teaching a class, and building a house still take about as long as they always did, so they get dearer next to the things that have got cheaper to make. And new money pushes their prices up as well, house prices most of all.

The squeeze

Falling prices start with the customer. Given two versions of the same thing, most people pick the cheaper one, or the better one at the same price. You do it at the supermarket without thinking, and nearly everywhere else you spend money. That one habit is what forces prices down.

Now say you run a business and you're looking for a market to get into. A product that sells for a lot more than it looks like it costs to make is a signal. It tells you there's room to come in cheaper. You can't win its customers by offering the same thing at the same price, because they'd have no reason to move. You win them by charging less, or by offering something better, or both. The business already there then has a choice. Match you, or lose its customers. Matching means cutting its price, or spending money to catch up with your better product. Either way its profit shrinks. And once it has matched, the next business comes in and the same thing happens again.

So why doesn't the price keep falling all the way to nothing? Because there's a limit on each side. A business can't sell below what the thing costs to make, not for long, because then every sale loses it money. But any price held well above that cost leaves room for someone else to come in cheaper and still make a profit. So the price gets pushed down from above and held up from below, until it settles just above what it costs to make one more of the thing, once the business is up and running. Economists call that the marginal cost. The little on top of it is what it takes to keep the business running.

Profit doesn't disappear in all this. It moves. You make your money while the price is on its way down. When it reaches the bottom, the money and the people who earned it move on to the next thing that's still scarce, whether or not the business survives. Often the next scarce thing is the way to reach customers, the search box, the app store, or the feed, and much of the profit has landed with the few businesses that own them. Storing photos went close to free, and the profit moved into tools for organising and sharing them. The calculator app went from something you paid for to a free line of code, and the developers moved on. And the money customers save on the old thing is what they spend on the next one. That's why people keep investing in things whose prices are falling. Money was made in streaming, where the price per play collapsed, in budget airlines, and in software that businesses rent instead of buy, while the price kept dropping, because lower prices bring in more customers.

Competition looks like a fight between businesses, but what it does is force each one to serve the customer better than the last one did. Where anyone is free to enter a market, that's the only way to win. So a free market makes things plentiful and cheap over time, instead of letting whoever got there first charge whatever they like.

A business can try to hold its price up when its costs fall, and for a while that works. Customers stick with the names they know, so brand and habit slow the fall, and some buyers will pay more for a name for as long as they value it. But a price held above cost is exactly the signal that brings the next rival in, so a name on its own doesn't keep rivals out. Only one thing holds the fall back for long, and that's a wall. A licence that keeps new businesses out. A regulation written by the big firms already in the market. Protection from the government. Or first access to newly created money, which lets a big firm outlast smaller rivals it couldn't beat on price. Some walls a business builds for itself. A secret way of making the thing. A head start. The trouble it takes a customer to switch. A network the customer won't leave because everyone else is on it. Behind a wall, the saving stays with the business as profit. Across American business, the gap between what things sell for and what they cost to make has widened since 1980. That's what walls look like in the figures.

But a monopoly that lasts a while is normal, and it can happen in any market. A product that gets better as more people use it can keep one winner in place for a decade or more, often by being cheap or free to the people using it. A monopoly that keeps prices high for decades is almost always leaning on one of those walls. That's a market that has been blocked, not one that failed. And it's that wall, not falling prices, that stops people building new businesses. You can't compete head-on with a rival the law protects, and you'll rarely take a network's customers by copying it.

Why the fall should speed up

Competition can only take a price down as far as the cost of making the thing. Once the price gets there, it has nowhere left to go. So competition on its own would run out of room, and fiercer competition would only get there sooner. What has no end in sight is the fall in the cost of making things. That's where the speeding up would come from, and there are five reasons to expect it.

The official figures don't show the speed-up yet. How much a worker produces in an hour grew about 2% a year in the UK in the ten years before 2008, and between 0.7% and 1.3% a year from 2009 to 2019, depending on which of the statisticians' two measures you take. The American figures slowed too. The figures do miss part of the fall, because they leave out things that carry no price, but on the measures tried so far that's a small part. Where the speed-up shows is in what the tools can do. The cost of getting the same standard of answer from an AI fell more than 280-fold in under two years. Gains like that reach the cost of making things with a delay.

1. Tools compound

Most improvements help make the next improvement. Better chips make better software, better software designs better chips, and now machines help build the machines. When each gain builds on the last, the steps get bigger over time, not smaller. We're used to progress coming in steady steps, so each time the steps get bigger we expect them to settle back to the old size. Taken all together, so far they haven't, and that's why new technology keeps taking people by surprise.

2. More of the economy keeps turning into information

A song used to be a disc, and now it's a file. A map used to be paper, and now it's an app. The design of a product is becoming a file that a machine can print close to the buyer. And more and more, a diagnosis, or the first draft of a contract, comes from an AI in under a minute. Once a thing is information, making one more of it means making a copy, and a copy costs almost nothing. So the price of a copy heads toward free. Software did this to one set of tasks, AI is doing it to work that used to need a trained person at a desk, and robots are carrying the same change into warehouses and factories. Year after year a bigger share of the work in the economy goes into things that cost almost nothing to copy, so the fall in the cost of making things, across the whole economy, should get steeper.

The price of playing a song fell to almost nothing. Your streaming bill has gone up all the same. It pays for making new music and programmes, and making them isn't copying them. Like almost every price you pay, it carries the new money on top.

3. The competing itself got faster

Opening an online shop used to need a team of programmers and years of building. Today someone can rent the tools for about £50 a month and sell to the whole world from a laptop. When starting a rival gets that cheap, a big profit gets noticed sooner, and attacked sooner, as long as the rival can reach customers without going through the business it's attacking. Competing a price down to its cost once took a generation. Now it can take a few years. So where that route is open, competition itself, pushing the price down to the cost, happens faster than it used to. And it brings the cheaper way of making the thing in sooner, because the business that doesn't take it up loses to the one that does.

4. The floor under every floor is sinking

Every step in making or moving anything uses energy, including digging up and shaping the materials. So a fall in the cost of making energy pulls almost every other price down. The pull is small at first, because energy is a small part of what most things cost to make. The pull grows with time, because cheap energy makes it worth using ways of making things that use a lot of energy, and then energy is a bigger part of what those things cost to make. And the cheapest way of making energy keeps getting cheaper. Each time the total number of solar panels the world has ever made doubles, the cost of a panel falls by about a fifth. That pattern has a name, Swanson's Law. Batteries for storing the power are following a similar path. Your energy bill hasn't followed, and you're not misreading it. The bill is a price like any other, so it carries the new money on top, and it pays for a lot more than the making of the energy. What keeps falling is the least it can cost to make energy at all, and since energy goes into everything made, the lowest point the price of anything made can fall to is itself getting lower.

5. The fight against the fall speeds the fall up

When new money is created to keep prices rising, wages rise too. So a business faces a bigger wage bill while its customers still want more for less. It can't pay its staff more and charge its customers less at the same time, so it replaces people with machines sooner than it otherwise would. The café puts in a self-order screen. The supermarket puts in self-checkout. Where every rival faces the same wage rise at once, a business can also raise its prices or trim what the customer gets, for as long as customers pay. The pull toward the machine stays, because the first rival to bring one in can charge less or serve better. Each round of new money meant to hold prices up brings forward the technology that pushes costs down. That leaves a bigger fall to cancel next time, and cancelling it takes more new money.

Why the fall doesn't settle down

So why doesn't the fall ever settle down? For that to happen, one of three things would have to be true. New inventions would have to stop, and they don't, because solving one problem makes the tools for solving the next one cheaper. New businesses would have to stop coming in, and where the way in is open they don't, because a new profit keeps appearing somewhere to chase. Or the cost of making things would have to hit a bottom that holds, and it doesn't, because the least it costs to make energy keeps falling, and energy goes into everything. Taken on its own, any one technology does flatten out eventually. The chips inside computers are getting harder to shrink, and people point at that and say the speeding up must be over. But as one technology flattens, the ones already under way keep compounding, and a new one often starts as the old one matures. What counts for the cost of making things is all of them added together. AI models keep improving on the same chips. Robots take software out into the physical world. As energy gets cheaper to make, so does almost everything else. Computing, then software, then AI, then robots, with energy getting cheaper to make underneath all of them. No single breakthrough is needed. Ordinary improvements, each building on the last, are enough.

So competition pushes the price of a thing down to what it costs to make, and technology pushes that cost down and doesn't stop. Wherever businesses are free to compete, prices should fall, and the fall should get bigger with time. Under money nobody could add to, prices would fall. There's a word for that, deflation. Here it means prices falling because we got better at making things. Prices can also fall because people have stopped buying, and that's a different thing with the same name. The good kind of fall is where the hard part of the thesis starts. Nearly all the money we use is created when somebody borrows. A debt doesn't shrink when prices fall, but the money coming in to pay it does. What matters is which prices fall, and how fast. A gradual fall that comes with better tools isn't the crash. In that fall it's the cost of making things that drops, and pay drifts down slowly behind it, so the money to meet a fixed payment is still there. The crash is a sudden fall in the prices that borrowing pushed up, house prices above all, because in a system carrying as much debt as ours the losses spread through the banks. In that fall it's the lending that has stopped, so incomes and the house fall together and at once, and the fixed payment is hit from both sides in the same year. So every time a fall like that threatens, the system is rescued with new money, and the rescues keep getting bigger. And new money is what pushes the price you pay up.

## Sources

What this essay rests on, as checked on 2026-09-18.

1. "Caring for someone, teaching a class, and building a house still take about as long as they always did, so they get dearer next to the things that have got cheaper to make."
   Goolsbee and Syverson, “The Strange and Awful Path of Productivity in the U.S. Construction Sector”, National Bureau of Economic Research Working Paper 30845, 2023: “Aggregate data show a large and decades-long decline in construction sector productivity”; physical productivity in housing “falling or, at best, stagnant over multiple decades”. The page covers the US construction sector only and prints no figure. https://www.nber.org/papers/w30845
   William J. Baumol, “Macroeconomics of Unbalanced Growth: The Anatomy of Urban Crisis”, American Economic Review, June 1967: “If productivity per man hour rises cumulatively in one sector relative to its rate of growth elsewhere ... relative costs in the nonprogressive sectors must inevitably rise”. It gives no measurement and names none of these activities. http://piketty.pse.ens.fr/files/Baumol1967.pdf

2. "Storing photos went close to free, and the profit moved into tools for organising and sharing them."
   Google, Google blog post, 28 May 2015, “Picture this: A fresh approach to Photos”: "With Google Photos, you can now backup and store unlimited, high-quality photos and videos, for free." This is one provider, and free only for compressed copies capped at 16MP photos and 1080p video, not originals. https://blog.google/products-and-platforms/products/photos/picture-this-fresh-approach-to-photos/

3. "A business can try to hold its price up when its costs fall, and for a while that works."
   Borenstein, Cameron and Gilbert, Quarterly Journal of Economics, 1997, article on crude oil and pump prices: Crude oil price increases reach the pump within about 4 weeks; decreases reach it over about 8 weeks. https://academic.oup.com/qje/article-abstract/112/1/305/1870906
   Nakamura and Zerom, Review of Economic Studies, 2010, volume 77, pages 1192–1230, study of coffee prices: Incomplete and delayed pass-through of costs into coffee prices, with the delay mostly at the wholesale level. https://academic.oup.com/restud/article-abstract/77/3/1192/1571044

4. "Customers stick with the names they know, so brand and habit slow the fall, and some buyers will pay more for a name for as long as they value it."
   Bronnenberg, Dubé and Gentzkow, “The Evolution of Brand Preferences: Evidence from Consumer Migration”, American Economic Review, October 2012: Brand preferences "are highly persistent, and explain 40 percent of geographic variation in market shares" and "create large entry barriers and durable advantages for incumbent firms". The page does not print the word "decades". https://www.aeaweb.org/articles?id=10.1257/aer.102.6.2472

5. "But a price held above cost is exactly the signal that brings the next rival in, so a name on its own doesn't keep rivals out."
   Gutiérrez and Philippon, “The Failure of Free Entry”, National Bureau of Economic Research working paper 26001, 2019: "The elasticity of entry with respect to Tobin's Q was positive and significant until the late 1990s but declined to zero afterwards." Entry here responds to Tobin's Q, not to profits. https://www.nber.org/papers/w26001

6. "Across American business, the gap between what things sell for and what they cost to make has widened since 1980."
   De Loecker, Eeckhout and Unger, Quarterly Journal of Economics, 2020, study of US aggregate markups: Aggregate markups rose from 21% above marginal cost in 1980 to 61%. https://academic.oup.com/qje/article-abstract/135/2/561/5714769

7. "A product that gets better as more people use it can keep one winner in place for a decade or more, often by being cheap or free to the people using it."
   United States District Court for the District of Columbia, published by the United States Department of Justice, U.S. v. Microsoft: Court's Findings of Fact, 5 November 1999: "Every year for the last decade, Microsoft's share of the market for Intel-compatible PC operating systems has stood above ninety percent." The page covers one decade, up to November 5, 1999. https://www.justice.gov/atr/us-v-microsoft-courts-findings-fact

8. "How much a worker produces in an hour grew about 2% a year in the UK in the ten years before 2008, and between 0.7% and 1.3% a year from 2009 to 2019, depending on which of the statisticians' two measures you take."
   Office for National Statistics, UK Whole Economy: Output per hour worked, % change per annum, seasonally adjusted (series LZVD), released 18 August 2026: Yearly rates, output per hour worked, seasonally adjusted: 1998 2.5; 1999 2.1; 2000 4.3; 2001 1.4; 2002 1.7; 2003 2.7; 2004 1.1; 2005 1.7; 2006 1.7; 2007 2.0. From 2006 to 2019 rates run -1.7 to 2.0. https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/labourproductivity/timeseries/lzvd/prdy/data

9. "The American figures slowed too."
   U.S. Bureau of Labor Statistics, Monthly Labor Review, April 2021, "The U.S. productivity slowdown: an economy-wide and industry-level analysis": "has grown at a below-average rate since 2005, representing a dramatic reversal of the above-average growth of the late 1990s and early 2000s"; nonfarm business labor productivity 3.3 percent a year 1998 to 2005, 1.3 percent since 2005. https://www.bls.gov/opub/mlr/2021/article/the-us-productivity-slowdown-the-economy-wide-and-industry-level-analysis.htm

10. "The figures do miss part of the fall, because they leave out things that carry no price, but on the measures tried so far that's a small part."
   Brynjolfsson, Collis and Eggers, Paper in the Proceedings of the National Academy of Sciences, 2019: Digital goods generate "a large amount of consumer welfare that is currently not captured in GDP". https://www.pnas.org/doi/10.1073/pnas.1815663116
   Syverson, Journal of Economic Perspectives, Spring 2017, "Challenges to Mismeasurement Explanations for the US Productivity Slowdown": "estimates from the existing research literature of the surplus created by internet-linked digital technologies fall far short of the $3 trillion or more of 'missing output' resulting from the productivity growth slowdown" https://www.aeaweb.org/articles?id=10.1257/jep.31.2.165

11. "The cost of getting the same standard of answer from an AI fell more than 280-fold in under two years."
   Stanford AI Index, AI Index Report 2025: Inference cost at GPT-3.5 level fell "over 280-fold between November 2022 and October 2024", from $20 to $0.07 per million tokens. https://hai.stanford.edu/ai-index/2025-ai-index-report

12. "Better chips make better software, better software designs better chips, and now machines help build the machines."
   Mirhoseini and others, Nature, 2021, "A graph placement methodology for fast chip design": "a deep reinforcement learning approach to chip floorplanning" that "was used to design the next generation of Google's artificial intelligence (AI) accelerators"; floorplans "superior or comparable to those produced by humans in all key metrics". https://www.nature.com/articles/s41586-021-03544-w?error=cookies_not_supported&code=2730c6f2-ac68-4a8a-a18e-a68eaa437bcd

13. "Today someone can rent the tools for about £50 a month and sell to the whole world from a laptop."
   Shopify, Shopify Pricing, UK plans page: "Basic" "£19/mo", "£25 GBP/mo" paid monthly; "Grow" "£49/mo"; "Online standard card rates 2% + 25p GBP". The page's entry plan is £19 or £25 a month, not the about £50 the sentence gives. https://www.shopify.com/uk/pricing

14. "Each time the total number of solar panels the world has ever made doubles, the cost of a panel falls by about a fifth."
   Our World in Data, Data insight, "Solar panel prices have fallen by around 20% every time global capacity doubled", 13 June 2024: "Costs have fallen by around 20% every time the global cumulative capacity doubles." https://ourworldindata.org/data-insights/solar-panel-prices-have-fallen-by-around-20-every-time-global-capacity-doubled
   Our World in Data, "Why did renewables become so cheap so fast?", 2020: "The learning rate of solar PV modules is 20.2%"; in 1976 "the price of a solar module, adjusted for inflation, was US-$106 per watt" at 0.3 megawatts installed; "The price of solar modules declined from $106 to $0.38 per watt. A decline of 99.6%." https://ourworldindata.org/cheap-renewables-growth

15. "Batteries for storing the power are following a similar path."
   BloombergNEF, Annual battery price survey, "Lithium-Ion Battery Pack Prices See Largest Drop Since 2017, Falling to $115 per Kilowatt-Hour", 10 December 2024: "Lithium-ion battery pack prices dropped 20% from 2023 to a record low of $115 per kilowatt-hour" ($115 per kilowatt-hour, 2024). No 2010 figure is printed on this page. https://about.bnef.com/insights/commodities/lithium-ion-battery-pack-prices-see-largest-drop-since-2017-falling-to-115-per-kilowatt-hour-bloombergnef/

16. "The bill is a price like any other, so it carries the new money on top, and it pays for a lot more than the making of the energy."
   Ofgem, "How your electricity or gas bill is calculated": Costs in the bill: "VAT (5%); wholesale costs, the cost a supplier pays to buy energy; network costs to build, fix and repair pipes and wires to move energy; operating, debt and industry costs", plus policy costs and supplier margin. No shares are printed except VAT. https://www.ofgem.gov.uk/information-consumers/energy-advice-households/costs-your-energy-bill

17. "It can't pay its staff more and charge its customers less at the same time, so it replaces people with machines sooner than it otherwise would."
   Grace Lordan and David Neumark, “People versus Machines: The Impact of Minimum Wages on Automatable Jobs”, IZA Discussion Paper No. 11297, January 2018: “Based on CPS data from 1980–2015, we find that increasing the minimum wage decreases significantly the share of automatable employment held by low-skilled workers.” https://www.iza.org/publications/dp/11297/people-versus-machines-the-impact-of-minimum-wages-on-automatable-jobs

18. "AI models keep improving on the same chips."
   Ho and others, “Algorithmic progress in language models”, arXiv paper, 9 March 2024: “the compute required to reach a set performance threshold has halved approximately every 8 months, with a 95% confidence interval of around 5 to 14 months, substantially faster than hardware gains”; language model evaluations spanning 2012-2023. https://arxiv.org/abs/2403.05812

19. "Nearly all the money we use is created when somebody borrows."
   Bank of England, Quarterly Bulletin 2014 Q1, “Money creation in the modern economy”, 14 March 2014: “the majority of money in the modern economy is created by commercial banks making loans”. https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy
   Deutsche Bundesbank, Monthly Report, April 2017, “The role of banks, non-banks and the central bank in the money creation process”: Banks create deposits when they extend credit, and repayment of the credit eliminates those deposits. https://www.bundesbank.de/en/publications/search/the-role-of-banks-non-banks-and-the-centralbank-in-the-money-creation-process-654284

20. "A gradual fall that comes with better tools isn't the crash."
   Bordo, Landon-Lane and Redish, “Good versus Bad Deflation: Lessons from the Gold Standard Era”, NBER Working Paper 10329, February 2004: “low deflation, rapid productivity growth, positive output growth” in the United States, the United Kingdom and Germany in the late nineteenth century; the deflation was “primarily good”. https://www.nber.org/papers/w10329
   Borio, Erdem, Filardo and Hofmann, Bank for International Settlements, “The costs of deflations: a historical perspective”, BIS Quarterly Review, March 2015: “in a sample covering 140 years for up to 38 economies ... we find only a weak association between goods and services price deflations and growth; the Great Depression is the main exception.” https://www.bis.org/publ/qtrpdf/r_qt1503e.htm
   Atkeson and Kehoe, “Deflation and Depression: Is There an Empirical Link?”, NBER Working Paper 10268, February 2004: “Deflation and depression do seem to have been linked during the 1930s. But in the rest of the data for 17 countries and more than 100 years, there is virtually no evidence of such a link.” https://www.nber.org/papers/w10268


---

# The Two Kinds of Deflation
Date: 2026-07-15
Canonical: https://thenaturalstate.org/essays/the-two-kinds-of-deflation/

People say deflation caused the Great Depression, so deflation must be bad. But deflation just means falling prices, and falling prices sound like good news for you and me. So how can it be bad when the things you buy get cheaper? It depends why they got cheaper. Prices can fall for two opposite reasons. In the Depression, prices fell because the money itself was being destroyed, which is what happens when too many people can't pay their debts. The other reason is that things are getting cheaper to make. The first leaves a society poorer. The second is what getting richer looks like.

Two different events that share a symptom

To see how money can be destroyed, start with where it comes from. Most money is loaned into existence. When a bank makes you a loan, it creates the money it hands you, so the new money and the debt appear together. And when too many loans go bad and the banks that made them fail, that money disappears again.

That's what happened in the 1930s. In the United States, people and businesses borrowed far more through the 1920s, some of it just to buy shares. When the boom broke, borrowers couldn't pay back what they owed, and their losses became their banks' losses. Banks failed, and when a bank failed, the money people had in their accounts vanished with it. Thousands of banks went down, and the amount of money in the economy shrank by roughly a third. With a third less money around, buyers couldn't pay the old prices. A seller with stock on the shelf and bills to pay couldn't wait for money that wasn't coming. So sellers cut their prices to get the money that was left, and prices fell by about a quarter. None of that fall came from anyone getting better at making things. The money side of every price was collapsing.

Falling prices then made everything worse, because the amount you owe on a debt is fixed. It stays the same whether prices rise or fall. Your wage falls with prices, but your mortgage payment doesn't, so the same debt takes a bigger bite out of a shrinking income. More people can't pay, more banks fail, more money vanishes, and prices fall further. That loop has a name, debt deflation, and it's real. But a fever is a symptom of an infection. The falling prices are the fever. The debt that can't be paid is the infection. Blaming the Depression on falling prices is blaming the fever for the infection. You'd still treat a fever that high. What the treatment can't do is cure the infection. It works by making the debt easier to carry, not by clearing it, so the next fever comes with more debt under it and needs a bigger dose.

The other reason prices fall has nothing to do with any of that. When a business finds a way to make the same thing with fewer hours, less energy, and less material, competition pushes the price down toward the cost of making one more of it, because any business that keeps the old price loses customers to a rival who passes the saving on. No money is destroyed. Nobody has to go bust for the price to fall. Where prices are allowed to fall like that, your wage buys more year after year. Photographs used to cost real money, in film, developing, and postage. Today taking a photo and sending it around the world costs almost nothing, and people take and share more photos than they ever did.

So the two reasons prices fall are opposites in everything that matters. When prices fall because the money is being destroyed, none of the fall comes from things getting cheaper to make. When prices fall because things are getting cheaper to make, no money is being destroyed. On a price chart the two falls look the same. For your life they mean the opposite.

History has even shown both at the same time. In the last decades of the 1800s, prices in Britain and America drifted gently down for years, while output grew and wages bought more. Money then was tied to gold, and nobody could make more of it at will, so nothing pushed prices back up when things got cheaper to make. But banks still created money by lending, and the painful episodes inside those same decades were America's banking panics of 1873 and 1893, when too many of those loans went bad and the money vanished. You can only make sense of those years if you tell the two reasons apart.

Why people lump them together

The first reason people lump the two together is what the numbers show. Inside a money system that can create money at will, the falling prices that show up in the numbers mostly come from money being destroyed. A system like that can take a slow fall that comes with better tools. In that fall it's the cost of making things that drops, and pay drifts down slowly behind it, so the money to meet a fixed payment is still there. What it can't take is a sudden fall in the prices credit pushed up, houses first, because then the losses spread through the banks. In that fall it's the lending that has stopped, so incomes and the house fall together and at once, and the fixed payment is hit from both sides in the same year. And where the loan was written against a house, the house is worth less too, so the bank stands to lose more on that loan. So every time a sudden fall in those prices threatens, the system is rescued with new money, and the rescues keep getting bigger. In between, the aim is for prices to rise a little every year, for the reasons the central banks publish. Either way, when technology pushes prices down, the government and central bank create more money and credit to push them back up, and the fall is cancelled out before it can spread across a whole economy. That power was taken on to stop crashes like the panics of 1873 and 1893, and at first it had a hard limit, because the money was still tied to gold. Once that tie was cut, the power buried the good kind along with the bad. That's why every deep, economy-wide deflation of the past century came with a crash. An economist who says "deflation means depression" is reading the record in good faith. But the record was produced by a system built to stop the good kind before it spreads.

The second reason is that the economics was worked out from inside that system. If you just accept that money is always loaned into existence, then a sudden broad fall in prices is dangerous, and the models say so correctly. The mistake is the starting assumption. What's true inside that system gets treated as a law about falling prices, whatever the cause.

The third reason is the word itself, and it's the only one of the three where anyone's interests come in. One word, deflation, covers prices falling for either reason, and as long as it does, "we need 2% inflation" sounds like a law of nature. Governments that fund themselves by creating more money have a strong reason not to split that word in public. Split it, and the target shows as what it is, a decision made by people that prices will rise 2% a year. At 2% a year, prices double about every 35 years. We call that "price stability".

And there's a test you can run yourself. In the corners of the economy where prices have kept falling anyway, you won't find a depression. Electronics have got cheaper, for what they do, for fifty years, and the industry making them is thriving.

Wouldn't people delay every purchase?

The objection is that people would just wait to buy, if they knew prices would keep falling. You already live inside that experiment, and your own behaviour answers it. You know next year's phone will be better and cheaper for what it does. People queue overnight to buy this year's anyway. For fifty years the price of computing power has fallen year after year, predictably, and the world keeps buying more of it, not less.

Why do people buy anyway? Because you buy things to use them, and waiting has a cost, which is living without the thing. You buy the coat because winter is now. You buy the phone because of what it does for you, starting today. Computing is where you'd most expect people to wait. Prices there fall fast, buyers know it's coming, and they still buy. Across a whole economy prices would fall far more slowly than that. Even if prices fell at 5% a year, waiting a full year to buy something for £1,000 would save you £50, and the price of that £50 is a year without the thing. Set against a coat you need this winter, that isn't a trade people take.

What people do put off is the purchase that can wait. Sometimes that's the impulse buy or the fourth gadget, the thing you bought partly because money sitting in the bank loses value today, and sometimes it's a big one, like a car. What gets cut is the borrowing that would have paid for it, and life carries on. The other change is that more people save up for big purchases instead of borrowing for them, because saving finally works. Wait six months, pay less, owe nothing. Some people will still borrow, for houses and cars above all. But people borrow less, borrowing costs more, and it's kept for the cases where it beats simply holding your money.

Turn the objection around and it claims people will only spend if their savings are quietly drained. That's a claim that the economy runs on a kind of theft, and it fails its own test. If inflation made people spend their way to prosperity, the countries with the highest inflation would be the richest on earth. What you actually see in those countries is people desperately swapping their pay for anything solid the day it arrives. The careful version of the objection says a little inflation is needed, so that there's room to cut interest rates in a downturn and pay doesn't have to be cut. The comparison between countries doesn't reach that version. But it still asks savers to lose a little every year on the money they hold, so the charge of theft stands against it too. And both of its worries have answers. Dearer credit means less borrowing and more careful borrowing, and the economy keeps going. Pay that resists cuts buys more as prices fall.

What about businesses with debts?

The strongest version of the objection to falling prices is about businesses and their debts. When prices fall, a loan gets harder to pay back, because the money you pay back buys more than the money you borrowed. And a business whose selling prices fall faster than its own costs gets squeezed. That's true. In an economy running on borrowed money, a squeezed business ends up unable to pay what it owes, which is exactly why you can't switch today's economy over to falling prices overnight. The pile of debt has to shrink first, or be built differently.

When the price falls because the business got better at making the thing, the order runs the other way round. It found a way to make the same thing with fewer hours and less material, so its cost per item has already come down by the time its price does. In an economy built from the start on money that nobody can create more of, wages hold roughly steady while most of what they buy gets cheaper, so workers gain without asking for a rise, and businesses make their profit through efficiency rather than by raising prices. Investment carries on, disciplined, funded more by savings and ownership stakes than by cheap credit. Innovation doesn't need cheap credit.

The fever and the infection

Follow the Depression argument to its end and it's an argument against building an economy on debt, with money made of debt, because that structure can't take a sudden fall in the prices credit pushed up. The same money that holds incomes and house prices up also cancels the overall fall in shop prices. The infection is the debt. Prices falling because things got cheaper to make is what getting richer looks like, when nobody is creating money to hide the fall. Only a money that nobody can create more of, and that no bank creates by lending, lets prices fall as we get better at making things. It doesn't stop a new pile of debt being built on top of it. But when that debt goes bad, nobody can create more of that money to cover the losses, so the rescue is harder and the failure faster. That's the job bitcoin applies for. Bitcoin comes at the end of that story, once you can tell the two reasons apart.

## Sources

What this essay rests on, as checked on 2026-09-27.

1. "Most money is loaned into existence."
   Bank of England, Quarterly Bulletin 2014 Q1, “Money creation in the modern economy”, published 14 March 2014: The page states that “the majority of money in the modern economy is created by commercial banks making loans”. https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy

2. "When a bank makes you a loan, it creates the money it hands you, so the new money and the debt appear together."
   Bank of England, Quarterly Bulletin 2014 Q1, “Money creation in the modern economy”, published 14 March 2014: The page states that “the majority of money in the modern economy is created by commercial banks making loans”. https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy
   Deutsche Bundesbank, Monthly Report, April 2017, “The role of banks, non-banks and the central bank in the money creation process”: The report sets out that banks create deposits when they extend credit, and that repayment of the credit eliminates those deposits. https://www.bundesbank.de/en/publications/search/the-role-of-banks-non-banks-and-the-centralbank-in-the-money-creation-process-654284

3. "In the United States, people and businesses borrowed far more through the 1920s, some of it just to buy shares."
   Federal Reserve History, Essay, “Stock Market Crash of 1929”: “Purchasers put down a fraction of the price, typically 10 percent, and borrowed the rest. Borrowed money poured into equity markets, and stock prices soared.” The page prints no figure for how much credit expanded over the decade. https://www.federalreservehistory.org/essays/stock-market-crash-of-1929

4. "Thousands of banks went down, and the amount of money in the economy shrank by roughly a third."
   Federal Deposit Insurance Corporation, FDIC historical timeline, 1930–1939: “During 1930, there are about 1,350 bank suspensions.” “During 1931, there are about 2,300 bank suspensions.” “During 1932, there are about 1,450 bank suspensions.” “During 1933, there are about 4,000 bank suspensions, with 3,800 by March 16.” https://www.fdic.gov/history/1930-1939
   Federal Reserve History, Essay, “The Great Depression”: “From the fall of 1930 through the winter of 1933, the money supply fell by nearly 30 percent.” The page prints nearly 30 percent, not a third, and its window is fall 1930 to winter 1933. https://www.federalreservehistory.org/essays/great-depression

5. "So sellers cut their prices to get the money that was left, and prices fell by about a quarter."
   U.S. Bureau of Labor Statistics, Monthly Labor Review, 2014, “One hundred years of price change: the Consumer Price Index and the American inflation experience”: “From October 1929, the month of the famed crash, to the trough in April 1933, the All-Items CPI declined 27.4 percent.” https://www.bls.gov/opub/mlr/2014/article/one-hundred-years-of-price-change-the-consumer-price-index-and-the-american-inflation-experience.htm

6. "That loop has a name, debt deflation, and it's real."
   Irving Fisher, “The Debt-Deflation Theory of Great Depressions”, Econometrica, October 1933: "Debt liquidation leads to distress setting and to Contraction of deposit currency, as bank loans are paid off... causes A fall in the level of prices... precipitating bankruptcies" https://fraser.stlouisfed.org/title/debt-deflation-theory-great-depressions-3596/fulltext

7. "But banks still created money by lending, and the painful episodes inside those same decades were America's banking panics of 1873 and 1893, when too many of those loans went bad and the money vanished."
   Federal Reserve History, “Banking Panics of the Gilded Age”: "The Panic of 1873 arose from investments in railroads"; "The Panic of 1893 was one of the most severe financial crises in the history of the United States"; in June 1893 "More than one-hundred banks suspended operations" https://www.federalreservehistory.org/essays/banking-panics-of-the-gilded-age

8. "In between, the aim is for prices to rise a little every year, for the reasons the central banks publish."
   European Central Bank, An overview of the ECB's monetary policy strategy, 2021 strategy review: "at this juncture the Governing Council considers that price stability is best maintained by aiming for a two per cent inflation target over the medium term"; "Three additional factors ... call for a sufficient inflation buffer." https://www.ecb.europa.eu/mopo/strategy/strategy-review/ecb.strategyreview_monpol_strategy_overview.en.html
   Federal Reserve, FOMC statement of longer-run goals and policy strategy, 25 January 2012: "The Committee judges that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve's statutory mandate." https://www.federalreserve.gov/newsevents/pressreleases/monetary20120125c.htm

9. "One word, deflation, covers prices falling for either reason, and as long as it does, "we need 2% inflation" sounds like a law of nature."
   International Monetary Fund, Deflation: Determinants, Risks, and Policy Options, Occasional Paper 221, 2003: "Both demand and supply shocks can lead to deflation. However, with demand shocks declining prices are likely to accompany falling demand for goods and services, while with supply shocks, declining prices might be accompanied by increases in output." https://www.imf.org/external/pubs/nft/op/221/index.htm
   Bank for International Settlements, The costs of deflations: a historical perspective, BIS Quarterly Review, March 2015: Demand-driven deflation "pushes down prices, incomes and output," while "Supply-driven deflations depress prices while raising incomes and output." https://www.bis.org/publ/qtrpdf/r_qt1503e.htm

10. "Split it, and the target shows as what it is, a decision made by people that prices will rise 2% a year."
   HM Treasury, Remit for the Monetary Policy Committee and the new inflation target, December 2003: "Announced in June 2003 and implemented on 10th December 2003, the Bank of England's inflation target was redefined from 2.5 percent measured by RPIX inflation to 2 percent measured by annual CPI inflation." https://www.bankofengland.co.uk/letter/2003/chancellor-letter-101203
   Federal Reserve, FOMC statement of longer-run goals and policy strategy, 25 January 2012: "The Committee judges that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve's statutory mandate." https://www.federalreserve.gov/newsevents/pressreleases/monetary20120125c.htm
   European Central Bank, Press release, 8 July 2021, "ECB's Governing Council approves its new monetary policy strategy": "The Governing Council considers that price stability is best maintained by aiming for a 2% inflation target over the medium term. This target is symmetric, meaning negative and positive deviations of inflation from the target are equally undesirable." https://www.ecb.europa.eu/press/pr/date/2021/html/ecb.pr210708~dc78cc4b0d.en.html

11. "We call that "price stability"."
   European Central Bank, Two per cent inflation target (monetary policy strategy page): "The ECB's Governing Council considers that price stability is best maintained by aiming for 2% inflation over the medium term." "The ECB's primary objective is to maintain price stability, that is, to preserve the purchasing power of the euro." https://www.ecb.europa.eu/mopo/strategy/pricestab/html/index.en.html
   Federal Reserve, Why does the Federal Reserve aim for inflation of 2 percent over the longer run? (page last updated 22 August 2025): "the Federal Open Market Committee (FOMC) judges that inflation of 2 percent over the longer run … is most consistent with the Federal Reserve's mandate for maximum employment and price stability" https://www.federalreserve.gov/faqs/economy_14400.htm

12. "Electronics have got cheaper, for what they do, for fifty years, and the industry making them is thriving."
   U.S. Bureau of Labor Statistics, The Economics Daily, 13 October 2015, “Long-term price trends for computers, TVs, and related items”: "The price index for TVs decreased 94 percent from December 1997 to August 2015." The page's falls run December 1997 to August 2015, about eighteen years, a much narrower window than fifty. https://www.bls.gov/opub/ted/2015/long-term-price-trends-for-computers-tvs-and-related-items.htm

13. "For fifty years the price of computing power has fallen year after year, predictably, and the world keeps buying more of it, not less."
   Computer History Museum, Blog post, 15 April 2015, “Moore's Law@50: The most important graph in human history”: "the price of computing has fallen over a million-fold, while the cost of electronics has fallen a billion-fold." The page prints a magnitude, not a span: the fifty appears only in its title and its April 2015 date. https://computerhistory.org/blog/moores-law50-the-most-important-graph-in-human-history/

14. "Prices there fall fast, buyers know it's coming, and they still buy."
   U.S. Bureau of Labor Statistics, Consumer Price Index series CUUR0000SEEE01, computers, peripherals, and smart home assistants, U.S. city average, all urban consumers, not seasonally adjusted: Index, December 2007=100, not seasonally adjusted: December 1997 = 1119.0; December 2013 = 54.869, a fall of about 95 percent. https://data.bls.gov/timeseries/CUUR0000SEEE01?years_option=all_years


---

# Why the System Needs Rising Prices
Date: 2026-07-15
Canonical: https://thenaturalstate.org/essays/why-the-system-needs-rising-prices/

Nearly every major central bank targets 2% inflation, forever. They publish their reasons for the number. The system is also rescued with new money whenever house prices, and the other prices that borrowing pushed up, threaten to fall suddenly. What breaks in that fall and who collects from the everyday 2% tell you exactly what's being kept alive.

Why 2%, and why forever

Two facts about our money explain what the target has to live with. In our system, money is loaned into existence. When a bank writes you a mortgage, it isn't passing on someone else's savings. It creates a new deposit in your account. That deposit is new money. When loans are repaid, that money disappears again. When they go bad, the loss eats the bank's own capital instead, and the bank stops lending, which does the same thing to the money supply. So the money in the economy is the total of all the loans not yet repaid, plus whatever the central bank creates directly when it buys bonds. If all the loans were somehow repaid at once, there'd be almost no money left.

The second fact is that nearly all debt is fixed in pounds. The amount you owe stays the same whatever prices do. If prices and wages fall, your £1,200 monthly mortgage payment doesn't fall with them. It just takes a bigger bite of a smaller income. The rate might be cut. The £180,000 you owe won't be.

A system built out of those two facts can take a slow fall that comes with better tools. In that fall it's the cost of making things that drops, and pay drifts down slowly behind it, so the money to meet a fixed payment is still there. What it can't take is a sudden fall in the prices credit pushed up, houses first, because then the losses spread through the banks. In that fall it's the lending that has stopped, so incomes and the house fall together and at once, and the fixed payment is hit from both sides in the same year. Houses come first because people buy them with borrowed money. And where the loan was written against a house, the house is worth less too, so the bank stands to lose more on that loan. So every time a sudden fall in those prices threatens, the system is rescued with new money, and the rescues keep getting bigger. In between, the aim is for prices to rise a little every year, forever. Two is the number the major central banks set their target against, as a point, as a ceiling, or as the edge of a band, and it's a number the debt structure can live with. Small enough to feel like weather. Compound 2% a year and it halves the purchasing power of savings roughly every 35 years. Across a full working life it takes about 60%. Almost nobody notices it happening.

Technology explains the "forever". It makes the job harder every year. Under a money nobody can add to, the natural direction of prices is down, because people keep getting better at making things and competition passes the saving on. Better tools mean the same goods take fewer inputs to make. That holds for everything technology has changed the making of. It doesn't hold for housing, care, teaching, or building. How far prices would fall on their own is about the rate at which output per hour of work grows, which is what the productivity figures measure. In Britain that was near 2% a year before 2008, and between 0.7% and 1.3% a year from 2009 to 2019, depending on which of the statisticians' two measures you take. The push behind that fall keeps getting stronger, because the tools are improving faster than they did, as software and AI spread into industry after industry. You won't see that in the official productivity figures yet. So the true baseline isn't zero. If prices would have fallen 2% on their own, as they would have at Britain's rate before 2008, holding them flat already takes two points of push, and hitting the 2% target takes four. So in a world where technology keeps pushing prices down, a 2% target is a standing commitment to create enough new money and credit to cancel the whole of the price fall, and then push prices two points beyond that. And because technology compounds, what it takes to cancel the fall keeps growing. That's why the target can never be hit once and then put away. Central banks publish why they aim there. They want room to cut interest rates in a downturn, they know wages resist falling, and they say the official measure of prices overstates the rise. Those are the reasons they give, and the debts aren't among them. Missing it low is treated as an emergency. Missing it high is called "transitory".

Why do they nearly all land on the same number? Every major economy runs the same design, money loaned into existence against debts fixed in pounds or the local equivalent, so every one of them has the same weak spot, a sudden fall in the prices credit pushed up. How hard that fall hurts depends on how much debt the economy carries and how that debt is written. But two is a number every one of those debt structures can live with. Nobody defects alone for free, either. If your neighbours inflate at two and you hold at zero, your currency strengthens, your exporters complain, and your politicians hear about it. It's a race to debase, to cut what the currency buys before your neighbour does, and the club of major central banks moves together. Switzerland comes closest. It targets below two, and it spent more than a decade creating francs to stop its currency rising. Defecting cost it a central bank balance sheet bigger than the country's economy. And the target makes itself look normal. Once 2% is officially defined as "price stability", money losing value every year becomes health by definition, and the question of who collects the difference almost never gets asked out loud.

One footnote, and I'm stepping outside the argument's own ground here, so hold it loosely. The 2% number has a famously thin pedigree. It surfaced in New Zealand's policy reforms in the late 1980s and spread through the 1990s by imitation. Nobody derived it from first principles, and the arguments for it came later. The strongest of them is that 2% buys room to cut rates before they hit zero. It was a number the debt structure could live with, and then the measure became the goal.

What breaks when prices fall

Take a café owner with a £150,000 business loan and a librarian with a mortgage, both customers of the same bank. Now let prices, incomes, and house prices fall broadly and suddenly, with nothing done to stop it.

1. Takings fall

The café's menu prices are its income. When prices fall, its takings fall with them, unless it sells enough extra to make up the difference. Its ingredients get cheaper too, and eventually its wage bill. One thing doesn't move. The loan payment.

2. Wages follow

The owner can't pay yesterday's wages out of today's smaller takings, so hours get cut, then jobs, then pay. Wages are sticky, meaning they're slow to move. They fall more slowly than prices, but in an economy this loaded with debt they follow. The librarian's pay gets frozen while her mortgage payment stays fixed. Her frozen pay buys more, so on everything except the mortgage she's better off. The falling prices were never her problem. The fixed payment is. Everything else in her life shrinks around it, its real weight climbing while the number on it stands still, and when her pay finally follows prices down, it's the payment that breaks her.

3. The first missed payment

The fixed payment now takes a bigger share of a shrinking income. Say the café's takings drop 8% in a year while the loan payment doesn't budge. The owner did nothing reckless. The arithmetic stopped working. The debt got heavier without anyone borrowing another pound. That's the first missed payment, and the same arithmetic is hitting millions of borrowers at once, because the price fall is economy-wide. How many of them are pushed into a missed payment depends on the size of the fall and on what happens to the price of the things the loans are secured on. In this fall those prices are dropping too, the librarian's house among them. The historical record ties mass defaults to falling property prices. It ties them to falling shop prices only at the scale of the Great Depression.

4. The bank eats the loss

A loan is something the bank owns. What a bank owns is mostly promises of repayment, and what it owes is mostly deposits. Between the two is a thin cushion of the bank's own capital. Measured against everything the bank holds, that's a few pounds for every hundred. Measured the way regulators usually quote it, against everything it holds with each part weighted by how risky it is, it's more than twice that. So the bank doesn't need everyone to default. If losses on its loans reach the size of that cushion, the bank is insolvent, meaning it owes more than it can pay. That takes more than five pounds in every hundred going bad, because a bad loan isn't a total loss. The bank sells what the loan was secured on and gets part of its money back. When the price of what the loan was secured on is falling, it gets back less, and then a smaller share of bad loans is enough.

5. Credit gets pulled

The wounded bank defends itself the fastest way it can. It stops making new loans, and when a loan reaches the date it has to be repaid or renewed, it won't renew. Where it can cancel a borrowing limit without the borrower's agreement, it cancels it, and a business with nothing wrong with it loses its funding. Where it has promised the limit in a contract, it can't cancel, so in the first weeks of the pull-back, businesses borrow everything they were promised while they still can, and the bank finds money going out rather than doors closing. A builder who depends on short-term borrowing finds the limit cancelled once property prices start slipping. Sound firms start failing with their customers still there, because their funding isn't.

6. The money supply itself shrinks

Money is created by lending, so when new lending stops while old loans keep being repaid, deposits are destroyed with nothing replacing them, and the total amount of money in the economy contracts. With less money around, prices fall further. That makes the remaining debts heavier still, which means more defaults, more bank losses, less lending, and less money. The loop feeds itself. Economists call it a deflationary spiral, but it's the same arithmetic going round and round, each turn tighter.

7. Banks stop trusting banks

The same freeze runs at the top of the chain. Each bank knows the others are carrying the same kind of losses, so they stop lending to each other. In late 2008 some fully backed letters of credit, the bank guarantees that stand behind payments in trade, froze for days. Containers sat on docks because banks had stopped trusting each other's promises. That's what the cascade looks like at the top of the chain.

8. The state steps in

Faced with that sequence, authorities step in, crisis after crisis. They rescue banks, create money, and change rules, because the alternative is the whole debt pyramid being written down all at once. The debts show up in the rescues, not in the everyday 2%. Central bankers can read the sequence as well as anyone. They're standing between an economy loaded with debt fixed in pounds and the arithmetic above.

Everything above is the debt structure's reaction to a sudden broad fall in prices, not a property of falling prices themselves. Prices falling because things got cheaper to make is simply your money buying more each year, and this system can take that. The catastrophe needs the borrowing, and it needs the prices the borrowing pushed up to fall suddenly. People can live with falling prices. A system built out of debt fixed in pounds can't live with a sudden fall in the prices credit pushed up.

What "a little inflation is good for growth" is keeping alive

The official story says that without inflation, people put off buying, spending dries up, and the economy stalls. Yet you buy a phone, a winter coat, tonight's dinner, even though next year's version will be better or cheaper, because you need or want them now. Electronics have fallen in price for decades and people queue overnight for them. What does get put off is the purchase that can wait, and sometimes that's a big one, like a car. What falls when people wait is the borrowing that would have paid for it, and life carries on. No saver's life gets worse because the money they put aside buys more later.

So if household spending isn't what's being kept alive, what is, and who collects?

The debts themselves. Inflation quietly shrinks the real weight of debt already fixed in pounds, and of new debt whenever the interest rate on it is lower than the rate prices are rising. The biggest borrowers, governments and anyone who borrowed to buy houses and shares, then repay in pounds that buy less than the pounds they borrowed. It's a default that never needs announcing.

The banks. Rising prices and incomes, counted in pounds, keep the loans getting repaid on time wherever the payment doesn't rise with them. On a loan with a fixed rate, the payment stands still while incomes rise. On a loan whose rate moves, that protection holds only while the rate rises more slowly than incomes do. Rising money and credit also lift the price of the things loans are secured on, and that lift holds while borrowing stays cheap. The cascade runs in reverse. Gentle inflation is the weather the bank's loans live in.

The state's funding. The clearest figures are American, and they come from a rescue year, when the same lever runs at full size. The gap between what the United States government spent and what it took in tax was larger in a single Covid year than the whole profit of corporate America, so taxing profits at 100% couldn't have closed it. What money creation gave the state was funding on a scale tax could not reach. The central bank bought the government's debt with new money, and its buying kept the interest the government had to pay low. That's most of how the gap was bridged. Then the inflation that followed made the debt the government already owed lighter, because it would be repaid in dollars that bought less. Inflation is the tax that never needs a vote.

Asset owners, first in line. New money usually enters through loans and financial markets, and reaches asset prices before it reaches wages. Whoever owns houses and shares gets the gain early, and whoever earns a salary pays the higher prices later. That ordering, repeated for decades, widens the gap between people who own things and people who don't, whatever the two sides blame each other for.

And last, the weakest claims on anything real. Businesses that cheap credit helps keep trading, the ones called zombie firms, and the jobs that exist to run the redistribution and price-control schemes that manage the harm an inflating money does.

The growth story comes with an invoice. Between 2000 and early 2018, the world added roughly 185 trillion dollars of new debt to get about 46 trillion of measured growth. Four borrowed for each one gained, and each new unit of debt buys less growth than the ones before it. That's the look of growth, rented at a cost that compounds.

And the real price is the one that never appears on the invoice. Counted from zero, 2% looks tiny. Counted from the fall that should have happened, it's the whole gap. Technology should have been cutting your cost of living by about as much as productivity grew, a point or two a year. Instead prices rose two. The fall you never received is the productivity gain that technology handed the system, year after year, and the rise you paid sits on top of it. No statistic records that fall, because it never happened. Under a money nobody can add to, that gain would have reached you as lower prices. Instead, governments and banks created enough new money to stop prices falling. The rising money supply swallowed that gain, and what didn't reach you later as pay went to the borrowers and asset owners above. You worked just as hard. Machines made the things in your basket cheaper to make. Your weekly shop never got cheaper. That's the theft. And it's why inflation is wage deflation read from the other side of the ledger.

"Deflation caused the 1930s, look at Japan." Those were debt deflations, that same cascade, the collapse of systems built on too much borrowed money. They show what happens when the prices credit pushed up fall suddenly in a system carrying that much debt. They say nothing against prices falling because things got cheaper to make. Using them to argue for the 2% target is citing the disease as the case for the medicine that builds it.

"Wages fall in deflation too, so workers gain nothing." They do fall, but more slowly than prices, because wages are sticky. When prices fall because things got cheaper to make, that stickiness works for the typical worker, whose pay drifts down slowly while the cost of living falls faster, so what their pay buys rises without constant renegotiation. Under inflation the same stickiness works against them. We've watched wages lose to house prices for forty years.

The rescues keep the debt structure standing. Growth is the story told for a little inflation. Solvency, the whole debt pyramid not being written down at once, is the function of the rescues, not of the everyday 2%, whose reasons are the published ones. Whatever the reasons, the everyday 2% still takes from savers and wage earners, year after year, and hands the difference to borrowers and asset owners. The system can take prices drifting down as things get cheaper to make. What it can't survive is a sudden broad fall in the prices credit pushed up.

The arithmetic needs no villains. A central banker who let the bad debts be cleared out, who raised rates and let the defaults run, would cause mass unemployment, be blamed for a depression, and wouldn't be allowed to finish. Volcker came closest in 1980. Even he only raised rates, and most of the debt he was crushing was owed by households and firms, not by the state. Nobody gets to run that experiment from here. The system chooses the behaviour, whoever holds the job. Indict the design, not the people operating inside it. They can't step outside it. You can.

## Sources

What this essay rests on, as checked on 2026-09-26.

1. "Nearly every major central bank targets 2% inflation, forever."
   HM Treasury, Remit for the Monetary Policy Committee and the new inflation target, December 2003: "Announced in June 2003 and implemented on 10th December 2003, the Bank of England's inflation target was redefined from 2.5 percent measured by RPIX inflation to 2 percent measured by annual CPI inflation." https://www.bankofengland.co.uk/letter/2003/chancellor-letter-101203
   Federal Reserve, FOMC statement of longer-run goals and policy strategy, 25 January 2012: "The Committee judges that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve's statutory mandate." https://www.federalreserve.gov/newsevents/pressreleases/monetary20120125c.htm
   European Central Bank, Press release, “ECB's Governing Council approves its new monetary policy strategy”, 8 July 2021: "The Governing Council considers that price stability is best maintained by aiming for a 2% inflation target over the medium term. This target is symmetric, meaning negative and positive deviations of inflation from the target are equally undesirable." https://www.ecb.europa.eu/press/pr/date/2021/html/ecb.pr210708~dc78cc4b0d.en.html

2. "In our system, money is loaned into existence."
   Bank of England, Quarterly Bulletin 2014 Q1, “Money creation in the modern economy”, 14 March 2014: "the majority of money in the modern economy is created by commercial banks making loans" https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy
   Deutsche Bundesbank, Monthly Report, April 2017, “The role of banks, non-banks and the central bank in the money creation process”: Banks create deposits when they extend credit; repayment eliminates deposits. https://www.bundesbank.de/en/publications/search/the-role-of-banks-non-banks-and-the-centralbank-in-the-money-creation-process-654284

3. "It creates a new deposit in your account."
   Bundesbank, Monthly Report, April 2017, “The role of banks, non-banks and the central bank in the money creation process”: Banks create deposits when they extend credit. https://www.bundesbank.de/en/publications/search/the-role-of-banks-non-banks-and-the-centralbank-in-the-money-creation-process-654284

4. "When loans are repaid, that money disappears again."
   Bundesbank, Monthly Report, April 2017, “The role of banks, non-banks and the central bank in the money creation process”: Repayment of credit eliminates the deposits that were created when the credit was extended. https://www.bundesbank.de/en/publications/search/the-role-of-banks-non-banks-and-the-centralbank-in-the-money-creation-process-654284

5. "So the money in the economy is the total of all the loans not yet repaid, plus whatever the central bank creates directly when it buys bonds."
   Bank of England, Quarterly Bulletin 2014 Q1, “Money creation in the modern economy”, 14 March 2014: "The central bank can also affect the amount of money directly through purchasing assets or 'quantitative easing'." https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy

6. "Two is the number the major central banks set their target against, as a point, as a ceiling, or as the edge of a band, and it's a number the debt structure can live with."
   Federal Reserve, FOMC Statement on Longer-Run Goals and Monetary Policy Strategy, 25 January 2012: "The Committee judges that inflation at the rate of 2 percent... is most consistent over the longer run with the Federal Reserve's statutory mandate." 2 percent, annual change in the price index for personal consumption expenditures; January 25, 2012. https://www.federalreserve.gov/newsevents/pressreleases/monetary20120125c.htm
   Swiss National Bank, The SNB's monetary policy strategy: "The SNB equates price stability with a rise in the Swiss consumer price index (CPI) of less than 2% per annum." No date is given on the page. https://www.snb.ch/en/the-snb/mandates-goals/monetary-policy/strategy
   Reserve Bank of Australia and the Treasurer, Statement on the Conduct of Monetary Policy, 8 December 2023: "an appropriate goal is consumer price inflation between 2 and 3 per cent"; 2 to 3 per cent, Statement dated 8 December 2023. https://www.rba.gov.au/monetary-policy/framework/stmt-conduct-mp-8-2023-12-08.html

7. "In Britain that was near 2% a year before 2008, and between 0.7% and 1.3% a year from 2009 to 2019, depending on which of the statisticians' two measures you take."
   Office for National Statistics, UK Whole Economy: Output per hour worked, % change per annum, seasonally adjusted (series LZVD, dataset PRDY), released 18 August 2026: "UK Whole Economy: Output per hour worked % change per annum SA", per cent: 2007 2.0; 2009 -1.7. No averages are printed: annual growth runs 1.1 to 4.3 for 1996 to 2005 and -1.7 to 2.0 for 2006 to 2019. https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/labourproductivity/timeseries/lzvd/prdy/data

8. "You won't see that in the official productivity figures yet."
   Brynjolfsson, Rock and Syverson, “The Productivity J-Curve: How Intangibles Complement General Purpose Technologies”, American Economic Journal: Macroeconomics, January 2021: "General purpose technologies (GPTs) like AI enable and require significant complementary investments. These investments are often intangible and poorly measured in national accounts... this can lead to underestimation of productivity growth in a new GPTs early years" https://www.aeaweb.org/articles?id=10.1257%2Fmac.20180386

9. "It targets below two, and it spent more than a decade creating francs to stop its currency rising."
   Swiss National Bank, The SNB's monetary policy strategy: "The SNB equates price stability with a rise in the Swiss consumer price index (CPI) of less than 2% per annum." No date is given on the page. https://www.snb.ch/en/the-snb/mandates-goals/monetary-policy/strategy
   Swiss National Bank, Press release, 6 September 2011, “Swiss National Bank sets minimum exchange rate at CHF 1.20 per euro”: "no longer tolerate a EUR/CHF exchange rate below the minimum rate of CHF 1.20". The dates given run 6 September 2011 to 15 January 2015, shorter than more than a decade; the release itself printed no figure. https://www.snb.ch/en/publications/communication/press-releases/2011/pre_20110906

10. "Once 2% is officially defined as "price stability", money losing value every year becomes health by definition, and the question of who collects the difference almost never gets asked out loud."
   Swiss National Bank, The SNB's monetary policy strategy: "The SNB equates price stability with a rise in the Swiss consumer price index (CPI) of less than 2% per annum." No date is given on the page. https://www.snb.ch/en/the-snb/mandates-goals/monetary-policy/strategy
   European Central Bank, The ECB's monetary policy strategy statement, July 2021: "The Governing Council considers that price stability is best maintained by aiming for two per cent inflation over the medium term. The Governing Council's commitment to this target is symmetric." Adopted July 2021. https://www.ecb.europa.eu/mopo/strategy/strategy-review/ecb.strategyreview_monpol_strategy_statement.en.html

11. "It surfaced in New Zealand's policy reforms in the late 1980s and spread through the 1990s by imitation."
   Hoover Institution, interview with Don Brash, The Origins Of Inflation Targeting In New Zealand With Don Brash: "the zero to two, I think came out of an interview with Roger Douglas on television"; "a flippant off the cuff remark"; 0 to 2% range adopted 1990. The source prints a 0 to 2% range, not a 2% target. https://www.hoover.org/research/origins-inflation-targeting-new-zealand-don-brash
   Bank for International Settlements, Moving targets? Inflation targeting frameworks 1990 - 2025: "Inflation targeting ... was first adopted in New Zealand in 1990." Adoption years listed: New Zealand 1990; Sweden 1997; United Kingdom 1997; Canada 1998. https://www.bis.org/publ/qtrpdf/r_qt2503c.htm

12. "The strongest of them is that 2% buys room to cut rates before they hit zero."
   Ben S. Bernanke, Federal Reserve Board of Governors, Panel Discussion on Inflation Targeting: Prospects and Problems, Federal Reserve Bank of St. Louis, 17 October 2003: "The risk of hitting the zero bound seems to decline sharply once the long-run average inflation rate rises to about 2 percent." https://www.federalreserve.gov/boarddocs/speeches/2003/20031017/default.htm

13. "Wages are sticky, meaning they're slow to move."
   Bewley, Why Wages Don't Fall during a Recession, Harvard University Press, 1999: “They believed that cutting wages would hurt morale, which they felt was critical in gaining the cooperation of their employees and in convincing them to internalize the managers' objectives for the company.” https://www.hup.harvard.edu/books/9780674009431
   Dickens and co-authors, How Wages Change: Micro Evidence from the International Wage Flexibility Project, Journal of Economic Perspectives, Spring 2007, pages 195–214: “individual workers' earnings data for 16 countries”, with “evidence of both downward nominal and real wage rigidities”, the extent of which “varies substantially across countries”. https://www.aeaweb.org/articles?id=10.1257%2Fjep.21.2.195

14. "That's the first missed payment, and the same arithmetic is hitting millions of borrowers at once, because the price fall is economy-wide."
   UK Finance, UK Finance mortgages data update, published 8 May 2025: “Residential mortgages outstanding — Fixed: 7,104,000 (85%); Tracker: 591,000 (7%); SVR: 540,000 (6%); Total: 8,404,000 (100%)”. The page counts 8,404,000 mortgages, that is 8.4 million rather than roughly nine million, and it covers the UK only. https://ukfinance-newsroom.prgloo.com/news/uk-finance-mortgages-data-update-2

15. "Measured against everything the bank holds, that's a few pounds for every hundred."
   Basel Committee on Banking Supervision, Basel III leverage ratio framework and disclosure requirements, 12 January 2014: “The capital measure is currently defined as Tier 1 capital and the minimum leverage ratio is 3%.” https://www.bis.org/publ/bcbs270.pdf
   Bank of England, Financial Stability in Focus: The bank capital framework: “In the UK, leverage ratio requirements comprise a minimum of 3.25% of the UK leverage exposure measure (excluding central bank reserves)”. https://www.bankofengland.co.uk/financial-stability-in-focus/2026/fsif-the-bank-capital-framework
   Basel Committee on Banking Supervision, Basel III monitoring report: 6.2% for Group 1 banks, the average fully phased-in final Basel III Tier 1 leverage ratio at 31 December 2024; by region, Europe 5.1%, Americas 5.8%, rest of world 7.1%. The report calls the ratio “stable during H2 2024”, after a decrease that started at end-2021, rather than rising over time. https://www.bis.org/bcbs/publ/d599.htm

16. "Measured the way regulators usually quote it, against everything it holds with each part weighted by how risky it is, it's more than twice that."
   Bank of England, Financial Stability Report, December 2025: “the aggregate Common Equity Tier 1 (CET1) capital ratio starts at 14.5%”. The 14.5% is the Bank's own figure, the starting point for participating major UK banks in the 2025 stress test, not a figure from the banks' annual reports. https://www.bankofengland.co.uk/financial-stability-report/2025/december-2025
   Bank of England, Financial Stability in Focus: The bank capital framework: “In revising its assessment of the appropriate benchmark for the level of system-wide Tier 1 capital requirements to around 13% of risk-weighted assets (RWAs) – lower than the previous level of around 14%”. https://www.bankofengland.co.uk/financial-stability-in-focus/2026/fsif-the-bank-capital-framework

17. "Money is created by lending, so when new lending stops while old loans keep being repaid, deposits are destroyed with nothing replacing them, and the total amount of money in the economy contracts."
   Bank of England, Quarterly Bulletin 2014 Q1, “Money creation in the modern economy”, 14 March 2014: “The central bank can also affect the amount of money directly through purchasing assets or 'quantitative easing'.” The copied wording covers quantitative easing only; the same page says money “is created by commercial banks making loans”. https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy

18. "In late 2008 some fully backed letters of credit, the bank guarantees that stand behind payments in trade, froze for days."
   International Chamber of Commerce, News release, “Trade volume and value decline sharply as a result of crisis”, 23 March 2009: “47% of the 122 banks surveyed reported a decrease in export Letter of Credit (LC) volume.” The survey records falling letter of credit volume and value, not fully backed credits freezing for days. https://iccwbo.org/news-publications/news/trade-volume-and-value-decline-sharply-as-a-result-of-crisis/

19. "Electronics have fallen in price for decades and people queue overnight for them."
   U.S. Bureau of Labor Statistics, The Economics Daily, “Long-term price trends for computers, TVs, and related items”, 13 October 2015: “The price index for TVs decreased 94 percent from December 1997 to August 2015”, with “audio equipment (−60 percent)” and “photographic equipment and supplies (−59 percent)” over the same period. https://www.bls.gov/opub/ted/2015/long-term-price-trends-for-computers-tvs-and-related-items.htm
   U.S. Bureau of Labor Statistics, Consumer Price Index series CUUR0000SEEE01, Computers, peripherals, and smart home assistants in U.S. city average, all urban consumers, not seasonally adjusted: Index, December 2007=100, not seasonally adjusted: December 1997 = 1119.0; December 2013 = 54.869. https://data.bls.gov/timeseries/CUUR0000SEEE01?years_option=all_years

20. "The gap between what the United States government spent and what it took in tax was larger in a single Covid year than the whole profit of corporate America, so taxing profits at 100% couldn't have closed it."
   United States Department of the Treasury, Monthly Treasury Statement, Table 1: receipts and outlays, fiscal years 2020 and 2021: Fiscal year 2020: receipts $3.42 trillion, outlays $6.55 trillion. Fiscal year 2021: receipts $4.05 trillion, outlays $6.82 trillion. https://fiscaldata.treasury.gov/datasets/monthly-treasury-statement/
   U.S. Bureau of Economic Analysis, Corporate profits with inventory valuation and capital consumption adjustments, annual series A051RC1A027NBEA: "Corporate profits with inventory valuation and capital consumption adjustments" — 2019: $2,471.321 billion. The figure covers calendar 2019, not a Covid year, and runs about $220 billion above the roughly $2.25 trillion cited. https://fred.stlouisfed.org/series/A051RC1A027NBEA

21. "New money usually enters through loans and financial markets, and reaches asset prices before it reaches wages."
   Bank of England, Explainer, “What is quantitative easing?”: "we can create money digitally in the form of 'central bank reserves'. We use these reserves to buy bonds"; "When we buy bonds, their price tends to increase"; "QE increases the price of financial assets other than bonds, such as equities." https://www.bankofengland.co.uk/monetary-policy/quantitative-easing

22. "Businesses that cheap credit helps keep trading, the ones called zombie firms, and the jobs that exist to run the redistribution and price-control schemes that manage the harm an inflating money does."
   Bank for International Settlements, BIS Quarterly Review, September 2018, “The rise of zombie firms: causes and consequences”: "we document a ratcheting-up in the prevalence of zombies since the late 1980s" and "this increase is linked to reduced financial pressure, which in turn seems to reflect in part the effects of lower interest rates". This is the BIS study alone, with no OECD page and no aggregation of company filings. https://www.bis.org/publ/qtrpdf/r_qt1809g.htm
   Caballero, Hoshi and Kashyap, American Economic Review, December 2008, “Zombie Lending and Depressed Restructuring in Japan”: "Large Japanese banks often engaged in sham loan restructurings that kept credit flowing to otherwise insolvent borrowers (which we call zombies) ... zombie-dominated industries exhibit more depressed job creation and destruction, and lower productivity." The page prints no date range, and gives the Japanese setting only in its title. https://www.aeaweb.org/articles?id=10.1257%2Faer.98.5.1943

23. "Between 2000 and early 2018, the world added roughly 185 trillion dollars of new debt to get about 46 trillion of measured growth."
   World Bank, World Development Indicators, “GDP (current US$)”, world, 2000 to 2020: GDP (current US$), World: 2000, 33,965,806,441,911.9; 2018, 87,310,840,056,717.8. The series' own figures give a rise of about $53.3 trillion from 2000 to 2018, not about $46 trillion. https://data.worldbank.org/indicator/NY.GDP.MKTP.CD?locations=1W

24. "Instead prices rose two."
   Office for National Statistics, CPI ANNUAL RATE 00: ALL ITEMS 2015=100, series D7G7, dataset MM23: Annual CPI rate, per cent: 2009 2.2; 2010 3.3; 2011 4.5; 2012 2.8; 2013 2.6; 2014 1.5; 2015 0.0; 2016 0.7; 2017 2.7; 2018 2.5; 2019 1.8 — rates ranging from 0.0 to 4.5, average 2.24, not a flat two. https://www.ons.gov.uk/economy/inflationandpriceindices/timeseries/d7g7/mm23

25. "We've watched wages lose to house prices for forty years."
   ONS, Housing affordability in England and Wales: 2025: England 2025: median home £300,000, 7.6 times median full-time earnings £39,300; about 3.6 times at the 1997 start of the series. The series begins in 1997, a shorter span, and 7.6 is the lowest since 2015. https://www.ons.gov.uk/peoplepopulationandcommunity/housing/bulletins/housingaffordabilityinenglandandwales/2025
   Miles and Monro, Bank of England, Staff Working Paper No. 837, “UK house prices and three decades of decline in the risk-free real interest rate”, 20 December 2019: "the rise in house prices relative to incomes between 1985 and 2018 can be more than accounted for by the substantial decline in the real risk-free interest rate observed over the period". The window is 1985 to 2018. https://www.bankofengland.co.uk/working-paper/2019/uk-house-prices-and-three-decades-of-decline-in-the-risk-free-real-interest-rate


---

# Four Pounds of Debt for One Pound of Growth
Date: 2026-07-15
Canonical: https://thenaturalstate.org/essays/four-pounds-of-debt-for-one-pound-of-growth/

Every rescue has to be bigger than the last one because each rescue adds to the very problem it's treating. A rescue is new money and credit, and new credit is new debt. That debt joins the pile that has to be kept serviceable the next time trouble comes. Meanwhile technology keeps cutting the cost of making things, and the push behind that fall keeps getting stronger, because the tools are improving faster than they did, so what policy has to cancel out keeps getting bigger. And each new pound of debt buys less growth than the one before it. So the gap to fill is wider, the pile to defend is taller, the medicine is weaker, and the economy is more fragile. Multiply those together and the next rescue has to be larger just to keep the picture looking stable. Nothing in that loop settles, because every part of it feeds the others.

The cost of keeping prices up is the abundance that technology created and that never reached you as lower prices. Because the loop never settles, this system changes, one way or another. What's open is how, and who pays on the way.

What it takes to hold prices up

Most money is loaned into existence. When a bank lends, it creates the deposit it lends to you. Most of those debts are nominal [fixed in pound terms, so the amount you owe doesn't change when prices change]. A system built on those debts can take a slow fall that comes with better tools. In that fall it's the cost of making things that drops, and pay drifts down slowly behind it, so the money to meet a fixed payment is still there. What it can't take is a sudden fall in the prices credit pushed up, houses first, because then the losses spread through the banks. In that fall it's the lending that has stopped, so incomes and the house fall together and at once, and the fixed payment is hit from both sides in the same year. Houses come first because people buy them with borrowed money. The debt takes a bigger bite of every income, yours, your employer's, the government's. And where the loan was written against a house, the house is worth less too, so the bank stands to lose more on that loan. Push that far enough and defaults cascade through the chain of lenders, because each lender's asset is someone else's promise to pay. So every time a sudden fall in those prices threatens, the system is rescued with new money, and the rescues keep getting bigger. The danger is the debt design, not the cheaper goods, which are exactly what better tools should deliver.

In between the rescues, policy targets rising prices of about 2% a year, forever. Central banks publish why they aim there. They want room to cut interest rates in a downturn, they know wages resist falling, and they say the official measure of prices overstates the rise. Those are the reasons they give, and the debts aren't among them. The debts show up in the rescues, not in the everyday 2%. The starting line for that 2% isn't zero. Under a money nobody can add to, the natural direction of prices is down, because people keep getting better at making things and competition passes the saving on.

So when a central bank targets 2% inflation, it doesn't need two points of push. It first has to cancel whatever better tools would have taken off prices that year, then add two on top. How big that fall would be is about how fast output per hour of work grows, which is what the productivity figures measure. On the published figures that's a point or two a year. No statistic records that fall, because it never happened. Say that fall is 1%. Then the system has to engineer three points of upward pressure. If technology accelerates and the natural fall becomes 5%, it has to engineer seven. It's like cycling up a hill that keeps getting steeper. You can't stop and hold your place. Just staying where you are takes a harder push.

The push itself is made of ordinary policy moves. Interest rates are cut so households and firms borrow more. Governments run deficits [spend more than they raise in tax and borrow the difference]. Central banks buy bonds with newly created money [quantitative easing, QE] to keep borrowing cheap. Every one of those channels ends in the same place. Each one either creates new claims on future income or makes creating them cheaper, and both leave more debt behind.

The gears that make it compound

Gear one. The gap widens on its own. Software already pushed the cost of copying anything digital toward zero. AI is now pushing the cost of knowledge work the same way, and robotics is starting on physical work. That downward force on the cost of making things compounds, because better tools build better tools. So even before you count any debt, what it takes to cancel the fall keeps growing. The official output-per-hour figures don't show that pull growing. They miss part of it, because what becomes free drops out of the count, though on the measures tried so far that part is small. It shows in what the tools can do.

Gear two. The pile grows, and the floor rises. Each rescue's borrowing joins the stock of debt. That stock never meaningfully shrinks, and it has to be kept serviceable. Worse, the share and house prices the rescue propped up are kept up through credit, because loans are secured against them. What that protects is whether the lenders survive, and the state acts wherever a lender is about to break. Where lenders borrow against things that are valued every day, it acts within days. Where a fall has to eat into the banks' own capital, it acts later and larger, after the fall has already been taken as a loss. Below the point where a lender breaks, prices are allowed to fall, and UK house prices did fall after 2022 with no purchase programme to hold them up. But let house prices that cheap credit lifted fall far enough to reach the banks, and the level the lenders can survive is the level the next rescue defends. Each rescue lifts those prices further from where buyers and sellers alone would set them. New loans are then written against the lifted prices, so the level the lenders can survive rises with each rescue. There's also a mechanical trap. After a price spike, prices would naturally fall back the next year, and unless the new money keeps coming, the price index [a basket that tracks consumer prices over time] reads that as deflation. You have to keep pushing against the level your own last push created.

Gear three. The medicine weakens. Between 2000 and early 2018, the world added roughly 185 trillion dollars of new debt to get about 46 trillion dollars of growth. Call it four borrowed pounds for one pound of growth. The ratio is the same whichever currency you count in. That ratio worsens because more of each new pound goes to paying the interest on old debts and renewing them rather than building anything. Cheap credit also keeps firms alive that competition should have replaced [zombie firms, companies that survive on cheap borrowing rather than real profits]. Those firms sit on capital and talent that better firms would have used, which drags on the very growth the borrowing was meant to buy.

Gear four. The pain threshold falls. Because markets have learned the rescue comes every time, they build on top of that expectation. Companies borrow to buy back their own shares. Investors take more risk because when the bets fail, the rescue passes the loss to savers and wage earners, through the new money it takes to fund it. The whole structure is built around permanent support, so ever smaller wobbles now demand a rescue. Time after time, when central banks hinted at shrinking support, markets convulsed and policy came back in. Support can be pulled back part of the way for a time, as it was from 2022 to 2024, when rates rose and bond holdings shrank. But each place the pull-back strained got new support within days, the Bank of England's in September 2022 and the Federal Reserve's in March 2023, and the promise to step in was never withdrawn. You can't ease off the pedals for good, because withdrawing the promise would cause the exact collapse the rescue was meant to prevent.

And a fifth gear. The rescue steepens the hill. When policy pushes up wages, rents, and input costs while customers still demand lower prices, automation pays for itself faster. Firms replace labour with software and machines sooner than they otherwise would. So the intervention adds to the force it has to cancel, which widens next year's gap again. The fifth gear is what feeds the first.

The gears multiply each other. The next rescue equals a wider gap, times a taller pile, times weaker medicine, times a lower pain threshold. Every term in that multiplication is fed by the previous rescue. That's why it compounds rather than settles. The record shows the stock of debt growing, and the rescue that each downturn gets growing with it. The yearly pace of new money hasn't trended up. Central bank holdings jump in a crisis and come only part of the way back. Rescues went from hundreds of billions of dollars of government spending and bond-buying in 2008 to trillions in 2020, and in the first year of the pandemic response the United States' stock of money, cash and bank deposits together, grew by more than one and a half times the before-tax profits of every US company for 2020. Taxes couldn't fund that scale. Only newly created money could, which tells you what the system actually runs on.

Where the bill lands

The bill lands in four places. The first is invisible, the price falls you never got. Technology made photography, navigation, communication, and computation nearly free, and it's been cutting the cost of making food, energy, and goods the whole time. Under a money nobody can add to, those gains would have reached you as a falling cost of living. Instead the expanding money supply absorbed them, so prices stayed flat or rose. Against what prices should have done, your yearly loss is the fall you didn't receive. The rise you paid on top of it is the second bill. You worked just as hard, and the saving existed. Part of it reached you as higher pay, late and unevenly. The rest went to whoever got the new money first, through house and share prices.

The second is your wage and your savings. Inflation and wage deflation are the same event seen from two sides. Your pay rises slowly, so it lags the money creation. Your cash savings are guaranteed to lose purchasing power [what your money can buy], which forces you to become an investor and take risk just to stand still. A mechanic who saves in cash falls behind through no fault of his own.

The third is the transfer. New money usually enters through bank loans and central bank bond purchases, landing with whoever sold the house or the bonds, so it reaches the people who already own houses and shares first, before prices adjust for everyone else. The landlord's house and rents rise while the tenant's pay lags. That's the transfer working as designed, and it widens the gap between owners and earners every cycle, feeding much of today's political anger.

The fourth is the future. Capital flows to whatever policy props up rather than to what serves people. Houses stop being shelter and become savings vehicles, pricing out the young. Fragility builds. And as stress rises, the system defends itself with more centralised control, because a structure that must keep the support going eventually has to manage what people hear and how they behave too. The two doors at the end of this road are a depression if support stops, or escalating political repression if it continues. History's versions of this story, from Weimar [Germany's 1920s currency collapse that preceded Nazi rule] onwards, ended in resets, strongmen, or wars.

If the mechanism is right

If this mechanism is right, the collision between the debt design and cheaper tools steepens from here, because no industry is safe from AI's push on the cost of making things, and that push is compounding. For a state carrying debt at the scale the United States, the United Kingdom, and Japan now carry, the ordinary exits are blocked. The debt can't be repaid in real terms [after allowing for what money will buy] at this scale, default is the very thing the rescues exist to prevent, growing out of it fails because each unit of debt buys less growth, and raising rates until the bad debt is forced out is closed too, for the reason the last objection below gives. Whichever exit is refused, the interest keeps adding up. With less debt against a year's output there's a door that list doesn't name. A long run of a state taking in more than it spends is ordinary, and Canada walked it, its debt falling from about two thirds of a year's output in the mid-1990s to under a third by 2009, with its currency rising against the US dollar. What closes that door at today's debt levels is how big the surplus would have to be, and none of the three is running one.

When the exits are blocked and creative destruction [the market process where better methods and firms replace old ones] is suppressed in markets, it moves up a level, to the money itself. The depression and the repression, the two doors at the end of the road, both end in the same place. The eventual reset happens at the money itself, the stick everything else is measured against. That comes in two forms, and they aren't the same thing. The slow form is a long loss of what the money buys, and for the dollar since it left gold in 1971, that's a measured fact. The event form is a break in the money itself, and that's a forecast. I can't put a date on that break, because the path to it is chaotic and no one can time the trigger. What I hold is that some form of reset is unavoidable, and that each rescue makes it larger. Technology's speed also brings it on faster than the old debt cycles, which took decades to unwind.

Because the reset lands on the money, my conclusion is a base money [the foundation money everything else is priced in and settles to] whose supply can't be expanded. Under a money like that, the gains from better tools can reach people as falling prices, and debts shrink in importance because saving works again. Credit can still be built on top of a fixed base, that credit can still go bad, and the firm that lent it can fail. What changes is that the base can't be expanded to rescue it, so the loss stays with the people who dealt with the firm that failed instead of spreading to everyone holding the money. Those people needn't have known they were taking a risk, and in the American bank failures before the federal government insured deposits most of them were ordinary depositors. Whether the credit built on top is kept fully reserved [every claim backed by money held] is a social choice, and the money's rules don't settle it.

Five ways this could be wrong

"If the system needed exponentially bigger rescues, it would have collapsed already."

It's been failing in slow motion. Two things masked it. The same price falls the new money absorbs, cheaper goods from better tools, kept a lid on shop prices for decades, and reserve-currency demand for dollars [the dollars the rest of the world, including its central banks, holds for trade and savings] spread the cost across the whole world. Both are wearing thin as the rescues grow. You've been watching the first of those happen since 2020.

"You can taper once growth returns."

Each exit so far has been partial, as the pull-back of 2022 to 2024 was, because positions built with borrowed money on the promise of support have to be marked down and sold the moment the promise wavers, and new support arrives within days. A system that can't withdraw that promise is hostage to the borrowing built on it.

"Growth will outpace the debt."

The arithmetic runs the other way. Four pounds borrowed for one pound of growth, and the ratio worsening, while the interest on the pile compounds regardless.

"The rescues are worth it, because deflation would be worse."

There are two reasons prices fall, and they need separating. Prices falling because credit is collapsing is destructive. Prices falling because we got better at making things is cheaper life, and people still buy phones and food when they expect them to be cheaper next year. The rescues defend the debt design, not your living standards. Debt of this design can't coexist with accelerating technology.

"A Volcker moment could purge it, the way high rates did in the early 1980s."

A purge on the pattern of the early 1980s can't do now what it did then. Back then the debt was mainly with households and companies rather than the state, so crushing rates punished borrowers, and the state was well enough placed to apply the cure. Now the state itself is the heavily indebted party. So the cost of higher rates lands first on its own interest bill, on the part of its debt whose interest changes at once. Rates can be raised, and they were. Both the Federal Reserve and the Bank of England took them from near zero to above 5% between late 2021 and mid-2023 while shrinking their bond holdings. What I hold is that the political cost, and the cost to the system itself, of going far enough to force the bad debt out is likely intolerable, so the policy I expect instead is holding returns below the rate prices rise. That's what happened to the lenders who held ordinary government debt through 2021 and 2022. It isn't what a new lender has been offered since. On the United States' inflation-protected ten-year debt, the return above inflation has been above zero since the middle of 2022.

When the next rescue arrives and it's larger than the last, you're watching the design work. Nobody has to be incompetent for the rescues to keep growing. A system built on debts fixed in pounds can't take a sudden fall in the prices credit pushed up. Every time one threatens, it has exactly one move. Put that system up against technology that keeps cutting the cost of making things, and the moves keep getting bigger.

## Sources

What this essay rests on, as checked on 2026-10-09.

1. "Most money is loaned into existence."
   Bank of England, Quarterly Bulletin 2014 Q1, “Money creation in the modern economy”: “the majority of money in the modern economy is created by commercial banks making loans” https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy

2. "When a bank lends, it creates the deposit it lends to you."
   Bank of England, Quarterly Bulletin 2014 Q1, “Money creation in the modern economy”: “the majority of money in the modern economy is created by commercial banks making loans” https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy

3. "In between the rescues, policy targets rising prices of about 2% a year, forever."
   Federal Reserve, Statement on Longer Run Goals, reaffirmed effective 27 January 2026: “The Committee reaffirms its judgment that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run” https://www.federalreserve.gov/monetarypolicy/2026-07-mpr-statement.htm
   Bank of England, Web page, “Inflation and the 2% target”: “The Government sets us a 2% inflation target” https://www.bankofengland.co.uk/monetary-policy/inflation
   European Central Bank, Press release, 8 July 2021, “ECB's Governing Council approves its new monetary policy strategy”: “The Governing Council considers that price stability is best maintained by aiming for a 2% inflation target over the medium term.” https://www.ecb.europa.eu/press/pr/date/2021/html/ecb.pr210708~dc78cc4b0d.en.html

4. "Central banks publish why they aim there."
   ECB, Strategy review, “An overview of the ECB's monetary policy strategy”, 2021: “aiming for a two per cent inflation target over the medium term”; “Three additional factors, which were present already in 2003 and which have remained broadly unchanged since then, call for a sufficient inflation buffer.” https://www.ecb.europa.eu/mopo/strategy/strategy-review/ecb.strategyreview_monpol_strategy_overview.en.html
   Bank of England, Web page, “Inflation and the 2% target”: “The Government sets us a 2% inflation target”; “But if inflation is too low, or negative, then some people may put off spending because they expect prices to fall.” https://www.bankofengland.co.uk/monetary-policy/inflation

5. "They want room to cut interest rates in a downturn, they know wages resist falling, and they say the official measure of prices overstates the rise."
   ECB, Strategy review, “An overview of the ECB's monetary policy strategy”, 2021: “An inflation target of two per cent underlines the ECB's commitment to providing an adequate safety margin to guard against the risk of deflation”; “by taking account of downward nominal wage rigidities”; “measurement bias in the HICP” https://www.ecb.europa.eu/mopo/strategy/strategy-review/ecb.strategyreview_monpol_strategy_overview.en.html
   Federal Reserve, Statement on Longer-Run Goals and Monetary Policy Strategy, as amended effective 27 August 2020: “the federal funds rate is likely to be constrained by its effective lower bound more frequently than in the past” https://www.federalreserve.gov/monetarypolicy/monetary-policy-strategy-tools-and-communications-statement-on-longer-run-goals-monetary-policy-strategy-2019-2020.htm

6. "On the published figures that's a point or two a year."
   Shawn Sprague, U.S. Bureau of Labor Statistics, Monthly Labor Review, April 2021, “The U.S. productivity slowdown: an economy-wide and industry-level analysis”: “Labor productivity—defined as output per labor hour”; U.S. nonfarm business labor productivity, average annual growth: 1.3 percent for the years since 2005 (through 2018); 2.1 percent long-term average 1947 to 2018. https://www.bls.gov/opub/mlr/2021/article/the-us-productivity-slowdown-the-economy-wide-and-industry-level-analysis.htm
   Office for National Statistics, Trends in UK business dynamism and productivity: 2023, published 11 December 2023: Labour productivity, Gross Value Added (GVA) per hour worked, average annual growth rate: 2.2% a year between 1971 and 2007; 0.6% a year between 2011 and 2022. The 2011 to 2022 rate is below a point a year. https://www.ons.gov.uk/economy/economicoutputandproductivity/productivitymeasures/bulletins/trendsinukbusinessdynamismandproductivity/2023

7. "They miss part of it, because what becomes free drops out of the count, though on the measures tried so far that part is small."
   Byrne, Fernald and Reinsdorf, Brookings Papers on Economic Activity, 2016, “Does the United States Have a Productivity Slowdown or a Measurement Problem?”: “many of the tremendous consumer benefits from smartphones, Google searches, and Facebook are, conceptually, non-market”; “little evidence that the slowdown arises from growing mismeasurement of the gains from innovation in IT-related goods and services” https://www.brookings.edu/bpea-articles/does-the-united-states-have-a-productivity-slowdown-or-a-measurement-problem/
   Syverson, Journal of Economic Perspectives, Vol. 31, No. 2, Spring 2017, “Challenges to Mismeasurement Explanations for the US Productivity Slowdown”: “estimates from the existing research literature of the surplus created by internet-linked digital technologies fall far short of the $3 trillion or more of ‘missing output’ resulting from the productivity growth slowdown” https://www.aeaweb.org/articles?id=10.1257/jep.31.2.165

8. "Below the point where a lender breaks, prices are allowed to fall, and UK house prices did fall after 2022 with no purchase programme to hold them up."
   ONS and HM Land Registry, UK House Price Index: December 2023: “Average UK house prices decreased by 1.4% in the 12 months to December 2023”. This fall is for 2023 alone; the same series gives a 9.8% rise in the 12 months to December 2022. https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/housepriceindex/december2023

9. "Support can be pulled back part of the way for a time, as it was from 2022 to 2024, when rates rose and bond holdings shrank."
   Federal Reserve, Federal Open Market Committee statement, 26 July 2023: “the Committee decided to raise the target range for the federal funds rate to 5-1/4 to 5-1/2 percent. ... In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities” https://www.federalreserve.gov/newsevents/pressreleases/monetary20230726a.htm
   Federal Reserve Board, Policy Tools: Open Market Operations, table of rate changes: Level after increases: 0.25-0.50 percent on March 17, 2022; 3.75-4.00 percent on November 3, 2022; 5.25-5.50 percent on July 27, 2023. After a decrease: 4.75-5.00 percent on September 19, 2024. https://www.federalreserve.gov/monetarypolicy/openmarket.htm
   Bank of England, Asset Purchase Facility Quarterly Report, 2025 Q3: “Holdings peaked at around £875 billion in 2022 before beginning to decline steadily until the end of the chart in 2025 Q3.” Stock of gilts for monetary policy purposes: £558 billion as of 24 September 2025. https://www.bankofengland.co.uk/asset-purchase-facility/2025/2025-q3

10. "But each place the pull-back strained got new support within days, the Bank of England's in September 2022 and the Federal Reserve's in March 2023, and the promise to step in was never withdrawn."
   Bank of England, News release, “Bank of England announces gilt market operation”, 28 September 2022: “The Bank will carry out temporary purchases of long-dated UK government bonds from 28 September. The purpose of these purchases will be to restore orderly market conditions.” https://www.bankofengland.co.uk/news/2022/september/bank-of-england-announces-gilt-market-operation
   Bank of England, Quarterly Bulletin article, “Financial stability buy/sell tools: a gilt market case study”: “In total, the Bank bought £19.3 billion of gilts between 28 September and 14 October 2022” https://www.bankofengland.co.uk/quarterly-bulletin/2023/2023/financial-stability-buy-sell-tools-a-gilt-market-case-study
   Federal Reserve Board, Press release announcing the Bank Term Funding Program, 12 March 2023: “The additional funding will be made available through the creation of a new Bank Term Funding Program (BTFP), offering loans of up to one year in length” https://www.federalreserve.gov/newsevents/pressreleases/monetary20230312a.htm

11. "Central bank holdings jump in a crisis and come only part of the way back."
   Federal Reserve, Total Assets (Less Eliminations from Consolidation): Wednesday Level (WALCL), weekly series: Total assets, millions of US dollars: 890,662 (26 December 2007); 2,232,311 (24 December 2008); 4,509,462 (24 December 2014); 3,759,946 (28 August 2019); 4,158,637 (26 February 2020); 8,965,487 (13 April 2022); 6,737,204 (2 September 2026). https://fred.stlouisfed.org/series/WALCL

12. "Rescues went from hundreds of billions of dollars of government spending and bond-buying in 2008 to trillions in 2020, and in the first year of the pandemic response the United States' stock of money, cash and bank deposits together, grew by more than one and a half times the before-tax profits of every US company for 2020."
   United States Congress, Emergency Economic Stabilization Act of 2008, Public Law 110-343: “An Act To provide authority for the Federal Government to purchase and insure certain types of troubled assets”; enacted October 3, 2008, with authority to buy up to $700 billion of troubled assets. https://www.congress.gov/110/plaws/publ343/PLAW-110publ343.htm
   Congressional Budget Office, H.R. 748, CARES Act, Public Law 116-136: “The CARES Act appropriates roughly $2.2 trillion of spending, tax breaks, loans, and other resources over the next decade.” The Act was enacted in March 2020. https://www.cbo.gov/publication/56334
   Federal Reserve Board, M2 (series M2SL), H.6 Money Stock Measures: M2, billions of dollars, seasonally adjusted: 15,492.8 in February 2020 and 19,641.4 in February 2021. It backs only the growth in money, not the comparison with profits, which rests on a separate series. https://fred.stlouisfed.org/series/M2SL

13. "Part of it reached you as higher pay, late and unevenly."
   Pessoa and Van Reenen, Centre for Economic Performance discussion paper, “Decoupling of Wage Growth and Productivity Growth? Myth and Reality”, October 2013: UK, 1972 to 2010: “real productivity grew by 114 per cent” and “median real wages by 72 per cent”. https://cep.lse.ac.uk/pubs/download/dp1246.pdf
   Stansbury and Summers, National Bureau of Economic Research working paper, “Productivity and Pay: Is the link broken?”: 1973 to 2016: “one percentage point higher productivity growth has been associated with 0.7 to 1 percentage points higher median and average compensation growth”; “other factors orthogonal to productivity have been acting to suppress typical compensation”. https://www.nber.org/papers/w24165

14. "The landlord's house and rents rise while the tenant's pay lags."
   Office for National Statistics, Housing affordability in England and Wales: 2023: House price to earnings ratio: “affordability ratios doubled in England from the start of the series in 1997 to 2007, stayed at a similar level until around 2013, and then broadly increased until 2023”; 8.3 in 2023. https://www.ons.gov.uk/peoplepopulationandcommunity/housing/bulletins/housingaffordabilityinenglandandwales/2023
   Zillow, Zillow Observed Rent Index, rental report: Annual rent growth peaked near 17% in February 2022. https://www.zillow.com/research/march-2023-rental-report-32399/

15. "A long run of a state taking in more than it spends is ordinary, and Canada walked it, its debt falling from about two thirds of a year's output in the mid-1990s to under a third by 2009, with its currency rising against the US dollar."
   Department of Finance Canada, Fiscal Reference Tables 2014, Table 2: Fiscal transactions (per cent of GDP): Table 2, per cent of GDP: 67.1 in 1995–96 and 28.2 in 2008–09. These figures sit in the column headed “Accumulated deficit”, not in a debt-to-GDP ratio. https://www.canada.ca/en/department-finance/services/publications/fiscal-reference-tables/2014/part-1.html
   Canada Revenue Agency, Average Exchange Rates for 1996: “Average Exchange Rates for 1996 ... Use these rates if you need to convert your income or deductions to Canadian dollars. ... United States (dollar) 1.36360357” https://www.canada.ca/en/revenue-agency/services/forms-publications/previous-year-forms-publications/archived-rc4152/archived-average-exchange-rates-1996.html
   Bank of Canada, Exchange rates, 13–14 November 2007 (archived page): “1 USD (noon) = 0.9643 CAD” on 13 November 2007. The 1996 rate is not on any Bank of Canada page, only in a Canada Revenue Agency annual average. https://bac-lac.wayback.archive-it.org/web/20071115023223/http://www.bankofcanada.ca/en/exchange.htm

16. "The slow form is a long loss of what the money buys, and for the dollar since it left gold in 1971, that's a measured fact."
   Federal Reserve History, “Nixon Ends Convertibility of U.S. Dollars to Gold and Announces Wage/Price Controls”: August 15, 1971: “The first order was for the gold window to be closed. Foreign governments could no longer exchange their dollars for gold.” https://www.federalreservehistory.org/essays/gold_convertibility_ends
   U.S. Bureau of Labor Statistics, Consumer Price Index for All Urban Consumers (CPI-U), series CUUR0000SA0: 1971 annual average: CPI-U, U.S. city average, all items, not seasonally adjusted: 1971 annual average, 40.5. https://data.bls.gov/timeseries/CUUR0000SA0

17. "Those people needn't have known they were taking a risk, and in the American bank failures before the federal government insured deposits most of them were ordinary depositors."
   Federal Deposit Insurance Corporation, Annual Report for the Year Ended December 31, 1934: Commercial bank suspensions, 1865-1934: “Losses to depositors in these banks are estimated at about three and one-half billion dollars, over and above all recoveries.” https://fraser.stlouisfed.org/title/annual-report-federal-deposit-insurance-corporation-3768/annual-report-1934-476741/fulltext

18. "Prices falling because credit is collapsing is destructive."
   Fisher, Econometrica, October 1933, “The Debt-Deflation Theory of Great Depressions”: “Debt liquidation leads to distress selling and to Contraction of the money supply, as bank loans are paid off, and to a slowing down of velocity of circulation.” https://www.econometricsociety.org/publications/econometrica/1933/10/01/debt-deflation-theory-great-depressions

19. "Both the Federal Reserve and the Bank of England took them from near zero to above 5% between late 2021 and mid-2023 while shrinking their bond holdings."
   Federal Reserve, H.4.1 weekly balance sheet, “Factors Affecting Reserve Balances”: Total assets $8,965,487 million on 13 April 2022 and $6,587,119 million on 1 October 2025. https://www.federalreserve.gov/releases/h41/20220414/
   Bank of England, Asset Purchase Facility Quarterly Report, 2025 Q3: “Holdings peaked at around £875 billion in 2022 before beginning to decline steadily until the end of the chart in 2025 Q3.” https://www.bankofengland.co.uk/asset-purchase-facility/2025/2025-q3

20. "On the United States' inflation-protected ten-year debt, the return above inflation has been above zero since the middle of 2022."
   United States Department of the Treasury, Daily Treasury Par Real Yield Curve Rates: Ten-year real yield -1.04 percent on 31 December 2021, 0.25 on 7 June 2022 and 0.36 on 27 July 2022; ranges of 1.68 to 2.28 in 2024 and 1.69 to 2.34 in 2025. These figures stop at 2025. https://home.treasury.gov/resource-center/data-chart-center/interest-rates/TextView?type=daily_treasury_real_yield_curve


---

# The Price Fall That Never Arrived
Date: 2026-07-15
Canonical: https://thenaturalstate.org/essays/the-price-fall-that-never-arrived/

The official inflation number measures how much prices rose. It has no way to measure the price fall that never arrived, and that missing fall is a large part of what inflation costs you.

Technology cut the cost of making most of what you buy. That saving was real, and it was collected before it could reach you as a lower price. Our money system is built to push prices up, so the government and central bank create new money and credit year after year, and the new money cancels the price falls you should have received. Part of the saving reaches you as higher pay, late and unevenly. Much of the rest moves to whoever is closest to the new money, mostly people who already own the real things the new money is spent on, houses and shares above all, and the state itself. Measuring inflation against zero is what keeps the collection invisible, because zero was never where prices were headed. Under a money nobody can add to, the natural direction of prices is down. The honest baseline is that falling line, and honest inflation is the distance between where prices actually are and where productivity, our improving ability to make things, should have taken them.

Where your saving went

A photo used to cost film, processing, and postage. Now it's free on your phone. When tools improve, the same goods take less to make. That holds for everything technology has changed the making of. It doesn't hold for housing, care, teaching, or building. In a market with real competition, a producer who keeps charging yesterday's price gets undercut by a rival who copies the cheaper way of making the goods and passes the saving on, so prices get pushed down toward the cost of making one more unit. Where nobody can copy it, the saving stays with the business. Say prices were left to fall that way. The saving would reach you. Wages are sticky, so at first the rate you're paid per hour holds while your weekly shop gets cheaper, and your savings buy more year after year without you having to chase returns to get it. Where things get cheaper to make and prices fall with them, pay can drift down gently and still buy more, because the weekly shop gets cheaper by more than the pay falls. Under a money nobody can add to, that's the natural state of a free market. Falling prices are what progress looks like when the measuring stick holds still.

That's not what you experience, because our money can be added to. Nearly every pound in existence was created as a loan, whether that's your mortgage, a company's borrowing, or the government's debt. So the money itself is made of debts, and those debts are fixed in pounds. If prices broadly fall and nothing is done to stop it, wages eventually follow them down, but the mortgage payment doesn't shrink. The debt takes a bigger bite of everyone's income, yours, your employer's, the government's.

A money system made of debts fixed in pounds can take a slow fall that comes with better tools. In that fall it's the cost of making things that drops, and pay drifts down slowly behind it, so the money to meet a fixed payment is still there. What it can't take is a sudden fall in the prices credit pushed up, houses first, because then the losses spread through the banks. In that fall it's the lending that has stopped, so incomes and the house fall together and at once, and the fixed payment is hit from both sides in the same year. Houses come first because people buy them with borrowed money. And where the loan was written against a house, the house is worth less too, so the bank stands to lose more on that loan. So every time a sudden fall in those prices threatens, the system is rescued with new money, and the rescues keep getting bigger.

Between rescues, the government and central bank aim for prices to rise by about 2% a year, and they call that success. Getting there takes new money that first cancels the fall better tools would have delivered, and then adds two on top. Central banks publish why they aim there. They want room to cut interest rates in a downturn, they know wages resist falling, and they say the official measure of prices overstates the rise. Those are the reasons they give, and the debts aren't among them.

The new money, created for the rescues and for the 2%, doesn't land evenly. It usually enters through banks and financial markets, so the first people to receive it buy houses, shares, and bonds before prices have adjusted. Early receivers of new money benefit at the expense of late receivers. The name for this is the Cantillon effect. House and share prices jump first. Your wages adjust last, after your rent and your weekly shop have already moved. Inflation and a wage that buys less are the same event seen from opposite sides.

So when you ask where your saving went, it's findable. It's in the gap between what prices did and what they should have done. It's in the house that more than doubled in pounds in the twenty years to 2020, which is where a large part of the new money went. It's in coffee, which is vastly cheaper to grow, ship, and roast than it was decades ago, yet costs more at the till. And it's in government spending paid for with new money rather than by a tax anyone voted on. Only after you've seen those steps does the short word fit. Captured. The gains were captured by the design, and no cabal was needed to plan it. Any government that allowed a sudden fall in the prices credit pushed up would preside over losses spreading through the banks. And between rescues nearly every major central bank aims at 2% for reasons it publishes. So government after government, whatever its politics, creates the money. Incentives, not villains.

Why zero is the wrong baseline

Measuring inflation from zero smuggles in the assumption that if prices didn't move, nobody lost anything. That would only be true if the natural drift of prices were flat. Under a money nobody can add to, it isn't. Technology pushes prices down every year, and the push keeps getting stronger, because the tools are improving faster than they did, as software and AI spread. So a year of "flat prices" isn't neutral. Before 2008, Britain's productivity grew near 2% a year. If that would have made your cost of living 2% cheaper and prices ended the year unchanged, the whole 2% was taken from what your money buys, and you'd never see it in any official number. At the 2% target, the take is 4%. The headline figure is only part of it. A large part of the transfer is the fall that was withheld, and no basket of goods can show you a price fall that was never allowed to happen. It's a theft with no crime scene. What was taken never arrived in your account.

It gets worse, because the 2% target turns the measure into the goal. The system is run to make the official number read 2%, so hitting the target only tells you the system is working as designed. And every "real terms" figure you've ever seen is worked out in the very unit that's being expanded. The ruler is elastic, and we're using the ruler to check the ruler. The official basket is adjusted for quality too. When a product gets better, the statisticians mark its price down, and the name for those changes is hedonic adjustments. Those adjustments are opaque, and the rules for them are a choice of method. The basket also underweights the things that dominate a household's life, housing above all.

The official number hides a split, and the split shows technology and new money pulling against each other. Televisions, computers, and software fell in price for decades. That's technology's push showing through, in the places where competition and technology moved faster than the new money. Meanwhile the things you can't opt out of and the things people use to store value, housing, education, healthcare, kept climbing. A large part of the reason is that they're where the new credit pools. Average a telly that got cheaper against a rent that rose and you manufacture a mild-looking 2% that describes almost nobody's actual life.

The honest baseline

The honest baseline is productivity. Prices should fall roughly in line with our improving ability to make things, so the honest measure of inflation is the gap between measured prices and that falling line. True cost to you equals the official number plus the price falls that were withheld. So the question to ask each year becomes "how much cheaper should my life have got, and who received the difference?"

I'll be straight about precision, because I don't want to fake it. From inside the system, nobody can work out to a decimal what prices would have done, and that blindness is itself part of the indictment. But the direction is certain and the rough scale is visible. Output per hour of work is what the productivity figures measure. In Britain it grew near 2% a year before 2008. From 2009 to 2019 it grew between 0.7% and 1.3% a year, depending on which of the statisticians' two measures you take. So a 2% inflation year is plausibly a 3% to 4% transfer, give or take. The tools are improving faster than they did, and you won't see that in the official productivity figures yet. You can see the strength of technology's push indirectly, in how hard the system pulls against it. Between 2000 and early 2018 the world added roughly 185 trillion dollars of new debt to buy roughly 46 trillion of measured growth. What it takes to hold back that push keeps growing. Nobody borrows four to get one because things are going well.

One clean way to check the ruler is to measure in a unit nobody can expand. That's what pricing the world in bitcoin is for. Set aside whether you ever buy any. Use it as the fixed ruler for a moment and the picture inverts. The same family home that more than doubled in pounds costs far fewer bitcoin than it did, not smoothly, but unmistakably across cycles. The house didn't change. The units did. The whole of that fall is bitcoin getting stronger as people move their savings into it. So the comparison shows you a price moving with its unit, and it can't show you the size of the fall technology should have delivered. You don't need the fixed ruler to accept the argument, though. The baseline stands on its own. Productivity, not zero.

The usual replies

"Official statistics already adjust for quality, so the gains are counted."

Quality adjustments are made inside the same unit that's being expanded, so they can't reveal what prices would have done under a unit nobody can expand. And much of what you now get for free, maps, photos, calls, music, barely registers in the figures at all. GDP is the official measure of how much the economy produces. GDP counts paid transactions, not value, so when something becomes free it looks like shrinkage.

"If prices fell, people would stop spending and the economy would die."

You bought a phone knowing next year's would be better and cheaper. You'll buy a winter coat because you're cold now. People buy what's useful when they need it. What does get put off is the purchase that can wait, and sometimes that's a big one, like a car. What falls when people wait is the borrowing that would have paid for it, and life carries on. The fear, said plainly, is that you won't shop unless we take a slice of your savings each year.

"But my TV did get cheaper, so the market clearly passes savings on."

Yes, where technology outran the new money, prices fell anyway. That shows technology's push is real. The question is why the same push so rarely makes it as far as your rent. New credit is a large part of the reason, because it's channelled straight into the assets the rescues protect. Another part is that building is one of the things better tools haven't made cheaper.

"Wages rise with inflation, so it comes out in the wash."

Wages lag prices, and house and share prices outrun both. That ordering follows from where new money enters. Part of the saving does reach you as higher pay, late and unevenly. Against shop prices pay can catch up, late. Against house prices it hasn't. Over a year the wash looks small. Over a generation it's the difference between your parents buying a house on one salary and you renting on two.

Once the baseline moves, "price stability" stops being a neutral phrase. Stable prices in a world of improving technology mean the whole of the fall that technology would have delivered is being cancelled, and the saving is being collected before it can reach you as a lower price. And the paradox you live inside resolves. Almost everything is more efficient than it's ever been, and yet most people feel poorer. Both are true. The efficiency is real, and so is the collection.

## Sources

What this essay rests on, as checked on 2026-09-28.

1. "The official inflation number measures how much prices rose."
   Office for National Statistics, Consumer Price Inflation (includes all 3 indices – CPIH, CPI and RPI) QMI: "The CPIH, CPI and RPI all measure the average change from month to month in the prices of consumer goods and services purchased in the UK." https://www.ons.gov.uk/economy/inflationandpriceindices/methodologies/consumerpriceinflationincludesall3indicescpihcpiandrpiqmi

2. "Our money system is built to push prices up, so the government and central bank create new money and credit year after year, and the new money cancels the price falls you should have received."
   Bank of England, Quarterly Bulletin 2014 Q1, “Money creation in the modern economy”, 14 March 2014: "the majority of money in the modern economy is created by commercial banks making loans" and "The central bank can also affect the amount of money directly through purchasing assets or 'quantitative easing'." https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy
   Federal Reserve, FOMC Statement on Longer-Run Goals and Monetary Policy Strategy, 25 January 2012: "The Committee judges that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve's statutory mandate." https://www.federalreserve.gov/newsevents/pressreleases/monetary20120125c.htm
   European Central Bank, An overview of the ECB's monetary policy strategy, 2021: "at this juncture the Governing Council considers that price stability is best maintained by aiming for a two per cent inflation target over the medium term." https://www.ecb.europa.eu/mopo/strategy/strategy-review/ecb.strategyreview_monpol_strategy_overview.en.html

3. "Part of the saving reaches you as higher pay, late and unevenly."
   Pessoa and Van Reenen, Centre for Economic Performance Discussion Paper 1246, “Decoupling of Wage Growth and Productivity Growth? Myth and Reality”, October 2013: "In the UK net decoupling is basically zero: both wages and productivity rose by the same amount since 1972." UK, 1972 to 2010: "real productivity grew by 114 per cent" and "median real wages by 72 per cent". https://cep.lse.ac.uk/pubs/download/dp1246.pdf
   Feldstein, NBER Working Paper 13953, 2008: Productivity doubled and compensation per hour rose "at approximately the same annual rate" with a consistent deflator; United States, 1970 to 2006. https://www.nber.org/papers/w13953

4. "Wages are sticky, so at first the rate you're paid per hour holds while your weekly shop gets cheaper, and your savings buy more year after year without you having to chase returns to get it."
   Federal Reserve Bank of San Francisco, Wage Rigidity Meter, fourth quarter 2019: "annual wage changes of U.S. workers that have not changed jobs over the year" from "a matched Current Population Survey dataset"; wage rigidity 13.44% in the fourth quarter of 2019, with the histogram concentrated at zero. https://fraser.stlouisfed.org/title/wage-rigidity-meter-6771/fourth-quarter-2019-622141/fulltext

5. "Nearly every pound in existence was created as a loan, whether that's your mortgage, a company's borrowing, or the government's debt."
   Bank of England, Quarterly Bulletin 2014 Q1, “Money creation in the modern economy”, 14 March 2014: "the majority of money in the modern economy is created by commercial banks making loans". The Bank says the majority of money, not nearly every pound. https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy

6. "Between rescues, the government and central bank aim for prices to rise by about 2% a year, and they call that success."
   Bank of England, Inflation and the 2% target: "The Government sets us a 2% inflation target"; "The Government has set us a target of keeping inflation at 2%". https://www.bankofengland.co.uk/monetary-policy/inflation
   HM Treasury, Remit for the Monetary Policy Committee and the new inflation target, December 2003: "Announced in June 2003 and implemented on 10th December 2003, the Bank of England's inflation target was redefined from 2.5 percent measured by RPIX inflation to 2 percent measured by annual CPI inflation." https://www.bankofengland.co.uk/letter/2003/chancellor-letter-101203

7. "Central banks publish why they aim there."
   European Central Bank, An overview of the ECB's monetary policy strategy, 2021: "Three additional factors, which were present already in 2003 and which have remained broadly unchanged since then, call for a sufficient inflation buffer." https://www.ecb.europa.eu/mopo/strategy/strategy-review/ecb.strategyreview_monpol_strategy_overview.en.html
   Federal Reserve, Statement on Longer-Run Goals and Monetary Policy Strategy, as amended effective 27 August 2020: "the federal funds rate is likely to be constrained by its effective lower bound more frequently than in the past"; "as amended effective August 27, 2020". https://www.federalreserve.gov/monetarypolicy/monetary-policy-strategy-tools-and-communications-statement-on-longer-run-goals-monetary-policy-strategy-2019-2020.htm

8. "They want room to cut interest rates in a downturn, they know wages resist falling, and they say the official measure of prices overstates the rise."
   European Central Bank, An overview of the ECB's monetary policy strategy, 2021: "Three additional factors … call for a sufficient inflation buffer"; "taking account of downward nominal wage rigidities". The three are the effective lower bound, wage rigidity and "measurement bias in the HICP". https://www.ecb.europa.eu/mopo/strategy/strategy-review/ecb.strategyreview_monpol_strategy_overview.en.html
   Federal Reserve, Statement on Longer-Run Goals and Monetary Policy Strategy, as amended effective 27 August 2020: "the federal funds rate is likely to be constrained by its effective lower bound more frequently than in the past". https://www.federalreserve.gov/monetarypolicy/monetary-policy-strategy-tools-and-communications-statement-on-longer-run-goals-monetary-policy-strategy-2019-2020.htm

9. "It usually enters through banks and financial markets, so the first people to receive it buy houses, shares, and bonds before prices have adjusted."
   Bank of England, Explainer, “Quantitative easing”: “Instead, like other central banks, we can create money digitally in the form of ‘central bank reserves’. We use these reserves to buy bonds.” https://www.bankofengland.co.uk/monetary-policy/quantitative-easing

10. "It's in coffee, which is vastly cheaper to grow, ship, and roast than it was decades ago, yet costs more at the till."
   Office for National Statistics, RPI average price series, “Coffee: pure, instant, per 100g” (CDID CZNP, dataset MM23): “RPI: Ave price - Coffee: pure, instant, per 100g”, unit pence: 1967, 24; January 2025, 385. https://www.ons.gov.uk/economy/inflationandpriceindices/timeseries/cznp/mm23

11. "Before 2008, Britain's productivity grew near 2% a year."
   ONS, Component approach to measuring labour productivity, UK: 1997 to 2024, 17 September 2026: “Output per hour growth averaged 2.1% a year under the current approach and 2.0% a year under the component approach between 1997 and 2007”. https://www.ons.gov.uk/economy/economicoutputandproductivity/productivitymeasures/methodologies/componentapproachtomeasuringlabourproductivityuk1997to2024

12. "It gets worse, because the 2% target turns the measure into the goal."
   Federal Reserve, FAQ, "Why does the Federal Reserve aim for inflation of 2 percent over the longer run?", page last updated 22 August 2025: "the Federal Open Market Committee (FOMC) judges that inflation of 2 percent over the longer run, as measured by the annual change in the price index for personal consumption expenditures, is most consistent with the Federal Reserve's mandate" https://www.federalreserve.gov/faqs/economy_14400.htm

13. "The official basket is adjusted for quality too."
   U.S. Bureau of Labor Statistics, Quality Adjustment in the CPI: "The hedonic quality adjustment method removes any price differential attributed to a change in quality by adding or subtracting the estimated value of that change from the price of the old item." https://www.bls.gov/cpi/quality-adjustment/

14. "When a product gets better, the statisticians mark its price down, and the name for those changes is hedonic adjustments."
   BLS, Quality Adjustment in the CPI: "The hedonic quality adjustment method removes any price differential attributed to a change in quality by adding or subtracting the estimated value of that change from the price of the old item." https://www.bls.gov/cpi/quality-adjustment/

15. "The basket also underweights the things that dominate a household's life, housing above all."
   UK Statistics Authority, UK Consumer Price Statistics: A Review (the Johnson review), published 8 January 2015: "other than not accounting for owner occupiers' housing costs, the Consumer Prices Index (CPI) is a well constructed measure of inflation". The review names only owner occupiers' housing costs and otherwise calls the index well constructed, with nothing on other items being underweighted. https://uksa.statisticsauthority.gov.uk/reports-and-correspondence/reviews/uk-consumer-price-statistics-a-review/

16. "Televisions, computers, and software fell in price for decades."
   BLS, Consumer Price Index item indices for televisions, computers and software, 1997 to 2024: To August 2015: TVs -94%, computers -96%, software -63%. Software index 32.4 to 23.7 (December 1997=100); computers 43.4 to 33.7 (December 2016 to December 2025, December 2007=100); all items up 95.6% from December 1997. https://data.bls.gov/timeseries/CUUR0000SEEE01?output_view=data

17. "Average a telly that got cheaper against a rent that rose and you manufacture a mild-looking 2% that describes almost nobody's actual life."
   Office for National Statistics, CPI ANNUAL RATE 00: ALL ITEMS 2015=100 (series D7G7): UK CPI annual rate: 2000: 0.8%; 2001: 1.2%; 2020: 0.9%; 2021: 2.6%; 2022: 9.1%; 2023: 7.3%. The yearly rates for 2000 to 2019 average 2.05%, and US CPI-U averages about 2.2% over the same years. https://www.ons.gov.uk/economy/inflationandpriceindices/timeseries/d7g7/mm23

18. "Output per hour of work is what the productivity figures measure."
   U.S. Bureau of Labor Statistics, Productivity and Costs, Second Quarter 2026, Revised, 3 September 2026: "Labor productivity, or output per hour, is calculated by dividing an index of real output by an index of hours worked by all workers, including employees, proprietors, and unpaid family workers." https://www.bls.gov/news.release/prod2.nr0.htm

19. "In Britain it grew near 2% a year before 2008."
   Office for National Statistics, Component approach to measuring labour productivity, UK: 1997 to 2024, page dated 17 September 2026: "Output per hour growth averaged 2.1% a year under the current approach and 2.0% a year under the component approach between 1997 and 2007." https://www.ons.gov.uk/economy/economicoutputandproductivity/productivitymeasures/methodologies/componentapproachtomeasuringlabourproductivityuk1997to2024

20. "From 2009 to 2019 it grew between 0.7% and 1.3% a year, depending on which of the statisticians' two measures you take."
   Office for National Statistics, Component approach to measuring labour productivity, UK: 1997 to 2024, page dated 17 September 2026: "between 2009 and 2019, growth slowed to 0.7% a year under the current approach but 1.3% a year under the component approach" https://www.ons.gov.uk/economy/economicoutputandproductivity/productivitymeasures/methodologies/componentapproachtomeasuringlabourproductivityuk1997to2024

21. "And much of what you now get for free, maps, photos, calls, music, barely registers in the figures at all."
   Brynjolfsson, Collis and Eggers, Paper in the Proceedings of the National Academy of Sciences, volume 116, number 15, 2019: Digital goods generate consumer welfare "not captured in GDP". https://www.pnas.org/doi/10.1073/pnas.1815663116

22. "Against house prices it hasn't."
   Office for National Statistics, Housing affordability in England and Wales: 2023: "affordability ratios doubled in England from the start of the series in 1997 to 2007, stayed at a similar level until around 2013, and then broadly increased until 2023, with a spike in 2021"; ratio 8.3 in England in 2023. https://www.ons.gov.uk/peoplepopulationandcommunity/housing/bulletins/housingaffordabilityinenglandandwales/2023
   David Miles and Victoria Monro, Bank of England, Staff Working Paper No. 837, 20 December 2019, "UK house prices and three decades of decline in the risk-free real interest rate": "the rise in house prices relative to incomes between 1985 and 2018 can be more than accounted for by the substantial decline in the real risk-free interest rate observed over the period". https://www.bankofengland.co.uk/working-paper/2019/uk-house-prices-and-three-decades-of-decline-in-the-risk-free-real-interest-rate

23. "Almost everything is more efficient than it's ever been, and yet most people feel poorer."
   Gallup, Gallup poll, 16 to 28 September 2024, "Majority of Americans Feel Worse Off Than Four Years Ago": "More than half of Americans (52%) say they and their family are worse off today than they were four years ago". One country, one four-year window, not most people generally. https://news.gallup.com/poll/652250/majority-americans-feel-worse-off-four-years-ago.aspx


---

# A Pay Cut by Another Name
Date: 2026-07-15
Canonical: https://thenaturalstate.org/essays/a-pay-cut-by-another-name/

The number on your payslip [your nominal wage] went up. What that number buys [your real wage] mostly didn't, and in plenty of years it fell. And there's a second part to this almost nobody accounts for. Technology should have been cutting your cost of living every year you've been working. So the honest comparison is your rise against the falling prices you were supposed to get and never did.

Two forces are fighting over your payslip

Every year our tools improve, so the same goods and services take fewer people, less energy, and less time to produce [productivity]. That holds for everything technology has changed the making of. It doesn't hold for housing, care, teaching, or building. Competition pushes prices down toward what things cost to make. You can watch this force operate wherever money's influence is weakest. The phone in your pocket swallowed a camera, film, a map, a music collection, and long-distance calls, and the price of all that capability keeps collapsing. In a market with honest money [money nobody can create more of], nothing cancels that force, and pay that merely stays flat buys a little more life each year. That's a real pay rise that never needed a meeting with your boss.

Now the counterforce. Our money is created through lending, and most debt is fixed in pound terms. If prices broadly fall and nothing is done to stop it, the income that pays those debts falls too. Company revenues and tax receipts drop almost at once. Pay follows slowly, which is why falling prices would leave you better off for a while. The debts don't move at all. A mortgage, your employer's loan, and the government's borrowing are the same number of pounds whatever prices do. Whether the system can carry that depends on how prices fall.

A system loaded with debt can take a slow fall that comes with better tools. In that fall it's the cost of making things that drops, and pay drifts down slowly behind it, so the money to meet a fixed payment is still there. What it can't take is a sudden fall in the prices credit pushed up, houses first, because then the losses spread through the banks. In that fall it's the lending that has stopped, so incomes and the house fall together and at once, and the fixed payment is hit from both sides in the same year. Houses come first because people buy them with borrowed money. The debt takes a bigger bite of every income. And where the loan was written against a house, the house is worth less too, so the bank stands to lose more on that loan. So every time a sudden fall in those prices threatens, the system is rescued with new money, and the rescues keep getting bigger.

In between, the government and central bank create new money and credit to keep prices rising by 2% a year, and that rate is an explicit target. Central banks publish why they aim there. They want room to cut interest rates in a downturn, they know wages resist falling, and they say the official measure of prices overstates the rise. Those are the reasons they give, and the debts aren't among them. The debts show up in the rescues, not in the everyday 2%.

Why you're always at the back of the queue

New money, whether for the rescues or for the everyday 2%, doesn't reach everyone at once. It usually enters through bank loans and the central bank buying bonds, so it lifts house prices and shares first, pulls rents up close behind, and reaches wages last. That order has a name, the Cantillon effect. Whoever gets new money early spends it at old prices, and by the time it filters to you, prices have already moved. Wages move more slowly than the prices they have to cover, because pay is renegotiated maybe once a year. So your rise arrives after last year's price rises and often falls short of them, while next year's are already coming. You keep running to stand still. The rise that felt like progress was catching up, not getting ahead.

You can watch the counterforce at full speed too. When Malawi's currency was devalued by about 44% overnight, prices jumped across the board, and no one got a 44% pay rise to match. Your version runs at about 2% a year instead of 44% in one day, slow enough to pass as normal.

Why it feels worse than the official number

The inflation figure is an average over a basket of the things people buy. Cheap electronics pull the average down. The costs that dominate your actual life, housing above all, run hotter. Supply is tight, and where building is limited the rises run further. But what sets them off is borrowing getting cheaper and easier. Money that can't hold its value turns houses into savings accounts and the credit flows straight into them. Add the price rises hidden at the till. A price can rise while the sticker holds still, and a smaller portion, thinner quality, and slower service are three forms it takes. So a rise that "beats inflation" on paper can still lose to your lived costs. That's the gap between the statistics saying you're fine and the feeling at the till that you're not.

The part nobody counts

Even if your rise exactly matched your lived costs, you'd still have been short-changed, because the starting point is wrong. Don't measure inflation from zero. Measure it from where prices would have gone without interference. Say better tools would have cut prices by a point or two in a year, which is about how fast output per hour of work grows on the published figures. Instead, prices rose 2%. On those numbers, three or four points of what your pay could buy moved somewhere else that year, without a line item anywhere. You worked just as hard. Technology made things cheaper to produce. The saving never reached you as lower prices. Part of it reached you as higher pay, late and unevenly. The rest was absorbed by the expansion of the money supply, and it surfaced in the prices of assets owned by the people ahead of you in the queue. That's why the share of the house your landlord owns outright grew while your deposit target ran away from you. And why you're pushed to become an investor, taking risks you never wanted, just to stand still.

Reasons to think your rise was real

"Wages do catch up over time."

They chase, they don't catch. The lag is the point, and the shortfall compounds. A shortfall of a few percent a year, held for twenty years, can be the difference between owning a home and renting one from someone who got the new money first.

"Official real wages look fine."

The basket leaves out the price of the thing you're actually saving for, a home, while the things technology already cheapened pull the average down. Your life isn't the basket.

"We need 2% inflation or people stop spending."

You still bought a phone knowing next year's would be better and cheaper. People buy what's useful when they need it. What does get put off is the purchase that can wait, and sometimes that's a big one, like a car. What falls when people wait is the borrowing that would have paid for it, and life carries on. Falling prices from productivity are progress. The dangerous deflation is a debt collapse, and what makes it dangerous is the debt, not the cheaper goods.

Why your rise never felt like one

For a given payslip, inflation is wage deflation, because the same number of pounds buys less. They're the same event seen from two sides, and your pay rise is how the system passes its own price rises back through your payslip about a year late and calls it a reward. Across a year it's a real pay cut only where your rise is smaller than the price rises, and the wait between one pay review and the next makes that the case for a stretch of most years.

Once you see that a bigger number isn't a rise, the next question asks itself. What would pay look like measured in a unit nobody can create more of? That question is the door. Flat pay in a money that can't be diluted is a rising life, because the falling prices finally get through to you.

## Sources

What this essay rests on, as checked on 2026-10-02.

1. "What that number buys [your real wage] mostly didn't, and in plenty of years it fell."
   Office for National Statistics, Average weekly earnings in Great Britain, December 2022: Real regular pay fell 3.0% in April to June 2022, "the fastest decline since comparable records began in 2001", and 2.7% in the year to December 2022; earnings adjusted by CPI roughly flat, UK, 2008 to 2023. https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/employmentandemployeetypes/bulletins/averageweeklyearningsingreatbritain/december2022

2. "The phone in your pocket swallowed a camera, film, a map, a music collection, and long-distance calls, and the price of all that capability keeps collapsing."
   U.S. Bureau of Labor Statistics, The Economics Daily, "Long-term price trends for computers, TVs, and related items": "The price index for TVs decreased 94 percent from December 1997 to August 2015"; audio equipment −60 percent, photographic equipment and supplies −59 percent, same period; the BLS index is hedonically adjusted. https://www.bls.gov/opub/ted/2015/long-term-price-trends-for-computers-tvs-and-related-items.htm
   Office for National Statistics, CPI INDEX 09.1: Audio-visual equipment and related products, 2015=100 (series D7CS): Annual index (2015=100): 1997 565.5, 2005 249.4, 2010 144.9, 2015 100.0, 2020 91.9, 2023 95.3, 2024 96.5, 2025 95.7. https://www.ons.gov.uk/economy/inflationandpriceindices/timeseries/d7cs/mm23

3. "Our money is created through lending, and most debt is fixed in pound terms."
   Bank of England, Quarterly Bulletin 2014 Q1, "Money creation in the modern economy", 14 March 2014: "the majority of money in the modern economy is created by commercial banks making loans". The page does not print anything about debt being fixed in pound terms. https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy
   Deutsche Bundesbank, Monthly Report, April 2017, "The role of banks, non-banks and the central bank in the money creation process": Banks create deposits when they extend credit; repayment of the credit eliminates the deposits. Nothing on the page is about debt being fixed in pound terms. https://www.bundesbank.de/en/publications/search/the-role-of-banks-non-banks-and-the-centralbank-in-the-money-creation-process-654284

4. "In between, the government and central bank create new money and credit to keep prices rising by 2% a year, and that rate is an explicit target."
   Federal Reserve, FOMC statement on longer-run goals and monetary policy strategy, 25 January 2012: "inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve's statutory mandate"; dated January 25, 2012. https://www.federalreserve.gov/newsevents/pressreleases/monetary20120125c.htm
   European Central Bank, Press release, 8 July 2021, "ECB's Governing Council approves its new monetary policy strategy": "The Governing Council considers that price stability is best maintained by aiming for a 2% inflation target over the medium term. This target is symmetric." Announced 8 July 2021. https://www.ecb.europa.eu/press/pr/date/2021/html/ecb.pr210708~dc78cc4b0d.en.html
   Bank of England, Inflation and the 2% target: "The Government sets us a 2% inflation target"; "If we miss the inflation target by more than 1 percentage point either side of the target, we must tell the Government why." https://www.bankofengland.co.uk/monetary-policy/inflation

5. "They want room to cut interest rates in a downturn, they know wages resist falling, and they say the official measure of prices overstates the rise."
   ECB, An overview of the ECB's monetary policy strategy, 2021: "Three additional factors … call for a sufficient inflation buffer", among them room for "interest rate cuts", "measurement bias", and "taking account of downward nominal wage rigidities". https://www.ecb.europa.eu/mopo/strategy/strategy-review/ecb.strategyreview_monpol_strategy_overview.en.html
   Bank of Canada, Renewal of the Inflation-Control Target: Background Information, November 2011: "risks associated with the ZLB", "measurement bias in the CPI and downward nominal wage rigidities" are costs of a target below 2 per cent. The Bank sees neither of the last two as a significant impediment. https://www.bankofcanada.ca/wp-content/uploads/2011/11/background_nov11.pdf

6. "It usually enters through bank loans and the central bank buying bonds, so it lifts house prices and shares first, pulls rents up close behind, and reaches wages last."
   Bank of England, Explainer, "Quantitative easing": "we can create money digitally in the form of 'central bank reserves'. We use these reserves to buy bonds." "QE increases the price of financial assets other than bonds, such as equities." https://www.bankofengland.co.uk/monetary-policy/quantitative-easing

7. "That order has a name, the Cantillon effect."
   Cantillon, Essai sur la Nature du Commerce en Général (Essay on the Nature of Trade in General), 1755: "The Essai sur la Nature du Commerce en Général, written between 1730 and 1734, is now printed for the first time in England. It follows the French text of 1755." https://www.econlib.org/library/NPDBooks/Cantillon/cntNT.html

8. "Wages move more slowly than the prices they have to cover, because pay is renegotiated maybe once a year."
   Bils and Klenow, Some Evidence on the Importance of Sticky Prices: "We examine the frequency of price changes for 350 categories of goods and services covering about 70% of consumer spending, based on unpublished data from the BLS for 1995 to 1997 … half of prices lasting less than 4.3 months." https://www.nber.org/papers/w9069

9. "So your rise arrives after last year's price rises and often falls short of them, while next year's are already coming."
   U.S. Bureau of Labor Statistics, Average hourly earnings of all employees, 1982-1984 dollars, total private, seasonally adjusted, 12-month percent change: 12-month percent change in real average hourly earnings: negative every month from April 2021 (-3.4 percent) through April 2023 (-0.4), first positive May 2023 (+0.2). https://data.bls.gov/timeseries/CES0500000013?output_view=pct_12mths

10. "When Malawi's currency was devalued by about 44% overnight, prices jumped across the board, and no one got a 44% pay rise to match."
   Reserve Bank of Malawi, Press Release on Foreign Exchange Situation in the Country, 8 November 2023: "the exchange rate of the Malawi Kwacha has been adjusted from the selling rate of MWK1180.29 to a selling rate of MWK1700.00 to the US Dollar": a 44 percent devaluation, with effect from 9th November, 2023. https://www.scotland-malawipartnership.org/assets/documents/PRESS-RELEASE-ON-FOREIGN-EXCHANGE-SITUATION-IN-THE-COUNTRY.pdf

11. "Cheap electronics pull the average down."
   U.S. Bureau of Labor Statistics, The Economics Daily, “Long-term price trends for computers, TVs, and related items”: "The price index for TVs decreased 94 percent from December 1997 to August 2015"; "audio equipment (−60 percent)"; "photographic equipment and supplies (−59 percent)". https://www.bls.gov/opub/ted/2015/long-term-price-trends-for-computers-tvs-and-related-items.htm
   Office for National Statistics, CPI INDEX 09.1: Audio-visual equipment and related products, 2015=100 (series D7CS): Annual index (2015=100): 400.0 in 2000, 249.4 in 2005, 144.9 in 2010, 100.0 in 2015, 96.5 in 2024. https://www.ons.gov.uk/economy/inflationandpriceindices/timeseries/d7cs/mm23

12. "Supply is tight, and where building is limited the rises run further."
   Hilber and Vermeulen, “The extraordinarily rigid planning system is the main reason homes in England are unaffordable”: "In our estimates, house prices would have risen by about 100 percent less in real terms between 1974 and 2008 if, hypothetically, all regulatory constraints were removed." https://blogs.lse.ac.uk/politicsandpolicy/three-reasons-homes-in-england-are-unaffordable/
   Edward Glaeser and Joseph Gyourko, Journal of Economic Perspectives, Winter 2018, “The Economic Implications of Housing Supply”: "The gap between price and production cost can be understood as a regulatory tax"; "the implicit tax on development created by housing regulations is higher in many areas than any reasonable negative externalities associated with new construction". https://www.aeaweb.org/articles?id=10.1257%2Fjep.32.1.3

13. "But what sets them off is borrowing getting cheaper and easier."
   David Miles and Victoria Monro, Bank of England, Staff Working Paper No. 837, 20 December 2019, “UK house prices and three decades of decline in the risk-free real interest rate”: "the rise in house prices relative to incomes between 1985 and 2018 can be more than accounted for by the substantial decline in the real risk-free interest rate observed over the period". https://www.bankofengland.co.uk/working-paper/2019/uk-house-prices-and-three-decades-of-decline-in-the-risk-free-real-interest-rate
   Mian and Sufi, Quarterly Journal of Economics article, 2009: Mortgage supply expansion "explains a large fraction of recent U.S. house price appreciation" in subprime ZIP codes. https://academic.oup.com/qje/article-abstract/124/4/1449/1917185
   Justiniano, Primiceri and Tambalotti, National Bureau of Economic Research working paper, 2019: Looser lending constraints were "the key force" behind the boom. https://www.nber.org/papers/w20874

14. "Say better tools would have cut prices by a point or two in a year, which is about how fast output per hour of work grows on the published figures."
   Office for National Statistics, Trends in UK business dynamism and productivity: 2023, 11 December 2023: Gross Value Added per hour worked grew "at an average rate of 2.2% a year between 1971 and 2007" and "between 2011 and 2022 this growth rate has averaged 0.6% a year". No two-decade average is stated. https://www.ons.gov.uk/economy/economicoutputandproductivity/productivitymeasures/bulletins/trendsinukbusinessdynamismandproductivity/2023

15. "Part of it reached you as higher pay, late and unevenly."
   Stansbury and Summers, National Bureau of Economic Research working paper, 2017, “Productivity and Pay: Is the link broken?”: "over 1973-2016, one percentage point higher productivity growth has been associated with 0.7 to 1 percentage points higher median and average compensation growth"; "other factors orthogonal to productivity have been acting to suppress typical compensation". https://www.nber.org/papers/w24165

16. "The basket leaves out the price of the thing you're actually saving for, a home, while the things technology already cheapened pull the average down."
   Office for National Statistics, Consumer Price Inflation (includes all 3 indices – CPIH, CPI and RPI) QMI: "CPIH uses an approach called rental equivalence to measure OOH"; "Rental equivalence uses the rent paid for an equivalent house as a proxy for the costs faced by an owner occupier"; "OOH does not seek to capture increases in house prices." https://www.ons.gov.uk/economy/inflationandpriceindices/methodologies/consumerpriceinflationincludesall3indicescpihcpiandrpiqmi
   ONS, Private rents and owner-occupier housing aggregates in consumer prices: "OOH measures do not seek to capture increases in house prices. The inclusion of an asset price and therefore capital gains are generally defined as being out of scope of any kind of consumer price index." https://www.ons.gov.uk/economy/inflationandpriceindices/methodologies/privaterentsandowneroccupierhousingaggregatesinconsumerprices

17. "The dangerous deflation is a debt collapse, and what makes it dangerous is the debt, not the cheaper goods."
   Borio, Erdem, Filardo and Hofmann, BIS Quarterly Review, March 2015, "The costs of deflations: a historical perspective": "We test the historical link between output growth and deflation in a sample covering 140 years for up to 38 economies. The evidence suggests that this link is weak and derives largely from the Great Depression". https://www.bis.org/publ/qtrpdf/r_qt1503e.htm
   Fisher, Econometrica, October 1933, "The Debt-Deflation Theory of Great Depressions": "Debt liquidation leads to distress selling and to Contraction of the money supply, as bank loans are paid off, and to a slowing down of velocity of circulation." https://www.econometricsociety.org/publications/econometrica/1933/10/01/debt-deflation-theory-great-depressions


---

# The Guaranteed Loss
Date: 2026-07-15
Canonical: https://thenaturalstate.org/essays/the-guaranteed-loss/

Saving in pounds no longer does what savers believe it does. You've seen it yourself. The safest account in the country paid 2% while lived costs rose 6%. Something is off, and the clearest way to see it is to write down the actual deal on offer. The system does make a saver a promise, and it's a different promise from the one people think they've been given.

The stated promise

The Bank of England targets 2% inflation a year, and hitting that target is defined as success. That 2% is not a rate of interest. It is a target for how fast the pound loses value. So the official promise to anyone holding pounds is that the unit you save in will buy about 2% less every year, on purpose, forever. In twenty years, your saved £100 buys about two thirds of what it buys today. In thirty five years it buys about half. That's the promise kept perfectly, with no crisis and no mistakes.

Then look at the interest you're paid to accept that. Most of the time, the interest on cash savings falls short of inflation, especially after tax. When the return on the "safest" home for your money is below the rate prices rise, your loss is guaranteed in real terms, which means in what the money actually buys, not the number on the statement. That arrangement has a name, financial repression. It means holding interest rates below inflation so that debts fixed in pounds quietly shrink in real terms and savers absorb the difference. And the biggest debtor in the country is the government itself, so the biggest beneficiary of your slow loss is the borrower running the system. Even in the windows where savings interest briefly tops the official inflation number, the gain is small and tax often takes part of it. And rates that high can't persist, because a system carrying this much debt breaks under them and policy has to retreat.

The hidden promise, which is bigger

The 2% understates the transfer, because the honest baseline isn't zero. Technology keeps making things cheaper to produce. Better tools, better software, more automation, the same goods from fewer inputs. Under a money nobody can add to, those gains would show up as prices drifting down, which means a saver would get richer by doing nothing risky at all. That holds for everything technology has changed the making of. It doesn't hold for housing, care, teaching, or building. So the wedge between what a saver should get and what a saver is promised is two points plus whatever prices would have fallen. If better tools would have cut prices by a point or two a year, which is about how fast output per hour of work grows on the published figures, the true gap is three or four points a year even when the target is hit, compounding against you. Nobody can measure the exact number, but the direction is certain. Flat prices already hide a tax on progress. Rising prices hide a bigger one.

So the full promise, spelled out as if the system said it aloud, reads, "Hold your working life in our unit. We will reduce what it buys by about 2% a year deliberately, and by more whenever the structure is stressed. We will also keep the price falls that technology would have handed you. If you want to stand still, go and take risk."

Why it has to be this way

This isn't a moral failure of particular central bankers. It's structural. Nearly every pound is loaned into existence. A bank makes a loan by creating new money in an account, so if every loan were repaid, almost no money would be left. Those debts are fixed in pounds. A system built on that much debt can take a slow fall that comes with better tools. In that fall it's the cost of making things that drops, and pay drifts down slowly behind it, so the money to meet a fixed payment is still there. What it can't take is a sudden fall in the prices credit pushed up, houses first, because then the losses spread through the banks. In that fall it's the lending that has stopped, so incomes and the house fall together and at once, and the fixed payment is hit from both sides in the same year. Houses come first because people buy them with borrowed money. The debt takes a bigger bite of every income. And where the loan was written against a house, the house is worth less too, so the bank stands to lose more on that loan. So every time a sudden fall in those prices threatens, the system is rescued with new money, and the rescues keep getting bigger.

In between, policy targets rising prices of about 2% a year, forever. Central banks publish why they aim there. They want room to cut interest rates in a downturn, they know wages resist falling, and they say the official measure of prices overstates the rise. Those are the reasons they give, and the debts aren't among them. The debts show up in the rescues, not in the everyday 2%. Getting there takes new money that first cancels the fall better tools would have delivered, and then adds two on top. And pushing prices up is the same act as pushing down what savers' money buys. They're one motion seen from two sides. In this design the saver pays.

What the promise does to people

Once you see the deal, modern financial behaviour stops looking strange.

Everyone became an investor, not from greed but from necessity. When the unit leaks, standing still takes risk. A bus driver has to think like a fund manager to protect thirty years of work. The nearest thing to an exception is a government bond whose payments rise with a price index, if you buy it when it offers a return above inflation. Reaching it means lending to the government until a fixed date, often paying tax on the income, and taking whatever that index does. In 2030 the way that index is worked out changes, to a method that has given a lower number in most years. And the game is tilted, because new money reaches people who already own property and shares and large borrowers first and wage earners last, so the people forced to play latest start furthest behind.

Houses became savings accounts. A large slice of a house's price is a savings premium on top of its shelter value. That's the extra price paid because people store wealth in property when money can't hold it. Which is also why that "safe" house is hostage to the next rate decision, because the buyers who set those prices borrowed to pay them.

And when enough of that forced risk-taking blows up at once, the largest players get rescued with newly created money. 2008 and 2020 each needed a bigger dose than the crisis before. Rescue after rescue runs the same transfer, and savers and wage earners are the ones who pay for it.

So, is saving pointless?

Saving is one thing. The vehicle you save in is another.

Saving, storing work you've already done so you can use it later, is healthy behaviour in an economy. Buffers, patience, low stress, long-term projects, all of it starts with savings. The system broke the vehicle, not the habit, and then taught everyone that the fault is theirs for saving at all.

It helps to split money's two jobs. For spending across weeks and months, pounds still work fine, and holding cash for near-term needs makes sense in any system. The job the pound fails at, by design, is the long one, carrying value across years and decades.

And in a money nobody can add to, the natural state comes through. Technology keeps cutting what things cost to make, so savings buy more over the years, and patience is rewarded instead of taxed. You don't need to outrun anything or become a speculator. In this framework, bitcoin is the unit where the deal inverts, as long as it stays decentralised and secure. Measured in it, the prices of many things have fallen from one halving date to the next. Those are the dates when the supply of new coins is cut in half, set by the code and not picked after the fact. Pick a window at random, though, and the line can run either way. Most of that fall so far is bitcoin gaining ground as a new money, a repricing that happens once. It isn't evidence of what the deal does for someone buying after it. Over the long run, what makes the deal invert is the falling cost of making things, and that part keeps going once the repricing is done. Whether and how far you act on that is yours to decide. But saving was never the broken part.

What savers are usually told

"Without inflation nobody would spend, and the economy would stall."

People buy things because they're useful now. You buy a coat because you're cold. People still queue for a new phone even though next year's will be better. They still buy a television even though next year's will be cheaper. What falling prices trim is waste. And the argument gives itself away. "Unless we take a slice of your savings each year, you won't buy." That's the case for the 2%, made from the saver's side, and it concedes this essay's point. The target works by making your savings worth less if you hold them.

"Savers should just invest like everyone else."

Some do well. But risk went from optional to compulsory, and the compulsory game favours whoever receives the new money first. Then, when it fails at the top, the losses are covered publicly while small failures are not. A system that punishes prudence and rescues size is teaching exactly the wrong lesson, and calling it choice.

"Wages rise with inflation, so it washes out."

Prices move first. Pay follows later, unevenly, and the lag is where the transfer happens. The lost ground rarely gets made up.

"My house did my saving for me."

In pounds, yes. But you still need somewhere to live, its taxes and upkeep rise on the same tide, and most of the gain is the money weakening rather than the house improving. Priced in a hard unit [a money nobody can add to], the same house has cost less and less over the last decade, though the line is jagged rather than smooth. The whole of that fall is the hard unit gaining ground. The house itself didn't lose ground. It rose in pounds, and the hard unit rose faster.

The system's promise to a saver is that you lose slowly, or take risk you didn't choose. The natural promise of a productive economy is the opposite. Under a money nobody can add to, hold on and most things get cheaper.

## Sources

What this essay rests on, as checked on 2026-10-03.

1. "The Bank of England targets 2% inflation a year, and hitting that target is defined as success."
   Bank of England, Inflation and the 2% target: "The Government has set us a target of keeping inflation at 2%"; "If we miss the inflation target by more than 1 percentage point either side of the target, we must tell the Government why." https://www.bankofengland.co.uk/monetary-policy/inflation
   HM Treasury, Chancellor of the Exchequer, Letter from the Chancellor of the Exchequer to the Governor of the Bank of England, 26 November 2025: "I hereby re-confirm the inflation target as 2 per cent as measured by the 12-month increase in the Consumer Prices Index (CPI). The inflation target of 2 per cent is symmetric and applies at all times." https://www.gov.uk/government/publications/monetary-policy-remit-budget-2025/letter-from-chancellor-of-the-exchequer-to-govenor-of-the-bank-of-england

2. "If better tools would have cut prices by a point or two a year, which is about how fast output per hour of work grows on the published figures, the true gap is three or four points a year even when the target is hit, compounding against you."
   U.S. Bureau of Labor Statistics, series OPHNFB on FRED, Nonfarm Business Sector: Labor Productivity (Output per Hour) for All Workers (OPHNFB), index 2017=100: Annual index 2017=100: 72.455 in 2000, 86.758 in 2007, 103.636 in 2019, which is 2.6% a year 2000 to 2007 and 1.5% a year 2007 to 2019. The earlier window runs above a point or two. https://fred.stlouisfed.org/series/OPHNFB
   Office for National Statistics, UK Whole Economy: Output per hour worked, seasonally adjusted, index 2023 = 100 (series LZVB), released 18 August 2026: Index 2023=100: 92.6 in 2008, 100.0 in 2023, about 0.6% a year. That UK growth of about 0.6% a year over 2008 to 2023 is slower than a point or two a year. https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/labourproductivity/timeseries/lzvb/prdy

3. "Nearly every pound is loaned into existence."
   Bank of England, Quarterly Bulletin 2014 Q1, “Money creation in the modern economy”, published 14 March 2014: "the majority of money in the modern economy is created by commercial banks making loans." The source says the majority of money, not nearly every pound. https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy

4. "A bank makes a loan by creating new money in an account, so if every loan were repaid, almost no money would be left."
   Bank of England, Quarterly Bulletin 2014 Q1, “Money creation in the modern economy”, published 14 March 2014: "the majority of money in the modern economy is created by commercial banks making loans." https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy

5. "In between, policy targets rising prices of about 2% a year, forever."
   Federal Reserve, Statement on Longer-Run Goals and Monetary Policy Strategy, 25 January 2012: "The Committee judges that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve's statutory mandate." https://www.federalreserve.gov/newsevents/pressreleases/monetary20120125c.htm
   European Central Bank, Press release, “ECB's Governing Council approves its new monetary policy strategy”, 8 July 2021: "The Governing Council considers that price stability is best maintained by aiming for a 2% inflation target over the medium term." https://www.ecb.europa.eu/press/pr/date/2021/html/ecb.pr210708~dc78cc4b0d.en.html
   HM Treasury, Remit for the Monetary Policy Committee and the new inflation target, December 2003: "Announced in June 2003 and implemented on 10th December 2003, the Bank of England's inflation target was redefined from 2.5 percent measured by RPIX inflation to 2 percent measured by annual CPI inflation." https://www.bankofengland.co.uk/letter/2003/chancellor-letter-101203

6. "In 2030 the way that index is worked out changes, to a method that has given a lower number in most years."
   UK Statistics Authority and HM Treasury, Response to the joint consultation on reforming the methodology of the Retail Prices Index, 25 November 2020: "bringing the methods and data sources of the Consumer Prices Index including owner occupier housing costs (CPIH) into it"; the change to be made "in February 2030". The page prints no comparison of the two methods' levels. https://uksa.statisticsauthority.gov.uk/news/response-to-the-joint-consultation-on-reforming-the-methodology-of-the-retail-prices-index

7. "2008 and 2020 each needed a bigger dose than the crisis before."
   United States Congress, Emergency Economic Stabilization Act of 2008, Public Law 110-343, enacted 3 October 2008: "An Act To provide authority for the Federal Government to purchase and insure certain types of troubled assets"; enacted October 3, 2008; authority to buy up to $700 billion of troubled assets. https://www.congress.gov/110/plaws/publ343/PLAW-110publ343.htm
   Congressional Budget Office, H.R. 748, CARES Act, Public Law 116-136, March 2020: "The CARES Act appropriates roughly $2.2 trillion of spending, tax breaks, loans, and other resources over the next decade." Act enacted March 2020. https://www.cbo.gov/publication/56334

8. "Those are the dates when the supply of new coins is cut in half, set by the code and not picked after the fact."
   Bitcoin Core (bitcoin/bitcoin repository), Source file src/validation.cpp, master branch: "CAmount nSubsidy = 50 * COIN; // Subsidy is cut in half every 210,000 blocks which will occur approximately every 4 years. nSubsidy >>= halvings;" The file sets the interval in blocks, roughly four years, and prints no calendar dates. https://github.com/bitcoin/bitcoin/blob/master/src/validation.cpp

9. "They still buy a television even though next year's will be cheaper."
   U.S. Bureau of Labor Statistics, The Economics Daily, “Long-term price trends for computers, TVs, and related items”: "The price index for TVs decreased 94 percent from December 1997 to August 2015." https://www.bls.gov/opub/ted/2015/long-term-price-trends-for-computers-tvs-and-related-items.htm
   Nielsen, “More than Half the Homes in U.S. Have Three or More TVs”, July 2009: "in 2009 the average American home had 2.86 TV sets, which is roughly 18% higher than in 2000 (2.43 sets per home), and 43% higher than in 1990 (2.0 sets)" https://www.nielsen.com/insights/2009/more-than-half-the-homes-in-us-have-three-or-more-tvs/

10. "Pay follows later, unevenly, and the lag is where the transfer happens."
   International Monetary Fund, World Economic Outlook, October 2022, Chapter 2: Wage Dynamics Post–COVID-19 and Wage-Price Spiral Risks: "rising inflation, positive nominal wage growth, declining real wages, and declining unemployment characterized the macroeconomic situation in 2021 in many economies"; "wage growth has generally stayed below inflation so far" https://www.imf.org/-/media/files/publications/weo/2022/october/english/ch2.pdf

11. "But you still need somewhere to live, its taxes and upkeep rise on the same tide, and most of the gain is the money weakening rather than the house improving."
   HM Revenue and Customs, Stamp Duty Land Tax: Residential property rates, bands as at April 2025: "You usually pay Stamp Duty Land Tax (SDLT) on increasing portions of the property price when you buy residential property"; zero up to £125,000, then 2%, 5%, 10% and 12% on higher portions of the price. https://www.gov.uk/stamp-duty-land-tax/residential-property-rates


---

# Who Gets the New Money First
Date: 2026-07-15
Canonical: https://thenaturalstate.org/essays/who-gets-the-new-money-first/

People keep asking where all the printed money goes.

The way it's normally asked hides the answer. New money doesn't get used up like fuel. Every new pound that exists is in someone's hands right now. So there are two questions underneath that one. Who gets to spend the new money first? And whose pounds quietly shrink to pay for it? Answer both of those and you've answered it.

New money enters the economy through a few specific doors, mostly bank lending and central bank purchases of bonds. Because of where those doors are, the money lands in financial markets and property first. It pushes up the prices of the things people use to store wealth, houses and shares above all. Only later, after it has passed through many hands, does it reach wages, and by then prices have already moved. So the printed money goes into asset prices, and the value it carries comes out of wages and cash savings. It's a transfer, and nobody posts you the bill. The bill arrives as prices.

How the money is actually born

Almost none of it is notes from a printing press. It's created in two main ways, and the door it comes in through decides who gets it first.

Banks create money when they lend. When a bank gives you a £300,000 mortgage, it doesn't move some saver's money into your account. It creates a brand new deposit that didn't exist the day before. Most money in the economy was born this way, and in Britain lending against houses is the largest single kind of bank lending, the door that stays open in every year. That's your first clue about where it all goes.

In a crisis, and well outside one, the central bank creates money directly. That's quantitative easing, the central bank creating new electronic money and using it to buy bonds. The Bank of England creates the money and buys government bonds from big investors such as pension funds and insurers. Those investors now hold cash they didn't plan to hold, and from 2009 to 2021 it paid them almost nothing. The first thing that cash buys is corporate bonds [loans to companies]. And when the Bank's buying leaves government bonds paying less, a company's future profits and a flat's future rents are worth more today, because the safe return that money could get instead has fallen. So share and property prices rise over the same years. The companies that sold those bonds have borrowed the cash cheaply, and much of it goes on buying back their own shares or buying rivals. So the new money still reaches shares, one hand later. The new money's first stop is financial markets because that's where it was delivered.

There's a third door, government spending funded by borrowing that the central bank then buys up. Furlough and the Covid support went through it. In crisis years more new money comes through that door than through bank lending, and in 2020 and 2021 far more. Of the three, it's the one that points at ordinary spending. It's why 2021 and 2022 finally saw shop prices jump after a decade in which people kept asking why all the money creation hadn't caused inflation. It had. When the new money went to markets, asset prices rose. When it finally went to households, food and energy prices rose. Blocked supply chains, and then the price of gas, pushed in the same direction.

Why first in line wins

Whoever receives new money first gets to spend it at today's prices. This has a name, the Cantillon effect. The people closest to new money benefit at the expense of the people furthest from it. It's the heart of the question. The order of arrival decides who wins.

The bank funds itself at the Bank of England's rate or cheaper and buys assets at today's prices, and the money it creates when it lends goes into a house at today's price. The pension fund that sold its bonds buys corporate bonds at today's prices. The company that sold those bonds buys a competitor, or buys back its own shares. Each hand the money passes through bids prices a little higher. The effect takes roughly a year to eighteen months to show up, and it shows up in whatever the money is being spent on.

In an ordinary year most of the new money is being spent on assets, so asset prices move first. Wages are behind all of it, so by the time a receptionist's pay review comes round, her rent, her food, and her energy have already gone up. She gets a 3% rise and an 8% rise in the cost of living. Nobody took a pound out of her account. The transfer happened entirely through prices. The decision behind it is on the record, the Bank of England has published an estimate of who gained from its own bond buying, and the official statisticians publish how much faster prices rose for poorer households when food and energy led the rise. But no record joins those halves or calls the result a transfer, so the person who paid is never shown a bill.

Rising prices and falling real wages are the same event seen from two seats. The receptionist's wage fell behind because the new money reaches wages late. The gap is where the new money's buying power came from.

Where it settles

Follow the chain far enough and the money pools in whatever people use to store wealth. Houses most of all. Banks lend new money into property, and when cash is losing value, people park their wealth in things that are hard to make more of. So a house takes on a second job. It's shelter, plus a savings account. The extra price it carries for that second job is called a monetary premium, the part of its price that comes from people using it to store value rather than to live in it. Decades of money creation are stored in that premium. It's a big part of why a house in Britain costs a far higher multiple of a salary than it did a generation ago, even though technology has made most goods cheaper to make.

Between 2000 and early 2018 the world added roughly 185 trillion dollars of new debt and got roughly 46 trillion dollars of growth for it. That's about four dollars of new debt for every dollar of new growth, and each new dollar of debt produces less new output than the one before. The gap went into raising the price of things that already existed, houses that were already built, shares in companies that already traded, and into paying the interest on the debt from earlier rounds.

Part of the state's funding runs through the third door too. In 2019 every American corporation together earned about 2.4 trillion dollars in profit before tax, while in 2020 alone America's stock of money grew by about 3.7 trillion dollars. You could have taxed away every dollar of every corporate profit and not matched the newly created money. In Britain's crisis years the gap between what the state spent and what it raised in tax was bridged mainly by new money, because the Bank of England bought government bonds on a scale close to the whole of that gap. Across the years since 2009 most of the gap was bridged by selling debt to savers, and the Bank has been selling its holdings back since 2022. The part bridged by new money is paid for through prices, and it passes no vote. The part bridged by borrowing is paid for through prices too, in part. That's because for most of those years the interest that the lenders were paid was held below the rate prices rose, so the savers who lent were paid back in pounds that bought less.

Since the question is where it all goes, some of it goes abroad. This is strongest for the dollar, because the world holds and trades in it. The world's demand for dollars spreads the cost of new dollars across the savings held in them, so the pressure shows up in weaker countries' currencies and import bills before it shows up in American shop prices. Part of the bill for a reserve currency's money creation is paid by people who never saw any of the money.

What the order of arrival explains

Inequality stops looking like a fault in the system and starts looking like the delivery route. The system moves buying power from late receivers to early receivers every round. Skill matters, but the gap between asset owners and wage earners widens on its own, by place in the line. The order of arrival also explains why so many people now feel forced to invest. When money loses value year after year, a saver has to take risk just to stand still. And each crisis needs a bigger dose than the last. Technology keeps pushing down what it takes to make things, and the debt piles higher with every round. That debt is fixed in pounds, and what it can't take is a sudden fall in the prices credit pushed up, houses first. So every time a sudden fall in the prices credit pushed up threatens, the system is rescued with new money, and the rescues keep getting bigger.

What people say back

"It paid for furlough and hospitals." Some of it reached people directly and it mattered. In 2020 and 2021 more new money came through the government's door than through bank lending. In an ordinary year the door that stays open is lending against houses, and the money it creates goes into houses first. And even the part that reached households was paid for by shrinking every existing pound rather than by a tax anyone voted for.

"Wages catch up in the end." Wages arrive late because of where the doors are, and that lag is the transfer. To catch up to prices that already moved is to arrive after the race has finished, and arriving later seldom restores what the gap took.

"My house went up, so I won." Against a wage earner, you did, and that gain is real. What you can't easily do is spend it. You'd have to sell and leave the housing market altogether, because you still need somewhere to live and the house you'd move to inflated with it. Measured in houses you're standing still, and your children buy in at the higher multiple of a salary that your gain is made of. The number rose. What you can spend, while you still need a roof, mostly didn't.

"Then tax the rich and claw it back." That attacks the symptom while the tap stays open. As long as new money keeps entering through assets first, asset prices outrun taxes. Whatever a tax takes from the people who own assets, the next round of new money lifts their assets again and pushes up the prices everyone else pays, so the gap between asset owners and wage earners is rebuilt. That's true however the tax is designed, because a tax attacks the effect, and the new money is the mechanism that keeps widening the gap.

The ruler moves too

The reason this is so hard to see is that we measure everything in the unit being created. The official measure of prices can tell you roughly how much the pound stretched against the goods it prices. What it can't show you is how far those goods would have fallen under a unit nobody can expand, because it does all its sums in the same stretched pound. Flip the measurement to something nobody can make more of at will, and the picture turns upside down. Bitcoin is the first money that lets you flip it. Priced that way, and read across whole cycles of bitcoin's own swings rather than year to year, the trend in houses and shares has been down for years. So the printed money went into the numbers. The value went from wages and savings to whoever stood closest to the door. And "everything going up" was mostly the ruler shrinking.

## Sources

What this essay rests on, as checked on 2026-10-16.

1. "New money enters the economy through a few specific doors, mostly bank lending and central bank purchases of bonds."
   Bank of England, Quarterly Bulletin 2014 Q1, McLeay, Radia and Thomas, “Money creation in the modern economy”, 14 March 2014: "Just as taking out a new loan creates money, the repayment of bank loans destroys money." "The central bank can also affect the amount of money directly through purchasing assets or 'quantitative easing'." https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy
   Bank of England, Explainer, “What is quantitative easing?”: "like other central banks, we can create money digitally in the form of 'central bank reserves'. We use these reserves to buy bonds." https://www.bankofengland.co.uk/monetary-policy/quantitative-easing

2. "It pushes up the prices of the things people use to store wealth, houses and shares above all."
   Bank of England, Explainer, “What is quantitative easing?”: "When we buy bonds, their price tends to increase"; "QE increases the price of financial assets other than bonds, such as equities." https://www.bankofengland.co.uk/monetary-policy/quantitative-easing
   Bank of England, Quarterly Bulletin 2012 Q3, “The distributional effects of asset purchases”, 12 July 2012: "By pushing up a range of asset prices, asset purchases have boosted the value of households' financial wealth held outside pension funds." https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2012/the-distributional-effects-of-asset-purchases.pdf
   Miles and Monro, Bank of England Staff Working Paper No. 837, “UK house prices and three decades of decline in the risk-free real interest rate”, 20 December 2019: "the rise in house prices relative to incomes between 1985 and 2018 can be more than accounted for by the substantial decline in the real risk-free interest rate observed over the period" https://www.bankofengland.co.uk/working-paper/2019/uk-house-prices-and-three-decades-of-decline-in-the-risk-free-real-interest-rate

3. "Almost none of it is notes from a printing press."
   Bank of England, Quarterly Bulletin 2014 Q1, “Money creation in the modern economy”: "97% of the money held by the public is in the form of deposits with banks"; "the majority of money in the modern economy is created by commercial banks making loans". https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy

4. "It's created in two main ways, and the door it comes in through decides who gets it first."
   Bank of England, Quarterly Bulletin 2014 Q1, “Money creation in the modern economy”: "the majority of money in the modern economy is created by commercial banks making loans"; "The central bank can also affect the amount of money directly through purchasing assets or 'quantitative easing'." https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy
   Deutsche Bundesbank, Monthly Report, April 2017, “The role of banks, non-banks and the central bank in the money creation process”: Banks create deposits when they extend credit, and repayment eliminates deposits. https://www.bundesbank.de/en/publications/search/the-role-of-banks-non-banks-and-the-centralbank-in-the-money-creation-process-654284

5. "Banks create money when they lend."
   Bank of England, Quarterly Bulletin 2014 Q1, “Money creation in the modern economy”, published 14 March 2014: “the majority of money in the modern economy is created by commercial banks making loans” https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy
   Deutsche Bundesbank, Monthly Report, April 2017, on the role of banks, non-banks and the central bank in the money creation process: Banks create deposits when they extend credit; repayment of the credit eliminates the deposits. https://www.bundesbank.de/en/publications/search/the-role-of-banks-non-banks-and-the-centralbank-in-the-money-creation-process-654284

6. "Most money in the economy was born this way, and in Britain lending against houses is the largest single kind of bank lending, the door that stays open in every year."
   Bank of England, Quarterly Bulletin 2014 Q1, “Money creation in the modern economy”, published 14 March 2014: “the majority of money in the modern economy is created by commercial banks making loans”; the article also prints “97% of the money held by the public is in the form of deposits with banks”. https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy

7. "In a crisis, and well outside one, the central bank creates money directly."
   Bank of England (McLeay, Radia and Thomas), Quarterly Bulletin 2014 Q1, “Money creation in the modern economy”, published 14 March 2014: “The central bank can also affect the amount of money directly through purchasing assets or 'quantitative easing'.” https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy

8. "That's quantitative easing, the central bank creating new electronic money and using it to buy bonds."
   Bank of England, Quantitative easing explainer page: “like other central banks, we can create money digitally in the form of 'central bank reserves'. We use these reserves to buy bonds.” Purchases totalled £895 billion: £875 billion gilts plus £20 billion corporate bonds. https://www.bankofengland.co.uk/monetary-policy/quantitative-easing

9. "Those investors now hold cash they didn't plan to hold, and from 2009 to 2021 it paid them almost nothing."
   Bank of England, Bank Rate history and data, Bank of England Database: Bank Rate: 0.50% from 5 March 2009, 0.25% August 2016, 0.50% November 2017, 0.75% August 2018, 0.25% then 0.10% March 2020, held until 0.25% on 16 December 2021. This is the policy rate paid on commercial bank reserves, not the interest paid on investors' cash. https://www.bankofengland.co.uk/boeapps/database/Bank-Rate

10. "The first thing that cash buys is corporate bonds [loans to companies]."
   Joyce, Liu and Tonks, Bank of England Working Paper No. 510, “Institutional investor portfolio allocation, quantitative easing and the global financial crisis”, 2014: “QE led to institutional investors shifting their portfolios away from gilts towards corporate bonds relative to the counterfactual”, and “the shift into corporate bonds was quite widespread”. https://www.bankofengland.co.uk/working-paper/2014/institutional-investor-portfolio-allocation-quantitative-easing-and-the-global-financial-crisis

11. "So share and property prices rise over the same years."
   Bank of England, Quarterly Bulletin 2012 Q3, “The distributional effects of asset purchases”, 12 July 2012: “By pushing up a range of asset prices, asset purchases have boosted the value of households' financial wealth held outside pension funds”. https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2012/the-distributional-effects-of-asset-purchases.pdf

12. "It's why 2021 and 2022 finally saw shop prices jump after a decade in which people kept asking why all the money creation hadn't caused inflation."
   Office for National Statistics, Consumer price inflation, UK: December 2022: CPI rose 5.4% in the 12 months to December 2021 and 10.5% in the 12 months to December 2022; “Food and non-alcoholic beverage prices rose by 16.9% in the 12 months to December 2022”. https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/consumerpriceinflation/december2022
   ONS, Consumer price inflation, UK: October 2021: “The Consumer Prices Index (CPI) rose by 4.2% in the 12 months to October 2021”; “This is the highest 12-month inflation rate since November 2011, when the CPI annual inflation rate was 4.8%.” This measures the gap since CPI was last that high, just under ten years, and the page says nothing about money creation. https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/consumerpriceinflation/october2021

13. "When it finally went to households, food and energy prices rose."
   ONS, Consumer price inflation, UK: September 2022: “Food and non-alcoholic beverage prices rose by 14.6% in the 12 months to September 2022, up from 13.1% in August”, having risen “for the last 14 consecutive months, from negative 0.6% in July 2021”. The rise runs from August 2021 through 2022, and the page prints food prices only. https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/consumerpriceinflation/september2022

14. "Blocked supply chains, and then the price of gas, pushed in the same direction."
   Bernanke and Blanchard, Brookings, “What caused the U.S. pandemic-era inflation?”, June 2023: “most of the rise in inflation in 2021 and 2022 was driven by developments that directly raised prices rather than wages”, including commodity prices and supply chain kinks. https://www.brookings.edu/articles/what-caused-the-u-s-pandemic-era-inflation
   Bank for International Settlements, Annual Economic Report 2022, chapter II, “Inflation: a look under the hood”: The chapter covers the shift from services to goods, bottlenecks, energy and food prices, and how relative price changes can broaden into inflation. https://www.bis.org/publ/arpdf/ar2022e2.htm
   Shapiro, Federal Reserve Bank of San Francisco, FRBSF Economic Letter 2022-15, “How Much Do Supply and Demand Drive Inflation?”, 21 June 2022: “Supply factors explain about half of the run-up in current inflation levels. Demand factors are responsible for about one-third, with the remainder resulting from ambiguous factors.” https://www.frbsf.org/research-and-insights/publications/economic-letter/2022/06/how-much-do-supply-and-demand-drive-inflation/

15. "The pension fund that sold its bonds buys corporate bonds at today's prices."
   Joyce, Liu and Tonks, Bank of England Working Paper No. 510, 2014, “Institutional investor portfolio allocation, quantitative easing and the global financial crisis”: "QE led to institutional investors shifting their portfolios away from gilts towards corporate bonds"; "the shift into corporate bonds was quite widespread". https://www.bankofengland.co.uk/working-paper/2014/institutional-investor-portfolio-allocation-quantitative-easing-and-the-global-financial-crisis

16. "The effect takes roughly a year to eighteen months to show up, and it shows up in whatever the money is being spent on."
   Ben S. Bernanke, Federal Reserve Board, Remarks, “The Legacy of Milton and Rose Friedman”, 24 October 2003: "at a horizon of twelve to eighteen months the effects of a monetary expansion or contraction are felt primarily on the rate of inflation." https://www.federalreserve.gov/boarddocs/speeches/2003/20031024/default.htm

17. "The decision behind it is on the record, the Bank of England has published an estimate of who gained from its own bond buying, and the official statisticians publish how much faster prices rose for poorer households when food and energy led the rise."
   Bunn, Pugh and Yeates, Bank of England, Staff working paper, 2018, “The distributional impact of monetary policy easing in the UK between 2008 and 2014”: "households around retirement age gained the most from the support to wealth, but that support to incomes disproportionately benefited the young". https://www.bankofengland.co.uk/working-paper/2018/the-distributional-impact-of-monetary-policy-easing-in-the-uk-between-2008-and-2014

18. "Houses most of all."
   Office for National Statistics, Household total wealth in Great Britain: April 2020 to March 2022: Great Britain, April 2020 to March 2022: "Net property wealth made up the largest proportion of household wealth (40%), followed by private pension wealth (35%)". https://www.ons.gov.uk/peoplepopulationandcommunity/personalandhouseholdfinances/incomeandwealth/bulletins/totalwealthingreatbritain/april2020tomarch2022

19. "It's a big part of why a house in Britain costs a far higher multiple of a salary than it did a generation ago, even though technology has made most goods cheaper to make."
   Office for National Statistics, Housing affordability in England and Wales: 2025: England 2025: median home £300,000, 7.6 times median full-time employee earnings of £39,300; at the 1997 start of the series, England and Wales, about 3.6 times annual gross full-time earnings. The figures cover England and Wales, not Britain. https://www.ons.gov.uk/peoplepopulationandcommunity/housing/bulletins/housingaffordabilityinenglandandwales/2025

20. "In 2019 every American corporation together earned about 2.4 trillion dollars in profit before tax, while in 2020 alone America's stock of money grew by about 3.7 trillion dollars."
   Federal Reserve, Money Stock Measures, H.6 releases, 2020 and 2021: M2, billions of dollars, seasonally adjusted: $15,302.4 billion (December 2019) and $19,129.5 billion (December 2020), a rise of about $3.8 trillion in the 2020 year. The releases print about $3.8 trillion, not $3.7 trillion. https://www.federalreserve.gov/releases/h6/20211228

21. "This is strongest for the dollar, because the world holds and trades in it."
   Federal Reserve Bank of St. Louis, “Foreign Demand for Currency and the Fed’s Balance Sheet”, May 2019: “the estimated share of currency held abroad went from around 20% prior to 1990 to 50% to 60% in present time.” https://www.stlouisfed.org/on-the-economy/2019/may/foreign-demand-currency-fed-balance-sheet
   Bank for International Settlements, Global liquidity indicators at end-June 2022: “Dollar credit to non-bank borrowers outside the United States stood at $13.3 trillion at quarter-end, only 1% higher than a year earlier” — $13.3 trillion at end-June 2022. https://www.bis.org/statistics/gli2210.htm
   Gopinath, Boz, Casas, Díez, Gourinchas and Plagborg-Møller, “Dominant Currency Paradigm”, American Economic Review, 2020: “the dollar exchange rate quantitatively dominates the bilateral exchange rate” in “price pass-through and trade elasticity regressions”; dataset of “more than 2,500 country pairs” covering “91 percent of world trade”. No sample years are stated on the page. https://www.aeaweb.org/doi/10.1257/aer.20171201

22. "The world's demand for dollars spreads the cost of new dollars across the savings held in them, so the pressure shows up in weaker countries' currencies and import bills before it shows up in American shop prices."
   International Monetary Fund, Blog post, “How Countries Should Respond to the Strong Dollar”, October 2022: “such pressures are especially acute in emerging markets, reflecting higher import dependency”. The page covers only the 2022 dollar rise and prints nothing on import bills moving before American consumer prices. https://www.imf.org/en/blogs/articles/2022/10/14/how-countries-should-respond-to-the-strong-dollar
   Bank for International Settlements, Annual Economic Report 2023, “I. Navigating the disinflation journey”: “The depreciation against the dollar was larger for the currencies of countries where the policy rate increased less than in the United States.” The report prints nothing on import bills preceding American consumer prices. https://www.bis.org/publications/aer-2023/navigating-disinflation-journey

23. "In an ordinary year the door that stays open is lending against houses, and the money it creates goes into houses first."
   Òscar Jordà, Moritz Schularick and Alan M. Taylor, Federal Reserve Bank of San Francisco Economic Letter 2015-09, “Mortgaging the Future?”: “The share of mortgage loans in banks' total lending portfolios averaged across 17 advanced economies including the United States has roughly doubled over the past century—from about 30% in 1900 to about 60% in 2014.” The page is an Economic Letter by the same authors rather than their study “The Great Mortgaging”, and it covers 17 advanced economies to 2014. https://www.frbsf.org/research-and-insights/publications/economic-letter/2015/03/great-mortgaging-business-cycle-recovery

24. "What you can't easily do is spend it."
   Mian, Rao and Sufi, Article in the Quarterly Journal of Economics, 2013: Average marginal propensity to consume out of housing wealth of “5–7 cents”, estimated using the 2006 to 2009 US housing collapse. https://academic.oup.com/qje/article-abstract/128/4/1687/1849337
   Buiter, National Bureau of Economic Research Working Paper 14204: “no pure wealth effect on consumption from a change in house prices if this represents a change in fundamental value”; such a change redistributes between those long and short housing. https://www.nber.org/papers/w14204
   Attanasio, Blow, Hamilton and Leicester, Article in Economica, 2009: The link between house prices and consumption is “stronger for younger than older households, contradicting the wealth channel”, pointing to common factors such as expectations. https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1468-0335.2008.00708.x

25. "Measured in houses you're standing still, and your children buy in at the higher multiple of a salary that your gain is made of."
   Office for National Statistics, Housing affordability in England and Wales: 2023: “In 2023, full-time employees in England could expect to spend around 8.3 times their annual earnings buying a home”; “affordability ratios doubled in England from the start of the series in 1997 to 2007”. https://www.ons.gov.uk/peoplepopulationandcommunity/housing/bulletins/housingaffordabilityinenglandandwales/2023


---

# Houses Stopped Being Homes
Date: 2026-07-15
Canonical: https://thenaturalstate.org/essays/houses-stopped-being-homes/

Houses are expensive for two reasons at once, and most of the public argument is about the smaller one. The smaller reason is supply. Britain doesn't build enough homes where people want to live, and that matters at the margin. The bigger reason is the money. The pound is built to lose value, and the system that creates new pounds channels them into property through mortgage lending. So a house stopped being just shelter a long time ago. It became one of the main places this country stores its savings. When you bid on a house, you're bidding against people who need a home. You're also bidding against everyone trying to protect the value of work they've already done, using borrowed money, in a unit that loses value.

Two opposite directions

Housing is where the whole thesis becomes something you can feel. Your phone replaced a camera, a map, a stereo, and a filing cabinet, and now does all of it for close to nothing. A television costs less every year and gets better. Under a money nobody can add to, that's the natural direction of a free market, because as tools improve, the same goods take fewer inputs to make, and competition passes the saving on as lower prices. That holds for everything technology has changed the making of. It doesn't hold for housing, care, teaching, or building. Better tools haven't made a house cheaper to build. Houses went the other way. They ran far ahead of pay. Same economy, same decades, two opposite directions. That gap is the tell that something other than the cost of bricks and the scarcity of land is setting the price.

How the money reaches the house

1. Money is loaned into existence

Most new money is created through lending. When a bank approves your mortgage, it creates a new deposit in your account, and that deposit is new money. No box of other people's savings gets handed over. Of all the loans an ordinary household takes, the mortgage is by far the largest. So when banks lend, the mortgage is the main door new money comes through into ordinary hands.

2. Debt needs rising prices

Debts are fixed in pounds. Your mortgage says the same number whatever prices do. A system built on debt can take a slow fall that comes with better tools. In that fall it's the cost of making things that drops, and pay drifts down slowly behind it, so the money to meet a fixed payment is still there. What it can't take is a sudden fall in the prices credit pushed up, houses first, because then the losses spread through the banks. In that fall it's the lending that has stopped, so incomes and the house fall together and at once, and the fixed payment is hit from both sides in the same year. Houses come first because people buy them with borrowed money. The debt takes a bigger bite of every income. And where the loan was written against a house, the house is worth less too, so the bank stands to lose more on that loan. So every time a sudden fall in those prices threatens, the system is rescued with new money, and the rescues keep getting bigger.

In between, policy targets rising prices of about 2% a year, forever. Central banks publish why they aim there. They want room to cut interest rates in a downturn, they know wages resist falling, and they say the official measure of prices overstates the rise. Those are the reasons they give, and the debts aren't among them. The debts show up in the rescues, not in the everyday 2%. And because technology keeps pushing prices down, hitting that target takes a continuous expansion of money and credit, and the debt it leaves behind keeps growing. Between 2000 and early 2018 the world added roughly 185 trillion dollars of new debt to buy about 46 trillion dollars of growth. The scale of the effort tells you how hard technology is pushing prices down.

3. The new money reaches assets first

New money doesn't land evenly. It usually enters through lending and financial markets, so it reaches assets before it reaches wages. Cheaper borrowing lets buyers bid more for the same house. The higher price becomes higher collateral, which is what the bank can take if the loan goes bad. Since 2014 the rules for an ordinary home loan have put an income test in the way, so a dearer house doesn't by itself raise what an ordinary buyer can borrow. But the lending still grows with the price, through remortgages and equity release, through loans to landlords, and through the extra lending a bank can do once the houses behind its existing loans are worth more. That lending feeds the next round of bidding. Your pay moves slowly by comparison, because wages are renegotiated once a year while assets are repriced every day. Asset owners run ahead, wage earners fall behind, and the first rung moves further out of reach each time round.

4. The house takes money's job

Under a money built to lose value, cash in the bank has lost value in most years, so money fails at one of its basic jobs, storing the work you've already done. People need somewhere to put that stored work, so the house takes the job. Demand for housing is two demands added together, one for shelter and one for a savings vehicle. That second demand is large and fed by policy, and it has nothing to do with the cost of building a house. What that second demand adds to the price has a name, a monetary premium. It's the extra price an asset carries because people use it to store savings, on top of what it's worth to use.

Put those four together and the rise in house prices reads the other way round. The money lost value, and houses were the sponge that soaked up the difference. You saved for years toward a house deposit, and then a round of money creation pushed prices further away from you. The house didn't get better. Your stored time shrank.

The same house, measured in bitcoin

Measure the same house in a money nobody can add to, and over several years the trend has usually reversed. A house that rose from 1.4 million to 2.1 million measured in dollars fell from roughly 300 bitcoin to roughly 40 bitcoin over the same few years. The same reversal holds for a house priced in pounds, because the pound loses value the same way. Any single example is noisy, and this isn't a suggestion about what to buy, only a measurement. The answer depends on the window too. Start at bitcoin's late-2021 high and run to late 2022, and you get the opposite answer. The whole of the fall from 300 bitcoin to 40 is bitcoin strengthening against the dollar, not the house getting cheaper. In the short run, how many dollars a bitcoin buys moves with how much new money and credit the central banks are creating, and with the appetite for risk that comes with it. Over several years, a bitcoin buys more because more people have moved the work they've already done out of cash and property and into bitcoin. The house rose in dollars over those years. Bitcoin rose far more. So what you're watching is a money that can finally hold savings taking the job on. The house letting go of it comes later.

Why the fixes keep disappointing

Blaming landlords or boomers goes nowhere, because there's no villain here, only buyers, landlords, and banks all doing what a leaking money pays them to do. Stop the money leaking and the behaviour changes.

The leak also explains why the fixes aimed at the buyer keep disappointing. Schemes that top up a buyer's deposit hand them more to bid with, and the price absorbs it, because the buyer is still bidding against stored savings and cheap credit while the money keeps losing value. Rent caps and stamp duty tweaks fight symptoms, and the cause goes on. And house prices are now hostage to policy, because prices this far ahead of what people earn only hold while borrowing stays supported. A young couple who stretch to buy carry that policy risk personally.

For owners, the paper gain is mostly illusion unless you sell down the ladder or leave, because you still need an equally inflated house to live in, and the council tax, insurance, and upkeep climb too. Most of the "wealth" is a transfer from those who don't own to those who do, not new value created.

The common replies

"It's just supply. Fix planning and this goes away."

Supply is real, and I'd never argue against building. But scarcity alone can't explain when house prices surge, or why they surge in country after country in the same years. The number of homes doesn't change suddenly. The terms people can borrow on do. Prices jump in waves, and the waves line up with how easy it was to borrow, not with sudden changes in land. After the money expansion of 2020 and 2021, house prices and rents jumped across many countries at once, with wildly different planning regimes. Land didn't get scarcer everywhere in twelve months. The money got bigger everywhere at once.

"Cheap mortgages are what make ownership possible."

I think the cheap mortgage is a cause of the high price more than a cure for it. Cheap credit is the bigger reason the price is high in the first place. Buyers bid the falls in rates into the price, so the loan a buyer had to carry grew with it. The affordability didn't arrive. What arrived was a bigger debt, and a buyer stretched to carry it. Mortgages at this scale exist because money fails at saving. Cheap debt was needed because the money lost value, so the deposit a saver put aside was outrun by the price of the house. With money that held its value, saving toward a house would actually work, and a starter home would be something you buy from savings rather than a debt that runs for decades.

"Falling house prices would be a catastrophe."

Under a money nobody can add to, prices fall as tools improve, for everything technology has changed the making of. That's the natural state, and it's how the gain from better tools reaches you without anyone having to grant it. A house price can fall in a way that's good for you too. When savings leave houses for a money that holds value, the price drifts toward what a home is worth to live in. What can't survive a sudden broad fall in the prices credit pushed up is a system loaded with debt. That's an argument about the design of the debt, not about what's good for you.

Banks lean heavily on loans backed by houses, so a large fall in house prices is a threat to them, and the record shows British policy acting on that threat again and again. That's a pressure on the system, though not one that stops house prices falling. When a sudden broad fall threatens, the losses would spread through the banks, so policy pushes house prices back up through credit. House prices have been allowed to fall, and the official tests of the banks assume a fall of about a third and still find every bank able to take it. Where prices were supported, the support served the lenders and the owners, and the cost fell on savers, whose interest didn't keep up with prices, and on buyers, who paid more to get in.

Bricks didn't get harder to make. Pounds got easier to make. Housing is doing a job money should do, storing value, and the whole country pays for that service in the price of a home. Money that holds its value takes the savings job back, and a house drifts toward what it's worth as a place to live. Measured in the hardest money we have, the savings job has already started to move.

## Sources

What this essay rests on, as checked on 2026-10-03.

1. "Better tools haven't made a house cheaper to build."
   Goolsbee and Syverson, National Bureau of Economic Research Working Paper 30845, “The Strange and Awful Path of Productivity in the U.S. Construction Sector”, 2023: “Aggregate data show a large and decades-long decline in construction sector productivity”; physical productivity in housing construction is “falling or, at best, stagnant over multiple decades”. The page gives no start year of about 1970 and no figure, and its scope is the US construction sector. https://www.nber.org/papers/w30845

2. "They ran far ahead of pay."
   Office for National Statistics, Housing affordability in England and Wales: 2023: “affordability ratios doubled in England from the start of the series in 1997 to 2007”; by 2023 the ratio was 8.3 in England and 6.1 in Wales. The bulletin's doubling is for England only and over 1997 to 2007, not England and Wales across the whole period. https://www.ons.gov.uk/peoplepopulationandcommunity/housing/bulletins/housingaffordabilityinenglandandwales/2023
   Miles and Monro, Bank of England, Bank of England Staff Working Paper, “UK house prices and three decades of decline in the risk-free real interest rate”, 20 December 2019: “the rise in house prices relative to incomes between 1985 and 2018 can be more than accounted for by the substantial decline in the real risk-free interest rate observed over the period” https://www.bankofengland.co.uk/working-paper/2019/uk-house-prices-and-three-decades-of-decline-in-the-risk-free-real-interest-rate

3. "Most new money is created through lending."
   Bank of England, Quarterly Bulletin 2014 Q1, “Money creation in the modern economy”, published 14 March 2014: “the majority of money in the modern economy is created by commercial banks making loans” https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy

4. "When a bank approves your mortgage, it creates a new deposit in your account, and that deposit is new money."
   Deutsche Bundesbank, Monthly Report, April 2017, “The role of banks, non-banks and the central bank in the money creation process”: Banks create deposits when they extend credit, and repayment eliminates deposits. https://www.bundesbank.de/en/publications/search/the-role-of-banks-non-banks-and-the-centralbank-in-the-money-creation-process-654284

5. "In between, policy targets rising prices of about 2% a year, forever."
   Federal Reserve, Statement on Longer-Run Goals and Monetary Policy Strategy, 25 January 2012: "The Committee judges that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve's statutory mandate." https://www.federalreserve.gov/newsevents/pressreleases/monetary20120125c.htm
   European Central Bank, Press release, “ECB's Governing Council approves its new monetary policy strategy”, 8 July 2021: "The Governing Council considers that price stability is best maintained by aiming for a 2% inflation target over the medium term. This target is symmetric, meaning negative and positive deviations of inflation from the target are equally undesirable." https://www.ecb.europa.eu/press/pr/date/2021/html/ecb.pr210708~dc78cc4b0d.en.html
   HM Treasury, Remit for the Monetary Policy Committee and the new inflation target, December 2003: "Announced in June 2003 and implemented on 10th December 2003, the Bank of England's inflation target was redefined from 2.5 percent measured by RPIX inflation to 2 percent measured by annual CPI inflation." https://www.bankofengland.co.uk/letter/2003/chancellor-letter-101203

6. "Between 2000 and early 2018 the world added roughly 185 trillion dollars of new debt to buy about 46 trillion dollars of growth."
   World Bank, World Development Indicators, GDP (current US$), World, indicator NY.GDP.MKTP.CD, 2000 to 2020: GDP (current US$), World: 2000, 33.97 trillion; 2018, 87.31 trillion, a rise of about 53.3 trillion dollars. The sentence gives about 46 trillion dollars of growth, and the series shows about 53.3 trillion. https://data.worldbank.org/indicator/NY.GDP.MKTP.CD?locations=1W

7. "It usually enters through lending and financial markets, so it reaches assets before it reaches wages."
   Bank of England, Quarterly Bulletin 2014 Q1, “Money creation in the modern economy”: "the majority of money in the modern economy is created by commercial banks making loans". The page states no order in which new money reaches lending and markets before it reaches wages. https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy
   Bank of England, Explainer, “What is quantitative easing?”: "we can create money digitally in the form of 'central bank reserves'. We use these reserves to buy bonds." — "QE increases the price of financial assets other than bonds, such as equities." https://www.bankofengland.co.uk/monetary-policy/quantitative-easing

8. "Cheaper borrowing lets buyers bid more for the same house."
   Miles and Monro, Bank of England, Staff Working Paper No. 837, “UK house prices and three decades of decline in the risk-free real interest rate”, 20 December 2019: "the rise in house prices relative to incomes between 1985 and 2018 can be more than accounted for by the substantial decline in the real risk‑free interest rate observed over the period" https://www.bankofengland.co.uk/working-paper/2019/uk-house-prices-and-three-decades-of-decline-in-the-risk-free-real-interest-rate

9. "Since 2014 the rules for an ordinary home loan have put an income test in the way, so a dearer house doesn't by itself raise what an ordinary buyer can borrow."
   Financial Conduct Authority, Press release, “Countdown to new mortgage lending rules – FCA publishes simple guide to explain the changes to consumers”: "New rules from the Financial Conduct Authority (FCA), which come into force on 26 April 2014" — "every borrower will now have to prove that they can afford the repayments both now and in the future" https://www.fca.org.uk/news/press-releases/countdown-new-mortgage-lending-rules-%E2%80%93-fca-publishes-simple-guide-explain
   Financial Conduct Authority, FCA Handbook, MCOB 11.6, Responsible lending and financing (rule MCOB 11.6.2R): The lender "must not enter into the transaction … unless it can demonstrate that the new or varied regulated mortgage contract or home purchase plan is affordable for the customer" https://www.handbook.fca.org.uk/handbook/MCOB/11/6.html
   Bank of England, Prudential Regulation Authority, Amendments to the PRA's rules on loan to income ratios in mortgage lending, November 2016: "mortgage lenders do not extend more than 15% of their total number of new residential mortgages at loan to income ratios at or greater than 4.5"; "In June 2014 the Financial Policy Committee (FPC) issued a recommendation" https://www.bankofengland.co.uk/prudential-regulation/publication/2016/amendments-to-the-pras-rules-on-loan-to-income-ratios-in-mortgage-lending-november-2016

10. "Under a money built to lose value, cash in the bank has lost value in most years, so money fails at one of its basic jobs, storing the work you've already done."
   Chancellor of the Exchequer, Letter from the Chancellor of the Exchequer to the Governor of the Bank of England, Monetary Policy Committee remit, 26 November 2025: "I hereby re-confirm the inflation target as 2 per cent as measured by the 12-month increase in the Consumer Prices Index (CPI). The inflation target of 2 per cent is symmetric and applies at all times." https://www.gov.uk/government/publications/monetary-policy-remit-budget-2025/letter-from-chancellor-of-the-exchequer-to-govenor-of-the-bank-of-england
   Bank of England, Inflation calculator: "Check how the value of money has changed over time… Due to inflation, £1 today will buy you less than it did in the past on your purchasing power." https://www.bankofengland.co.uk/monetary-policy/inflation/inflation-calculator/
   Office for National Statistics, CPI annual rate: all items, 2015=100 (series D7G7): CPI annual rate (%, UK): 1990: 7.0; 2000: 0.8; 2020: 0.9; 2021: 2.6; 2022: 9.1; 2023: 7.3. The page carries nothing on deposit rates, so what cash in the bank earned is not shown. https://www.ons.gov.uk/economy/inflationandpriceindices/timeseries/d7g7/mm23

11. "For owners, the paper gain is mostly illusion unless you sell down the ladder or leave, because you still need an equally inflated house to live in, and the council tax, insurance, and upkeep climb too."
   Institute for Fiscal Studies, Revaluation and reform: bringing council tax in England into the 21st century: Bands rest on values at 1 April 1991 and England has never revalued; average Band D rose from £1,898 in 2021-22 to £2,171 in 2024-25 by council decisions. https://ifs.org.uk/publications/revaluation-and-reform-bringing-council-tax-england-21st-century

12. "Most of the "wealth" is a transfer from those who don't own to those who do, not new value created."
   Buiter, National Bureau of Economic Research Working Paper 14204: "no pure wealth effect on consumption from a change in house prices if this represents a change in fundamental value"; such a change redistributes between those long and short housing. https://www.nber.org/papers/w14204

13. "After the money expansion of 2020 and 2021, house prices and rents jumped across many countries at once, with wildly different planning regimes."
   Bank for International Settlements, Commentary on residential property price statistics, August 2021 (first quarter 2021 data): "Global real house prices rose by 4.6% year on year in aggregate in the first quarter of 2021, representing the fastest growth rate recorded since the Great Financial Crisis"; advanced economies averaged 7.3%. This covers one quarter, not the whole 2020 and 2021 span, gives house prices rather than rents, and does not state that the rises were synchronised. https://www.bis.org/publications/202108-commentary-residential-property-prices

14. "Cheap credit is the bigger reason the price is high in the first place."
   Miles and Monro, Bank of England Staff Working Paper No. 837, “UK house prices and three decades of decline in the risk-free real interest rate”, 20 December 2019: “the rise in house prices relative to incomes between 1985 and 2018 can be more than accounted for by the substantial decline in the real risk-free interest rate observed over the period” https://www.bankofengland.co.uk/working-paper/2019/uk-house-prices-and-three-decades-of-decline-in-the-risk-free-real-interest-rate
   Favara and Imbs, “Credit Supply and the Price of Housing”, American Economic Review, 2015: “An exogenous expansion in mortgage credit has significant effects on house prices. This finding is established using US branching deregulations between 1994 and 2005 as instruments for credit.” https://www.aeaweb.org/articles?id=10.1257/aer.20121416

15. "What can't survive a sudden broad fall in the prices credit pushed up is a system loaded with debt."
   Fisher, “The Debt-Deflation Theory of Great Depressions”, Econometrica, volume 1, October 1933, pages 337–357: “Debt liquidation leads to distress setting and to Contraction of deposit currency … causes A fall in the level of prices … there must be A still greater fall in the net worths of business, precipitating bankruptcies” https://fraser.stlouisfed.org/title/debt-deflation-theory-great-depressions-3596/fulltext

16. "House prices have been allowed to fall, and the official tests of the banks assume a fall of about a third and still find every bank able to take it."
   Nationwide Building Society, House Price Index report, “House prices fall 1.8% over the course of 2023”: “UK house prices ended 2023 down 1.8% compared with December 2022”; down 1.8% over 2023, nominal, not seasonally adjusted. https://www.nationwide.co.uk/media/hpi/reports/house-prices-fall-1-8-percent-over-the-course-of-2023
   Bank of England, “Stress testing the UK banking system: 2019 results”: “UK house and commercial property prices fall 33 per cent and 41 per cent, respectively over the first three years”, with banks “remain above their hurdle rates”. https://www.bankofengland.co.uk/stress-testing/2019/bank-of-england-stress-testing-results
   Bank of England, “Stress testing the UK banking system: 2022/23 results”, published 12 July 2023: “Residential property prices fall by 31%”; “All participating banks and building societies remain above their … hurdle rates … and no bank is required to strengthen its capital position”. https://www.bankofengland.co.uk/stress-testing/2023/bank-of-england-stress-testing-results

17. "Where prices were supported, the support served the lenders and the owners, and the cost fell on savers, whose interest didn't keep up with prices, and on buyers, who paid more to get in."
   Bank of England, Effective interest rates, December 2023: “Table A: Effective interest rates paid/received on individual's balances by UK MFIs”: sight deposits 2.03%, time deposits 3.71% outstanding, 4.80% new business, December 2023. The page gives December 2023 only, not a run of earlier years. https://www.bankofengland.co.uk/statistics/effective-interest-rates/2023/december-2023
   Office for National Statistics, Consumer Prices Index annual rate, all items, series D7G7 (2015=100): CPI annual rate (%): 2009: 2.2; 2010: 3.3; 2011: 4.5; 2012: 2.8; 2013: 2.6; 2014: 1.5; 2015: 0.0; 2016: 0.7; 2017: 2.7; 2018: 2.5; 2019: 1.8; 2020: 0.9; 2021: 2.6; 2022: 9.1; 2023: 7.3. https://www.ons.gov.uk/economy/inflationandpriceindices/timeseries/d7g7/mm23
   National Audit Office, “Help to Buy Equity Loan scheme progress review”, 13 June 2019: Help to Buy buyers “paid less than 1% more”; “37% is the proportion of buyers in England who said they could not have bought without the support of the scheme (measured between June 2015 and March 2017)”. https://www.nao.org.uk/press-release/help-to-buy-equity-loan-scheme-progress-review/


---

# Forced to Gamble
Date: 2026-07-15
Canonical: https://thenaturalstate.org/essays/forced-to-gamble/

You can work hard, put money aside every month, and still end up behind without ever making a mistake, because the money you're paid in is built to lose value every year. That's a design choice, and it could have been designed otherwise. Your instinct that something is off is exactly right.

Technology keeps making things cheaper to produce. Under a money nobody can add to, that would show up as prices falling year after year, which means your savings would buy more over the years you simply held them. Standing still would mean slowly getting richer. But governments and central banks aim for prices to rise a little every year, deliberately, as policy, and create the money and credit to get there. That reverses the natural direction of your savings. Instead of your money buying more by default, it buys less by default. And once that's true, keeping what your money could buy means taking a risk of loss with money you already earned. That's the saver's position by design, year after year. Investing stops being a choice and becomes a defence.

The treadmill you've noticed is the system doing what it was built to do. The new money that keeps prices rising drives the housing madness, the wealth gap, and the feeling that everyone is running harder for less. That puts the treadmill close to the centre of the whole thesis. If you understand why saving stopped working, you understand most of the rest.

How the loss gets built in

Productivity means making more with less. When tools improve, the same goods take fewer hours, less material, and less energy to produce. That holds for everything technology has changed the making of. It doesn't hold for housing, care, teaching, or building. When one maker finds a cheaper way, its competitors adopt the better method and undercut each other, which pushes the price down toward what it costs to make one more unit. You see it clean wherever the new money doesn't pile up. Taking and sharing a photo used to cost film, developing, and postage. Now it costs you close to nothing. So under a money nobody can add to, the natural direction of prices is down, which means money that gains purchasing power. In that world, an ordinary person gets ahead by working and saving, with no cleverness required.

Most of the money we use is created through lending, which is how the policy actually works. Cheaper borrowing means more lending, and more lending means more money. When a bank makes a loan, it creates the deposit it hands you, so most of the pounds in existence are also somebody's debt. Those debts are fixed in pound amounts. If prices broadly fall and nothing is done to stop it, wages eventually follow, but the mortgage payment doesn't shrink. What that does to the system depends on how the fall comes.

A system loaded with debt can take a slow fall that comes with better tools. In that fall it's the cost of making things that drops, and pay drifts down slowly behind it, so the money to meet a fixed payment is still there. What it can't take is a sudden fall in the prices credit pushed up, houses first, because then the losses spread through the banks. In that fall it's the lending that has stopped, so incomes and the house fall together and at once, and the fixed payment is hit from both sides in the same year. Houses come first because people buy them with borrowed money. The debt takes a bigger bite of every income. And where the loan was written against a house, the house is worth less too, so the bank stands to lose more on that loan. So every time a sudden fall in those prices threatens, the system is rescued with new money, and the rescues keep getting bigger.

Between rescues, governments and central banks aim for prices to rise by about 2% a year, and they call that success. The 2% inflation target is a commitment to create enough new money and credit, every year, to overpower the natural price falls that technology keeps delivering. Central banks publish why they aim there. They want room to cut interest rates in a downturn, they know wages resist falling, and they say the official measure of prices overstates the rise. Those are the reasons they give, and the debts aren't among them. The debts show up in the rescues, not in the everyday 2%.

Whatever the reasons, the cost to you is bigger than the 2% on the label. Better technology would have made your cost of living fall by a point or two this year, which is about how fast output per hour of work grows on the published figures. Policy pushed prices up 2% instead. So the gap, in what your money buys, is three or four points. And 2% is the target, not a ceiling. In the years when the new money comes fastest, prices climb well past it, and so does the gap. Even a year of "zero inflation" means you were denied the price fall you should have had. You worked just as hard, the things you buy got cheaper to make, and the saving never reached you as lower prices. Part of it reached you as higher pay, late and unevenly. The rest was absorbed by the expansion of the money supply. That's the theft, and it's invisible because we measure everything with a unit that keeps shrinking.

New money lands unevenly. It usually enters through bank loans and the central bank's bond buying, so asset prices move first. Houses and shares rise ahead of wages, and the people who already own them benefit before prices adjust for everyone else. That order has a name, the Cantillon effect, which means the people closest to new money gain at the expense of those it reaches last. Meanwhile the interest paid on ordinary savings is held below the rate prices rise, on purpose, because that makes all that debt lighter to carry. That has a name too, financial repression, which means policies that move wealth from savers to borrowers by keeping rates below inflation. Interest rates can rise above prices for a while, but the debt the system carries means they can't stay there. Dearer borrowing on that much debt breaks things, so rates are brought back down. The "safest" place for your money is engineered to lose.

The menu for money you're trying to keep is short. Hold cash and lose, because that's what this money is built to do. Where a government bond whose payments rise with prices is on offer at a return above inflation, and you can hold it to the end, that route stands still without the risk. Or take on more risk, one step at a time. Buy a house to live in and to hold your savings. Buy shares in companies you've never thought about, with no view on the businesses, because you have to outrun the money creation. Money itself has stopped doing the job you need it for, which is carrying your work-hours safely through time. So people store their savings in other things instead, and the things savers crowd into carry a price above what they're worth for use. Housing is the clearest case, because it's the thing an ordinary household can borrow against and hold in large amounts, and shares pick up some of it in prices that run ahead of the earnings underneath them. That's a big part of why a house in this country costs what it costs. It's doing two jobs at once.

What it looks like in a normal life

Say your savings account pays 2% in a year when prices rise 6%. That's a guaranteed loss that counts as the prudent thing to do. Your pay goes up 3% and rent and food go up 8%, so you fall behind while on paper "getting a raise". Your neighbour's house doubles in price and he feels rich, but he'd need an equally inflated house to move into, and the upkeep rises with it. Mostly the ruler shrank. And your phone, your photos, your maps, and your music got dramatically cheaper over the same years the essentials ran away from you, which is the sign that the whole picture is distorted. Both forces are visible in one life. Technology pushing down, money pushing up.

Four reasons the treadmill might be fine

"Investing builds wealth anyway, so what's the harm?"

It can. But there's a world of difference between chosen risk and forced risk. Forcing carers, builders, and pensioners to become portfolio managers pushes people into risks they don't understand at exactly the wrong moments, and across society it shovels time and capital into speculation instead of production. The bubbles and crashes that follow are what you get when everyone must chase returns to stand still.

"Without inflation, nobody would spend and the economy would stall."

You buy a coat in winter because you're cold, a phone because it's useful, dinner because you're hungry. Falling prices don't stop people buying what they value. Televisions get cheaper and better every year and people still buy them. What does get put off is the purchase that can wait, and sometimes that's a big one, like a car. What falls when people wait is the borrowing that would have paid for it, and life carries on. Say the claim out loud, "we must quietly take from your savings or you won't buy things", and it refutes itself.

"But deflation causes depressions."

Careful, that one word covers two different events. Prices falling because the pile of debt is collapsing, that's destructive, and it's the thing central banks were set up to stop. Prices falling because we got better at making things, that raises living standards. Our system can take the second. What it can't take is a sudden broad fall in the prices credit pushed up, because it's so loaded with debt. That's an indictment of the debt design, and cheaper goods were never the danger.

"Wages rise with inflation, so it comes out even."

They rise last. Assets move first, the weekly shop moves next, wages limp in behind, and the lag is the transfer. That's why the same event is called inflation by the people who own assets and feels like a pay cut to the people who don't, which is one event seen from two sides.

What standing still should look like

In a system where nobody can expand the money, the picture inverts. Prices drift down with productivity, so money you've already saved buys more over the years while you do nothing clever at all, though not in every single year. Pay tends to move slower than prices, so what your pay buys rises too, whether the number on your payslip holds steady or drifts gently down. Where pay can't move at all, hours fall and jobs shift instead. Falling prices cushion that, because you need less income to live on, and fewer hours for the same quality of life is part of the gain. Saving works again. Patience is rewarded instead of punished. Simply holding money then gets you the productivity growth of the whole society. And the whole society is exactly who should receive it. Everyone. Investing then goes back to what it's supposed to be, a deliberate choice to back a business you believe in, and no longer a forced defence of what you already earned.

The need for a money nobody can add to is why I end up talking about bitcoin at all. It's the first money with a supply nobody can expand, and you can hold it yourself with no one standing in between. Measured in it, the thesis says prices fall over time, which is the natural state showing through. Whether and how you act on that is your call, not advice from me. The treadmill is a property of the money, so only different money removes it.

## Sources

What this essay rests on, as checked on 2026-10-01.

1. "You can work hard, put money aside every month, and still end up behind without ever making a mistake, because the money you're paid in is built to lose value every year."
   HM Treasury, Remit for the Monetary Policy Committee and the new inflation target, December 2003: "Announced in June 2003 and implemented on 10th December 2003, the Bank of England's inflation target was redefined from 2.5 percent measured by RPIX inflation to 2 percent measured by annual CPI inflation." https://www.bankofengland.co.uk/letter/2003/chancellor-letter-101203
   Federal Reserve, FOMC statement of longer-run goals and policy strategy, 25 January 2012: "The Committee judges that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve's statutory mandate." https://www.federalreserve.gov/newsevents/pressreleases/monetary20120125c.htm
   European Central Bank, ECB's Governing Council approves its new monetary policy strategy, 8 July 2021: "price stability is best maintained by aiming for a 2% inflation target over the medium term. This target is symmetric, meaning negative and positive deviations of inflation from the target are equally undesirable." https://www.ecb.europa.eu/press/pr/date/2021/html/ecb.pr210708~dc78cc4b0d.en.html

2. "Technology keeps making things cheaper to produce."
   Stanford Institute for Human-Centered Artificial Intelligence, AI Index Report 2025: Inference cost at GPT-3.5 level fell "over 280-fold between November 2022 and October 2024", from $20 to $0.07 per million tokens. https://hai.stanford.edu/ai-index/2025-ai-index-report
   U.S. Bureau of Labor Statistics, The Economics Daily, "Long-term price trends for computers, TVs, and related items", 13 October 2015: "The price index for TVs decreased 94 percent from December 1997 to August 2015." Also "audio equipment (−60 percent)" and "photographic equipment and supplies (−59 percent)" over the same period. https://www.bls.gov/opub/ted/2015/long-term-price-trends-for-computers-tvs-and-related-items.htm
   Office for National Statistics, CPI INDEX 09.1: Audio-visual equipment and related products, 2015=100 (series D7CS): Annual index, 2015=100: 1988 739.1; 1995 658.4; 2000 400.0; 2005 249.4; 2010 144.9; 2015 100.0; 2020 91.9; 2024 96.5; 2025 95.7. https://www.ons.gov.uk/economy/inflationandpriceindices/timeseries/d7cs/mm23

3. "But governments and central banks aim for prices to rise a little every year, deliberately, as policy, and create the money and credit to get there."
   HM Treasury, Remit for the Monetary Policy Committee and the new inflation target, December 2003: "Announced in June 2003 and implemented on 10th December 2003, the Bank of England's inflation target was redefined from 2.5 percent measured by RPIX inflation to 2 percent measured by annual CPI inflation." https://www.bankofengland.co.uk/letter/2003/chancellor-letter-101203
   Federal Reserve, Statement on Longer-Run Goals and Monetary Policy Strategy, 25 January 2012: "The Committee judges that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve's statutory mandate." https://www.federalreserve.gov/newsevents/pressreleases/monetary20120125c.htm
   Bank of England, Quarterly Bulletin 2014 Q1, "Money creation in the modern economy", 14 March 2014: "The majority of money in the modern economy is created by commercial banks making loans." "The central bank can also affect the amount of money directly through purchasing assets or 'quantitative easing'." https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy

4. "It doesn't hold for housing, care, teaching, or building."
   Goolsbee and Syverson, “The Strange and Awful Path of Productivity in the U.S. Construction Sector”, NBER Working Paper 30845, 2023: “Aggregate data show a large and decades-long decline in construction sector productivity”; physical productivity in housing construction “falling or, at best, stagnant over multiple decades”. The paper covers the US construction sector and housing construction, prints no figure, and does not cover care or teaching. https://www.nber.org/papers/w30845

5. "Most of the money we use is created through lending, which is how the policy actually works."
   Bank of England, Quarterly Bulletin 2014 Q1, “Money creation in the modern economy”, 14 March 2014: “the majority of money in the modern economy is created by commercial banks making loans”; “The amount of money created in the economy ultimately depends on the monetary policy of the central bank.” https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy

6. "When a bank makes a loan, it creates the deposit it hands you, so most of the pounds in existence are also somebody's debt."
   Bank of England, Quarterly Bulletin 2014 Q1, “Money creation in the modern economy”, 14 March 2014: “the majority of money in the modern economy is created by commercial banks making loans” https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy

7. "Between rescues, governments and central banks aim for prices to rise by about 2% a year, and they call that success."
   Federal Reserve, Statement on Longer-Run Goals and Monetary Policy Strategy, 25 January 2012: "The Committee judges that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve's statutory mandate." https://www.federalreserve.gov/newsevents/pressreleases/monetary20120125c.htm
   European Central Bank, Press release, 8 July 2021: ECB's Governing Council approves its new monetary policy strategy: "The Governing Council considers that price stability is best maintained by aiming for a 2% inflation target over the medium term. This target is symmetric"; announced 8 July 2021. https://www.ecb.europa.eu/press/pr/date/2021/html/ecb.pr210708~dc78cc4b0d.en.html
   Bank of England, Web page, "Inflation and the 2% target" (no date shown on the page): "The Government sets us a 2% inflation target"; "If we miss the inflation target by more than 1 percentage point either side of the target, we must tell the Government why." https://www.bankofengland.co.uk/monetary-policy/inflation

8. "They want room to cut interest rates in a downturn, they know wages resist falling, and they say the official measure of prices overstates the rise."
   European Central Bank, An overview of the ECB's monetary policy strategy, 2021: "Three additional factors ... call for a sufficient inflation buffer"; "by taking account of downward nominal wage rigidities"; the buffer is justified by the effective lower bound, downward nominal wage rigidities and "measurement bias in the HICP". https://www.ecb.europa.eu/mopo/strategy/strategy-review/ecb.strategyreview_monpol_strategy_overview.en.html
   Federal Reserve, Statement on Longer-Run Goals and Monetary Policy Strategy, as amended effective 27 August 2020: "the federal funds rate is likely to be constrained by its effective lower bound more frequently than in the past"; "as amended effective August 27, 2020". https://www.federalreserve.gov/monetarypolicy/monetary-policy-strategy-tools-and-communications-statement-on-longer-run-goals-monetary-policy-strategy-2019-2020.htm

9. "Better technology would have made your cost of living fall by a point or two this year, which is about how fast output per hour of work grows on the published figures."
   Office for National Statistics, Statistical bulletin, "Trends in UK business dynamism and productivity: 2023", 11 December 2023: "grew at an average rate of 2.2% a year between 1971 and 2007"; "between 2011 and 2022 this growth rate has averaged 0.6% a year". The recent published rate, 0.6% a year, is below a point or two. https://www.ons.gov.uk/economy/economicoutputandproductivity/productivitymeasures/bulletins/trendsinukbusinessdynamismandproductivity/2023

10. "Policy pushed prices up 2% instead."
   Federal Reserve, Frequently asked question, "Why does the Federal Reserve aim for inflation of 2 percent over the longer run?", page last updated 22 August 2025: "inflation of 2 percent over the longer run ... is most consistent with the Federal Reserve's mandate". The page gives a stated policy target, not a measured amount by which policy raised the cost of living. https://www.federalreserve.gov/faqs/economy_14400.htm

11. "And 2% is the target, not a ceiling."
   Federal Reserve, Statement on Longer-Run Goals and Monetary Policy Strategy, as amended effective 27 August 2020: "the Committee seeks to achieve inflation that averages 2 percent over time"; "inflation moderately above 2 percent for some time"; "as amended effective August 27, 2020". https://www.federalreserve.gov/monetarypolicy/monetary-policy-strategy-tools-and-communications-statement-on-longer-run-goals-monetary-policy-strategy-2019-2020.htm

12. "Part of it reached you as higher pay, late and unevenly."
   Stansbury and Summers, National Bureau of Economic Research Working Paper 24165, "Productivity and Pay: Is the link broken?", 2017: "over 1973-2016, one percentage point higher productivity growth has been associated with 0.7 to 1 percentage points higher median and average compensation growth"; "other factors orthogonal to productivity have been acting to suppress typical compensation". https://www.nber.org/papers/w24165
   Bivens and Mishel, Economic Policy Institute briefing paper, September 2015, on the divergence between productivity and a typical worker's pay: Typical pay and productivity diverged from 1973; briefing paper of September 2015. https://www.epi.org/publication/understanding-the-historic-divergence-between-productivity-and-a-typical-workers-pay-why-it-matters-and-why-its-real/

13. "New money lands unevenly."
   Cantillon, Essai sur la nature du commerce en général (Essay on the Nature of Trade in General), published 1755: "written between 1730 and 1734"; "follows the French text of 1755". Describes new money raising prices unevenly, first for those who receive it. https://www.econlib.org/library/NPDBooks/Cantillon/cntNT.html

14. "It usually enters through bank loans and the central bank's bond buying, so asset prices move first."
   Bank of England, Explainer, "What is quantitative easing?": "like other central banks, we can create money digitally in the form of 'central bank reserves'. We use these reserves to buy bonds"; "QE increases the price of financial assets other than bonds, such as equities." https://www.bankofengland.co.uk/monetary-policy/quantitative-easing

15. "Houses and shares rise ahead of wages, and the people who already own them benefit before prices adjust for everyone else."
   Miles and Monro, Bank of England Staff Working Paper No. 837, "UK house prices and three decades of decline in the risk-free real interest rate", 20 December 2019: "the rise in house prices relative to incomes between 1985 and 2018 can be more than accounted for by the substantial decline in the real risk-free interest rate observed over the period". https://www.bankofengland.co.uk/working-paper/2019/uk-house-prices-and-three-decades-of-decline-in-the-risk-free-real-interest-rate
   Bunn, Pugh and Yeates, Bank of England Staff Working Paper No. 720, "The distributional impact of monetary policy easing in the UK between 2008 and 2014", 27 March 2018: "households around retirement age gained the most from the support to wealth, but that support to incomes disproportionately benefited the young"; "the overall effect of monetary policy on standard relative measures of income and wealth inequality has been small". https://www.bankofengland.co.uk/working-paper/2018/the-distributional-impact-of-monetary-policy-easing-in-the-uk-between-2008-and-2014

16. "Meanwhile the interest paid on ordinary savings is held below the rate prices rise, on purpose, because that makes all that debt lighter to carry."
   Bank of England, Official Bank Rate history, Bank of England database: "Official Bank Rate history": 05 Mar 09, 0.50; 04 Aug 16, 0.25; 02 Nov 17, 0.50 (per cent), with no change listed in between. These are the Bank's official Bank Rate, not the interest paid on savings accounts. https://www.bankofengland.co.uk/boeapps/database/Bank-Rate.asp
   Office for National Statistics, Consumer Prices Index annual rate, all items, series D7G7 (2015=100): CPI annual rate, per cent: 2009 2.2; 2010 3.3; 2011 4.5; 2012 2.8; 2013 2.6; 2014 1.5; 2015 0.0; 2016 0.7. https://www.ons.gov.uk/economy/inflationandpriceindices/timeseries/d7g7/mm23

17. "Where a government bond whose payments rise with prices is on offer at a return above inflation, and you can hold it to the end, that route stands still without the risk."
   UK Debt Management Office, About Gilts: "Both the coupons and the principal repaid on redemption of these gilts are adjusted to take account of accrued inflation since the gilt was first issued." https://www.dmo.gov.uk/responsibilities/gilt-market/about-gilts/

18. "Falling prices don't stop people buying what they value."
   Bachmann, Berg and Sims, Study of inflation expectations and readiness to spend on durable goods, 2015: The effect of expected inflation on readiness to spend on durables is "generally small, outside the zero lower bound often statistically insignificant, and inside of it typically significantly negative". https://www.aeaweb.org/articles?id=10.1257%2Fpol.20130292

19. "Televisions get cheaper and better every year and people still buy them."
   U.S. Bureau of Labor Statistics, The Economics Daily, "Long-term price trends for computers, TVs, and related items": "The price index for TVs decreased 94 percent from December 1997 to August 2015." https://www.bls.gov/opub/ted/2015/long-term-price-trends-for-computers-tvs-and-related-items.htm
   Nielsen, Television Audience Report, "More than Half the Homes in U.S. Have Three or More TVs", July 2009: "in 2009 the average American home had 2.86 TV sets, which is roughly 18% higher than in 2000 (2.43 sets per home), and 43% higher than in 1990 (2.0 sets)" https://www.nielsen.com/insights/2009/more-than-half-the-homes-in-us-have-three-or-more-tvs/

20. "Prices falling because the pile of debt is collapsing, that's destructive, and it's the thing central banks were set up to stop."
   Fisher, Econometrica, October 1933, "The Debt-Deflation Theory of Great Depressions", pages 337-357: "Debt liquidation leads to distress selling and to Contraction of the money supply, as bank loans are paid off, and to a slowing down of velocity of circulation." https://www.econometricsociety.org/publications/econometrica/1933/10/01/debt-deflation-theory-great-depressions

21. "Prices falling because we got better at making things, that raises living standards."
   Bordo, Landon-Lane and Redish, National Bureau of Economic Research working paper, "Good versus Bad Deflation: Lessons from the Gold Standard Era", 2004: A period "characterized by low deflation, rapid productivity growth, positive output growth"; the paper finds "deflation in the nineteenth century was primarily good". The evidence is drawn from three countries, the United States, the United Kingdom and Germany, in the late nineteenth century, and the page prints no exact date range. https://www.nber.org/papers/w10329

22. "What it can't take is a sudden broad fall in the prices credit pushed up, because it's so loaded with debt."
   Eggertsson and Krugman, "Debt, Deleveraging, and the Liquidity Trap: A Fisher-Minsky-Koo Approach", 2012: The abstract says "Fisherian debt deflation" emerges once some agents are debt-constrained. The point that deflation from better production also raises real debt at the zero bound sits inside the paper, not in the abstract. https://academic.oup.com/qje/article-abstract/127/3/1469/1924252

23. "That's an indictment of the debt design, and cheaper goods were never the danger."
   Borio, Erdem, Filardo and Hofmann, BIS Quarterly Review, March 2015, "The costs of deflations: a historical perspective": "We test the historical link between output growth and deflation in a sample covering 140 years for up to 38 economies. The evidence suggests that this link is weak and derives largely from the Great Depression." https://www.bis.org/publ/qtrpdf/r_qt1503e.htm
   Atkeson and Kehoe, Study of deflation and depression, 2004: 17 countries over more than 100 years; outside the 1930s, "there is virtually no evidence of such a link". https://www.aeaweb.org/articles?id=10.1257%2F0002828041301588

24. "They rise last."
   International Monetary Fund, World Economic Outlook, October 2022, Chapter 2: Wage Dynamics Post–COVID-19 and Wage-Price Spiral Risks: "rising inflation, positive nominal wage growth, declining real wages, and declining unemployment characterized the macroeconomic situation in 2021 in many economies" https://www.imf.org/-/media/files/publications/weo/2022/october/english/ch2.pdf
   Office for National Statistics, Average weekly earnings in Great Britain: December 2022: Real regular pay fell 3.0% in April to June 2022, "the fastest decline since comparable records began in 2001", and 2.7% in the year to December 2022. https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/employmentandemployeetypes/bulletins/averageweeklyearningsingreatbritain/december2022

25. "Pay tends to move slower than prices, so what your pay buys rises too, whether the number on your payslip holds steady or drifts gently down."
   Dickens and co-authors, Federal Reserve Bank of Cleveland working paper 06-20, “How Wages Change: Micro Evidence from the International Wage Flexibility Project”: From “31 different data sets from sixteen countries”: “we find evidence of both downward nominal and real wage rigidities”, and “nearly all countries show asymmetry in their wage distributions below the median”. The page gives no range of years for the data. https://www.clevelandfed.org/publications/working-paper/2006/wp-0620-how-wages-change-micro-evidence-from-the-international-wage-flexibility-project

26. "It's the first money with a supply nobody can expand, and you can hold it yourself with no one standing in between."
   Bitcoin.org, Frequently Asked Questions: “Bitcoin is unique in that only 21 million bitcoins will ever be created” and “it is not possible to generate uncontrolled amounts of bitcoins out of thin air”. The page says nothing about bitcoin being the first such money. https://bitcoin.org/en/faq
   Nakamoto, Bitcoin: A Peer-to-Peer Electronic Cash System, 2008: “there is no central authority to issue them”; the system would “allow online payments to be sent directly from one party to another without going through a financial institution”. https://nakamotoinstitute.org/library/bitcoin/


---

# The Automation Accelerant
Date: 2026-07-15
Canonical: https://thenaturalstate.org/essays/the-automation-accelerant/

Policy that pushes up wages and costs speeds automation beyond its natural pace. Technology sets whether the job gets automated, and its price falls year after year. A vote can slow that locally for a while, but it doesn't turn it round. What the policy changes is when. Anything that raises the cost of employing a person, wherever a machine can already do part of the job, pulls the automation date toward the present, sometimes by years.

The mechanism first

Nearly every automation decision inside a business is the same piece of arithmetic. One side of the ledger is the all-in cost of a person doing a task. That's the wage, plus the employer's National Insurance, pension contributions, cover for holidays and sickness, training, and staff turnover that the employer carries on top of it. The other side is a machine that can do some of the task. The machine's side falls year after year because hardware and software get cheaper with scale and competition. The person's side is where policy acts, through two doors. The direct door is mandated cost, and it arrives as a higher wage floor, an employer's National Insurance rise, new required benefits. The indirect door is the government and central bank expanding money and credit, which pushes up the café's rent, beans, and energy, and pushes staff to ask for more because their own rent and food cost more. Both doors raise the human side of the ledger. The machine never asks for a pay rise. So the crossover, the day the machine beats the person on cost, arrives earlier than it would have. The automation was always coming. The policy moves the date.

The café

Take a small independent café with three people on the morning shift, one on coffee, one on food, one on the till taking orders and payments. The till job pays somewhere near the wage floor, the least an employer may legally pay, call it £12.70 an hour. Add the employer's National Insurance and pension contribution and the true cost is closer to £15 an hour before holiday cover and training. At full-time hours that's roughly £30,000 a year to have a person taking orders. Rough numbers, but the shape is right.

The alternative is a pair of self-order screens with card payment built in. A few thousand pounds up front and a modest monthly software fee, call it £5,000 in the first year and much less after. The screens work every opening hour and never call in sick. If they let the owner run each shift with one fewer person at the counter, the saving is around £400 a week, over £20,000 a year. That's the shift's counter hours going, not a whole post. The package pays for itself in about three months. Once the sums look like that, the owner is choosing between installing the screens and watching the café across the road install them first and serve the same flat white for 20p less.

In the same café ten years back, the wage floor was around £7 and the all-in cost maybe £8.50 an hour. The screens cost several times more and did less, with clunky software and poor card integration. Payback was measured in years, so most owners didn't bother. Between then and now, both lines moved. Technology cut the machine's price, which was going to happen anyway. Policy raised the person's price, with the wage floor lifted by law year after year, the employer's National Insurance rise in April 2025 on top for every employer bar the very smallest, and the general rise in living costs pushing wage demands up across the board. Every one of those moves dragged the crossover date toward the present. The natural pace, by which I mean the date set by the technology alone under honest prices, might have put screens in that café around the end of the decade. The policy-loaded ledger put them in this year. Same destination, earlier train.

Why the owner can't dodge it

Some owners raise prices instead, and they lose custom. And the competitor who automates can hold prices down or improve service, which pulls the whole street to the new cost structure. Margins in hospitality are typically only a few pence in the pound once everything is paid, so a cost rise that can't be passed on has to be taken out of the way the work is done. Cruelty doesn't come into it. The owner is reading a ledger the whole street is reading too.

What it looks like from the worker's side

It rarely looks like a sacking on a Tuesday. It looks like fewer hours on the rota, the person who leaves not being replaced, one person running a counter that used to take two, and the next branch opening with a leaner staffing plan from day one. Owners tend to make the switch when a cost shock or a downturn forces the decision, and the hours go before the post does. What's my own reasoning is the inference from there, that it's why I'd be careful with studies that compare headcounts just before and after a wage rise and find nothing. The margin that moves first is hours and the staffing of the next site, and it moves with a delay.

Why this matters for the thesis

The wage floor rise is usually a response to pain the money system itself created. Living costs rise because money and credit are expanded to keep a debt-heavy system serviceable. Voters demand relief. The relief arrives as a mandated pay rise, which raises the ledger line that brings the machine's start date forward. And the raise itself is partly an illusion, because if prices rise faster than the pay number, the real wage is falling even as the payslip grows. Inflation is wage deflation viewed from the other side. So the person the policy meant to help gets the automation sooner and keeps less of the raise. Meanwhile the saving from the screens doesn't reach anyone as a coffee that costs less than it did. It comes off a price the café's other costs are pushing up at the same time, so the cup holds or gets dearer, and the expanding money absorbs the gain. The gain ends up with whoever is closest to the new money and the assets it lifts. In a system with neutral money, money nobody can expand, the same screens arrive years later, on the date the technology alone would have set, and their saving lands where it belongs, in the price of the coffee, so the people whose counter hours go face a falling cost of living instead of a rising one while they find the next thing. The harm is the pairing of the work going sooner than it had to with a rising cost of living, and that pairing is a money-system choice.

Four arguments against the timing claim

"Automation happens regardless." True, and I concede it fully. Technology sets the direction, and the destination was already fixed. What policy changes is the timing. Where it raises the cost of employing a person and rivals are free to undercut, it pulls the date in and automation runs beyond its natural pace.

"Higher wages give workers more to spend, which protects jobs." There's a short-run demand effect, but the standing incentive it plants is to remove labour, and firms act on the incentive that stays in place, not on the one-off boost.

"Policy doesn't speed automation everywhere." Where the state shields a firm from competition or subsidises the old process, it does the opposite and keeps manual roles alive past their natural end. Policy bends the pace away from natural in both directions. It accelerates automation where it raises labour costs in open competition, and it slows automation where it blocks competition.

"A wage rise only bites like this when the substitute is actually on the shelf." When the wage floor was new, a rise in it mostly meant higher prices, because there was no kiosk to buy. Today the kiosk, the self-checkout, and increasingly the AI that does office work are sitting in a catalogue with next-day delivery, which is why the wage-to-automation link is tighter now than it was ten years ago.

---

# The Resentment Machine
Date: 2026-07-15
Canonical: https://thenaturalstate.org/essays/the-resentment-machine/

Politics is angry because most people are working harder than their parents did and still falling behind, and nothing in their daily life shows them what's causing it. When people feel robbed but can't see the thief, they turn on each other. The anger is real and it's rational. It's mostly aimed at the wrong target.

The mechanism underneath

Technology keeps making things cheaper to produce, because better tools let the same work create more output. Where money can't be created at will, that saving reaches you as falling prices for most goods and services. Your savings then buy more over time. You can see it in the corners of life the money system doesn't dominate. Your phone does what a camera, a map, a stereo, and a torch used to do, for close to nothing.

But our money is built on debt. Most new pounds come into existence when someone borrows [when a bank makes a loan, it creates the deposit it lends out], and those debts are fixed in pounds. That matters when prices fall. A system built on debt can take a slow fall that comes with better tools. In that fall it's the cost of making things that drops, and pay drifts down slowly behind it, so the money to meet a fixed payment is still there. What it can't take is a sudden fall in the prices credit pushed up, houses first, because then the losses spread through the banks. In that fall it's the lending that has stopped, so incomes and the house fall together and at once, and the fixed payment is hit from both sides in the same year. Houses come first because people buy them with borrowed money. The debt takes a bigger bite of every income. And where the loan was written against a house, the house is worth less too, so the bank stands to lose more on that loan. So every time a sudden fall in those prices threatens, the system is rescued with new money, and the rescues keep getting bigger.

In between, policy targets rising prices of about 2% a year, forever. Central banks publish why they aim there. They want room to cut interest rates in a downturn, they know wages resist falling, and they say the official measure of prices overstates the rise. Those are the reasons they give, and the debts aren't among them. The debts show up in the rescues, not in the everyday 2%. Getting there takes new money that first cancels the fall better tools would have delivered, and then adds two on top. Governments and central banks create that money and credit to push prices up.

That new money doesn't arrive evenly. It reaches financial markets first, so house and share prices jump quickly. Wages move last, because pay gets renegotiated slowly, maybe once a year (that order has a name, the Cantillon effect, whoever receives new money first benefits before prices adjust for everyone else). So over a stretch, people who own assets get richer in pound terms while people who live on a payslip find their pay buys less. In Britain since 2008 that's what the figures show. That's what happens when money is created faster than productivity grows. Pay rarely catches up in full, so the gap builds over years. Rising prices and falling real wages are the same event seen from two sides. Technology made things cheaper to produce, you worked just as hard, and you didn't get the saving as a lower average price. Part of it reached you as higher pay, late and unevenly. The rest went to whoever got the new money first, through house and share prices. Working harder than your parents did is what chasing that missing saving looks like.

Why that comes out as anger at each other

The loss is real but invisible. Nobody's payslip shows a line called "transferred to asset owners". People just feel the results. Rent up again. The food shop dearer. The deposit further away year after year. So they look for someone to blame, and the visible candidates are other people. The landlord, the boss, the banker, the immigrant, the boomers, the other party's voters. Some of them even gain from the transfer. None of them built the machine. A few do touch rules that bear on what people pay. The biggest banks help write the money's rules, and homeowners who vote in local planning help set what housing costs. Housing supply rules are a second real cause of the anger, and anger aimed there isn't misdirected.

Scarcity makes groups fight. At a summer camp in the 1950s (the Robbers Cave experiment), researchers split boys into two groups and put them in competition over scarce resources. The groups turned hostile fast. History outside the lab shows the same pattern. Given a shared goal that needed everyone, the hostility faded. Our money system takes the price falls technology would deliver and replaces them with rising costs in the things people must buy, housing most of all, which manufactures the feeling of scarcity in the most productive era so far. Part of the rise in care, health, and education would have happened under any money, because better tools have changed those jobs less. That manufactured scarcity is why the anger feels so out of proportion. People can sense the abundance exists and can't reach it.

Why politics feeds the anger instead of fixing it

Where the currency still works, the honest deal doesn't get offered, election after election. Imagine the honest pitch. "Your pay will go from £50,000 to £48,000, but your costs will fall by more, so you'll be better off." Voters hear the £48,000 and choose the candidate promising £52,000, even though the first deal wins. We're used to judging pay by the number, not by what it buys. People living with an unstable currency learn sooner to ask what the number buys, because they have to. Where the currency has visibly failed, the honest deal does get offered, and it can win. Where the currency still works, that's a standing bias in what gets offered, not a guarantee that an honest candidate loses a given election.

So the parties compete on promises of relief. Subsidies, transfers, rent caps, and help-to-buy schemes. Most of those promises are paid for by borrowing, because the sums run past what taxes raise. Time and again the central bank has ended up buying a large share of that debt with new money. It buys from existing holders, so the new money reaches them first and lifts asset prices before it reaches pay. That reopens the gap the relief was meant to close, even where the relief raised incomes at the bottom while it lasted. Election after election, the divide compounds, and each side becomes more certain the other side is the problem. The one thing never on your ballot paper is the money system itself.

Media and social platforms then pour fuel on the anger, because outrage holds attention and attention is what they sell. But the feed isn't what made people's pay buy less. What it takes is their attention. The falling behind is real. What the money system does is take the saving that technology would otherwise have delivered as falling prices. The money system isn't the only force pressing on people's pay. Automation and global wage competition push the same way, and fixing the money doesn't stop either of them. Economic stress makes tribes. The feed just sorts people into one of them.

Where it goes if nothing changes

Toward control. A system that keeps mass-producing losers has to manage them, so you get more surveillance of money and speech, and emergency powers that don't expire. The worst historical version is Germany in the 1920s, where printing destroyed savings, and a decade later, with the worldwide slump on top of it, people hunted for someone to blame and a strongman offered them targets. I'm not predicting that. I'm saying the direction of travel is set by the incentive, not by the character of whoever's in charge.

The arguments that point away from the money

"Anger has many causes: culture, education, social media, immigration."

True, and they matter. But the money pressure reliably deepens the fault lines people already have, because it makes life feel zero-sum, and people fight harder over their differences when they feel they're falling behind. That's a tendency, not a certainty, and measured political hostility hasn't risen together across rich countries. Social media is petrol. The money system is the match.

"Redistribution will fix the divide."

Inside this system, relief on this scale is paid for by borrowing rather than out of taxes. Some of that borrowing is taken up by savers, which moves money that already exists. Time and again, the rest has been bought by the central bank with new money. Year after year the sums run past what taxes do raise, and no tax rate pays off the debt those promises have already run up. Growing the economy faster than that debt is a different thing, and it does help. But when technology keeps pushing prices down and the debts are this large, the path governments lean toward is paying those savers less than prices rise, so the debt is repaid in pounds that buy less. The gap reopens after each transfer, because the new money reaches asset owners before it reaches pay. Tax fights attack the effects while the mechanism keeps widening the gap. Politics can blunt the worst of it at the margins. Politics inside this system hasn't stopped the transfer, because the lever, the power to create money, stays with the people who write the rules. Parliaments have rewritten the monetary rule more than once. What no rewrite has done is take away the power to rewrite it, and a promise not to pull a lever isn't the same as removing it. While the lever stays, a change of government changes who benefits and leaves the transfer itself running. That's a big part of why decades of redistribution haven't closed the divide.

"Politics was ever thus. This is just tribalism."

Tribalism is ancient, but whether tribes fight tracks how zero-sum life feels. Money outranks the law, because it shapes what laws get written and who they serve. Fix the base and the same tribal instincts have far less to feed on.

"Bigger government is a choice, not monetary fallout."

It looks like a choice. Follow the incentive underneath it. When the money system pushes rents, food, and deposits up year after year, voters demand relief from rising costs, and politicians respond with new programmes. The one who refuses is the one offering £48,000. Debased money creates the pain that makes the expansion politically inevitable. Fix the money and the pain that feeds the expansion drains away.

Where it goes if the base gets fixed

Whoever wins the shouting match inside the system, the way out is still fixing the base, which means money nobody can create more of, so productivity reaches everyone as falling prices. Do that and saving works again, the hidden transfer stops, and the manufactured scarcity drains out of politics. Fixing the base doesn't stop automation or global wage competition. What it changes is who ends up with the saving. Once prices are free to fall, that saving reaches people as cheaper goods and more free time, which cushions the change instead of leaving them a pay packet that buys less. That's where bitcoin comes into this story. Its role here is the neutral base that lets abundance reach people, not a trade to be in. That holds only while it stays decentralised and secure, and only if people use it as money rather than just hold it. It's also the kind of shared goal that ended the hostility at the camp. People who agree on nothing else can agree on rules nobody can bend. When someone can feel life getting cheaper over time, they need someone to blame far less.

Anger is a stage. When people first see the transfer, they're furious, and that's better than not seeing it. But it's a rung on a ladder, not a place to live.

## Sources

What this essay rests on, as checked on 2026-10-07.

1. "Politics is angry because most people are working harder than their parents did and still falling behind, and nothing in their daily life shows them what's causing it."
   National Bureau of Economic Research, The Fading American Dream: Trends in Absolute Income Mobility Since 1940: "We find that rates of absolute mobility have fallen from approximately 90% for children born in 1940 to 50% for children born in the 1980s." The source measures the share of children earning more than their parents, and 50% is about half rather than most; it reports income relative to parents, not hours worked or working harder. https://www.nber.org/papers/w22910

2. "Most new pounds come into existence when someone borrows [when a bank makes a loan, it creates the deposit it lends out], and those debts are fixed in pounds."
   Bank of England, Quarterly Bulletin 2014 Q1, “Money creation in the modern economy”, published 14 March 2014: "the majority of money in the modern economy is created by commercial banks making loans" https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy

3. "In between, policy targets rising prices of about 2% a year, forever."
   Federal Reserve, Statement on Longer-Run Goals and Monetary Policy Strategy, 25 January 2012: "The Committee judges that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve's statutory mandate." https://www.federalreserve.gov/newsevents/pressreleases/monetary20120125c.htm
   European Central Bank, Press release, 8 July 2021, "ECB's Governing Council approves its new monetary policy strategy": "The Governing Council considers that price stability is best maintained by aiming for a 2% inflation target over the medium term. This target is symmetric, meaning negative and positive deviations of inflation from the target are equally undesirable." https://www.ecb.europa.eu/press/pr/date/2021/html/ecb.pr210708~dc78cc4b0d.en.html
   Bank of England, Inflation and the 2% target: "The Government sets us a 2% inflation target"; "If we miss the inflation target by more than 1 percentage point either side of the target, we must tell the Government why." https://www.bankofengland.co.uk/monetary-policy/inflation

4. "They want room to cut interest rates in a downturn, they know wages resist falling, and they say the official measure of prices overstates the rise."
   European Central Bank, An overview of the ECB's monetary policy strategy, 2021: "Three additional factors ... call for a sufficient inflation buffer": "downward nominal wage rigidities", "measurement bias", and room for "interest rate cuts". The target "underlines the ECB's commitment to providing an adequate safety margin to guard against the risk of deflation". https://www.ecb.europa.eu/mopo/strategy/strategy-review/ecb.strategyreview_monpol_strategy_overview.en.html
   Bank of Canada, Renewal of the Inflation-Control Target: Background Information, November 2011: "In addition to the risks associated with the ZLB, two other potential costs of moving to an inflation target lower than 2 per cent were identified": "measurement bias in the CPI and downward nominal wage rigidities". The Bank adds that it views neither of those two as a significant impediment to a lower target. https://www.bankofcanada.ca/wp-content/uploads/2011/11/background_nov11.pdf

5. "Governments and central banks create that money and credit to push prices up."
   Bank of England, Quarterly Bulletin 2014 Q1, "Money creation in the modern economy": "The amount of money created in the economy ultimately depends on the monetary policy of the central bank." ... "The central bank can also affect the amount of money directly through purchasing assets or 'quantitative easing'." https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy

6. "It reaches financial markets first, so house and share prices jump quickly."
   Bernanke and Kuttner, "What Explains the Stock Market's Reaction to Federal Reserve Policy?", NBER Working Paper No. 10402: "equity prices respond within the day to the unanticipated component of monetary policy actions"; "The data are daily returns on the S&P 500 index from January 3, 1989 through December 31, 2002." https://nber.org/system/files/working_papers/w10402/w10402.pdf

7. "Wages move last, because pay gets renegotiated slowly, maybe once a year (that order has a name, the Cantillon effect, whoever receives new money first benefits before prices adjust for everyone else)."
   Cantillon, Essai sur la Nature du Commerce en Général, Part II, Chapter VI, "Of the increase and decrease in the quantity of hard money in a State": "the Proprietors of these Mines, the Undertakers, and all those who work there, will not fail to increase their expenses in proportion to the wealth and profit they make". The page carries nothing on prices adjusting afterwards for everyone else. https://www.econlib.org/library/NPDBooks/Cantillon/cntNT.html?chapter_num=25#book-reader

8. "In Britain since 2008 that's what the figures show."
   Office for National Statistics, Average weekly earnings in Great Britain: March 2020: "In real terms, regular pay fell to £471 per week and is back below the pre-2008 economic downturn peak"; "£2 (0.4%) less than the pre-2008 economic downturn peak of £473 per week for March 2008." This is one comparison, for January 2020, not a series across the years since 2008. https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/employmentandemployeetypes/bulletins/averageweeklyearningsingreatbritain/march2020

9. "Part of it reached you as higher pay, late and unevenly."
   Stansbury and Summers, "Productivity and Pay: Is the link broken?", NBER Working Paper 24165, 2017: "over 1973-2016, one percentage point higher productivity growth has been associated with 0.7 to 1 percentage points higher median and average compensation growth"; "other factors orthogonal to productivity have been acting to suppress typical compensation". https://www.nber.org/papers/w24165
   Pessoa and Van Reenen, "Decoupling of Wage Growth and Productivity Growth? Myth and Reality", Centre for Economic Performance Discussion Paper 1246, October 2013: UK, 1972 to 2010: "real productivity grew by 114 per cent" and "median real wages by 72 per cent". https://cep.lse.ac.uk/pubs/download/dp1246.pdf

10. "The biggest banks help write the money's rules, and homeowners who vote in local planning help set what housing costs."
   Igan and Mishra, "Wall Street, Capitol Hill, and K Street: Political Influence and Financial Regulation", Journal of Law and Economics, 2014: "spending on lobbying by the financial industry and network connections between lobbyists and legislators were positively associated with the probability of a legislator changing positions in favor of deregulation"; the database covers "the financial industry from 1999 to 2006". https://chicagounbound.uchicago.edu/jle/vol57/iss4/7/
   Hilber and Vermeulen, "The Impact of Supply Constraints on House Prices in England", Economic Journal, 2016: "regulatory constraints have a substantive positive impact on the house price-earnings elasticity", from "a unique panel dataset of 353 Local Planning Authorities in England between 1974 and 2008". The finding is on the house price-to-earnings elasticity, not a share of price levels. https://researchonline.lse.ac.uk/id/eprint/58017

11. "At a summer camp in the 1950s (the Robbers Cave experiment), researchers split boys into two groups and put them in competition over scarce resources."
   Sherif, Harvey, White, Hood and Sherif, Intergroup Conflict and Cooperation: The Robbers Cave Experiment, chapter 4, “Experimental Formation of In-groups Revealed Through Appropriate Attitudes and Behavior” (1954/1961): “Two groups of subjects were kept apart during Stage 1. Until the last days of that stage, at no time did the groups have contact with one another.” https://psychclassics.yorku.ca/Sherif/chap4.htm

12. "Subsidies, transfers, rent caps, and help-to-buy schemes."
   Scottish Parliament, Cost of Living (Tenant Protection) (Scotland) Act 2022, Explanatory Notes: “On or after 6 September 2022, a landlord under a Scottish secure tenancy or short Scottish secure tenancy may not increase the rent payable under the tenancy by more than the permitted rate, which is initially set at 0%.” https://www.legislation.gov.uk/asp/2022/10/notes/division/4/5/3
   HM Treasury, Spring Budget 2023: “additional Cost of Living Payments for more than 8 million households on means-tested benefits, 6 million people on disability benefits, and 8 million pensioner households”. The page does not mention Help to Buy. https://www.gov.uk/government/publications/spring-budget-2023/spring-budget-2023-html

13. "Time and again the central bank has ended up buying a large share of that debt with new money."
   Bank of England, Asset Purchase Facility Quarterly Report, 2021 Q4: “As at 31 December 2021, the Bank had reported cumulative asset purchases net of sales, redemptions and repayments totalling £894.7 billion.” The page prints no fiscal support figures. https://www.bankofengland.co.uk/asset-purchase-facility/2021/2021-q4

14. "It buys from existing holders, so the new money reaches them first and lifts asset prices before it reaches pay."
   Bank of England, The Distributional Effects of Asset Purchases, 12 July 2012: “the Bank's asset purchases have increased the prices of a wide range of assets, not just gilts.” https://www.bankofengland.co.uk/news/2012/july/the-distributional-effects-of-asset-purchases-paper

15. "That reopens the gap the relief was meant to close, even where the relief raised incomes at the bottom while it lasted."
   United States Census Bureau, Supplemental Poverty Measure report, “Poverty Measure That Includes Government Assistance Increased to 12.4% in 2022, When Pandemic Relief Ended”: “The Supplemental Poverty Measure (SPM), which includes government assistance, increased to 12.4% in 2022 from 7.8% in 2021,” the rise “largely the result of the end of stimulus payments and tax credits”. https://www.census.gov/library/stories/2023/09/supplemental-poverty-measure.html

16. "Automation and global wage competition push the same way, and fixing the money doesn't stop either of them."
   Acemoglu and Restrepo, “Robots and Jobs: Evidence from US Labor Markets”, NBER Working Paper No. 23285 (Journal of Political Economy, 2020): “We analyze the effect of the increase in industrial robot usage between 1990 and 2007 on US local labor markets... we estimate large and robust negative effects of robots on employment and wages across commuting zones.” https://www.nber.org/papers/w23285
   Autor, Dorn and Hanson, “The China Syndrome: Local Labor Market Effects of Import Competition in the United States”, NBER Working Paper No. 18054 (American Economic Review, 2013): “We analyze the effect of rising Chinese import competition between 1990 and 2007 on local U.S. labor markets”; it “increases unemployment, lowers labor force participation, and reduces wages in local labor markets.” https://www.nber.org/papers/w18054

17. "The worst historical version is Germany in the 1920s, where printing destroyed savings, and a decade later, with the worldwide slump on top of it, people hunted for someone to blame and a strongman offered them targets."
   Deutscher Bundestag, “Hyperinflation in Deutschland 1923”: “Die Hyperinflation traf vor allem Arbeiter, Kleinrentner und Kriegsversehrte sowie Sparer aus dem mittleren und wohlhabenden Bürgertum, die durch die Inflation regelrecht enteignet wurden”; 4.2 trillion marks per US dollar at the November 1923 peak. https://www.bundestag.de/parlament/geschichte/100-jahre-weimar/hyperinflation-970722

18. "That's a tendency, not a certainty, and measured political hostility hasn't risen together across rich countries."
   Boxell, Gentzkow and Shapiro, “Cross-Country Trends in Affective Polarization”, NBER Working Paper No. 26669, January 2020: “We measure trends in affective polarization in twelve OECD countries over the past four decades... the US experienced the largest increase in polarization. Five countries experienced a smaller increase in polarization. Six countries experienced a decrease in polarization.” https://www.nber.org/papers/w26669

19. "Time and again, the rest has been bought by the central bank with new money."
   Bank of England, Asset Purchase Facility Quarterly Report, 2021 Q3: Facility set up 29 January 2009; gilt purchases expanded by £200bn (19 March 2020), £100bn (18 June 2020) and £150bn (5 November 2020) to a £895bn target stock; £855.6bn cumulative purchases at 29 September 2021. https://www.bankofengland.co.uk/asset-purchase-facility/2021/2021-q3

20. "Year after year the sums run past what taxes do raise, and no tax rate pays off the debt those promises have already run up."
   Office for National Statistics, UK Perspectives 2016: Trends in the UK economy: "Government expenditure has been larger than government income for most years since 1980, which is why the UK has typically been in deficit since 1980." The page says most years, not every year. https://www.ons.gov.uk/economy/grossdomesticproductgdp/articles/ukperspectives2016trendsintheukeconomy/2016-05-25
   ONS, Public sector finances, UK: April 2026: "Borrowing – the difference between total public sector spending and income"; for the financial year ending March 2026, receipts £1,232.10 billion against spending £1,362.80 billion. The bulletin gives that one year, not a run of years. https://www.ons.gov.uk/economy/governmentpublicsectorandtaxes/publicsectorfinance/bulletins/publicsectorfinances/april2026

21. "Parliaments have rewritten the monetary rule more than once."
   Parliament of the United Kingdom, Bank of England Act 1998, section 12: Specification of matters relevant to objectives: "The Treasury may by notice in writing to the Bank specify for the purposes of section 11—(a)what price stability is to be taken to consist of", and "at least once in every period of 12 months". https://www.legislation.gov.uk/ukpga/1998/11/section/12
   Congress of Argentina, Ley 25.561, Emergencia Pública y Reforma del Régimen Cambiario, sanctioned 6 January 2002: "Deróganse los artículos 1°, 2°, 8°, 9°, 12 y 13 de la Ley N° 23.928" (Article 3); sanctioned 06-01-2002, published in the Boletín Oficial 07-01-2002. https://www.argentina.gob.ar/normativa/nacional/norma-71477/texto


---

# The State That Grows on Its Own Damage
Date: 2026-07-15
Canonical: https://thenaturalstate.org/essays/the-state-that-grows-on-its-own-damage/

A bank rescue, a stimulus cheque, a help-to-buy scheme, and a cut in interest rates look like different tools, but they're all the same move. The government and central bank create more money and credit so that yesterday's debts stay payable. Once you see the one move, the pattern stops being a mystery. Each fix works today and makes things worse, because each fix feeds the thing causing the damage.

If the fixes were merely badly designed, better politicians could design better ones, and this whole thesis would be a policy pamphlet. The failure is structural. Technology keeps pushing prices down, and policy aims at prices that rise, so the two can't be reconciled inside the current rules, and what policy has to cancel out keeps getting bigger as the tools improve faster. That's why the story only moves in one direction, toward bigger interventions, bigger side effects, and more control.

Debt against technology

Nearly all our money is created through lending. When a bank writes a mortgage, new money comes into existence with a matching debt attached. So the economy carries a mountain of debt, and most of that debt is fixed in pounds. Your mortgage payment doesn't shrink because your wages fell.

Technology pushes prices down. When tools improve, the same goods cost less to make, and competition passes the saving on to the buyer. Under a money nobody can add to, prices would fall almost everywhere, the way they already do in electronics, and the force is accelerating, because with software, and now AI, each improvement makes the next one come faster.

A system built on debts fixed in pounds can take a slow fall that comes with better tools. In that fall it's the cost of making things that drops, and pay drifts down slowly behind it, so the money to meet a fixed payment is still there. What it can't take is a sudden fall in the prices credit pushed up, houses first, because then the losses spread through the banks. In that fall it's the lending that has stopped, so incomes and the house fall together and at once, and the fixed payment is hit from both sides in the same year. Houses come first because people buy them with borrowed money. The debt takes a bigger bite of every income, yours, your employer's, the government's. And where the loan was written against a house, the house is worth less too, so the bank stands to lose more on that loan. Push that far enough and defaults cascade through the banking system, because each bank's promises are backed by someone else's ability to pay.

So every time a sudden fall in the prices credit pushed up threatens, the system is rescued with new money, and the rescues keep getting bigger. The rescue can come as cheaper borrowing, as new money created to buy bonds [quantitative easing], as cheques in the post, or as loans guaranteed by the state, and every one of those is more money and credit.

In between the rescues, policy targets rising prices of about 2% a year, forever. Central banks publish why they aim there. They want room to cut interest rates in a downturn, they know wages resist falling, and they say the official measure of prices overstates the rise. Those are the reasons they give, and the debts aren't among them. The debts show up in the rescues, not in the everyday 2%. The starting line for that 2% isn't zero, because technology keeps pushing prices down. So when a central bank targets 2% inflation, it doesn't need two points of push. It first has to cancel whatever better tools would have taken off prices that year, then add two on top. How big that fall would be is about how fast output per hour of work grows, which is what the productivity figures measure. On the published figures that's a point or two a year. No statistic records that fall, because it never happened.

The trap

The rescue does work today, and it charges compound interest for tomorrow. Some of the bill is due later, and some of it you're already paying.

1. Storing the pressure instead of releasing it

New money is new debt. A rescue paid for by adding money and credit leaves a bigger debt pile than the one that made the rescue necessary, so the pile the next downturn lands on is bigger than the last. Between 2000 and early 2018, the world added roughly 185 trillion dollars of debt to get roughly 46 trillion dollars of growth. Each new dollar of debt buys less growth than the last one did.

2. Transferring wealth while it "works"

Most of the new money enters through asset markets. House and share prices move first, wages move last. If you own a house or shares, the fix makes you richer on paper. If you rent and earn a wage, your costs rise before your pay does. You worked just as hard, technology made things cheaper to produce, but the saving never reached you as lower prices. Part of it reached you as higher pay, late and unevenly. The rest went to whoever got the new money first, through house and share prices. So a fix that works by holding up asset prices widens the distance between people who own houses and shares and people who rent and live on a wage, and that distance is what the next fix is asked to close.

3. Corrupting prices as information

A price is a signal telling everyone what's scarce and what's worth doing. When policy sets the interest rate and holds up asset prices, every calculation built on those prices is bent. Firms that only survive because borrowing is nearly free soak up workers and capital that better firms should have had, so the economy gets less productive, which means more fixing. And the fix grades its own homework, because GDP [the money value of everything a country produces in a year] counts the borrowed spending as growth, so the intervention looks successful on the very measure it distorted.

4. Removing small failures and saving up a big one

Put out every small fire in a forest and the dry fuel builds until one fire takes everything. Rescue every failing firm and bank without the loss ever being counted, and the errors build the same way. Each stays on the books, the next lands on top of it, and they never clear. The pressure doesn't vanish. It moves up a level, and the level above the banks is the currency itself.

Politics closes the loop

Because the fixes raise the cost of living, voters demand relief. Governments answer with programmes. Rent caps, subsidies, minimum wage rises, and eventually a universal basic income [a flat regular payment to every citizen, working or not] each treat a symptom the money system created, and the cash ones are paid for mainly with new money, not with tax. The government borrows, and the central bank creates new money to buy that borrowing. In 2020 and 2021 new money bought most of what was borrowed. So the cause gets stronger. Programmes multiply to solve the problems earlier programmes created, and the ones brought in as temporary tend to stay. So with every turn of the loop, more of the economy comes to run on political allocation instead of prices. The share has grown across the turns so far and hasn't gone back to where it began.

And none of it needs villains. Each person in the chair faces the same choice, to let the structure collapse on their watch or to add more. A central banker who deliberately purged the bad debt would cause mass unemployment and lose the job. Incentives beat intent. That's also why the people in those seats can't stop for good. Withdrawing support would let the whole credit structure fall at once to the prices a free market would set, and even a believable announcement of a stop would start the collapse early. The choice is a short, sharp depression now, or a longer grind in which wages and savings keep losing ground, with more inequality and more control later. Government after government has chosen later.

The pattern in the wild

The 2000 dot-com crash was met with cheap credit, which inflated housing. Housing collapsed in 2008 and was met with bank bailouts, near-zero rates, and central banks creating money to buy bonds. Then 2020 was met with trillions in months. Each rescue is bigger, each recovery weaker, and markets now wobble at the hint of support being withdrawn.

In housing, cheap credit pushes house prices up. First-time buyers fall behind, so the government adds help-to-buy, which adds buying power, which pushes prices up further. The fix for expensive housing is more credit, and more credit is what made housing expensive.

Stimulus cheques arrive, rents and prices rise to meet them, and the next round has to be larger to produce the same relief.

Iceland in 2008 let its banks fail and wiped out the bad debts. It took the short, sharp depression, and it recovered faster than the countries that rolled their losses forward. It also let its currency fall hard and stopped money leaving the country while it healed, so it isn't a clean test of the choice. What it does show is that recognising the losses beat pretending they weren't there.

Bigger interventions, bigger side effects

If this is right, the interventions keep growing. Technology keeps cutting the cost of making things, and the push behind that fall keeps getting stronger, because the tools are improving faster than they did, so what policy has to cancel out keeps getting bigger. The yearly pace of new money hasn't trended up. What the record shows growing is the stock of debt and the size of the rescue that each downturn gets. When the interventions grow, the same side effects grow with them. The gap between people who own houses and shares and everyone else widens, the programmes keep coming, control of money and speech tightens, because a system that needs support also needs the story managed, and the politics get angrier. That's been the record so far, with the rescue at each downturn since 2000 bigger than the last. A spell of tightening can interrupt the run, as one did from 2022. The earlier spells ended in a return to support when something broke, and the forecast is that this one ends the same way.

And no policy mix inside the system ends the pattern, because the system's survival requires the thing that does the damage. The exit needs a base money nobody can expand, and that on its own isn't enough, because credit built on top can still push prices up unless the losses fall on whoever took the risk. With both, when technology makes things cheaper, prices actually fall and everyone gets the saving. Bitcoin opens that door. The destination is everyone getting the saving.

The case for carrying on

"2008 and 2020 prove the fixes work. Without them we'd have had a depression."

In the moment that's true, and I don't wave it away. But what the objection concedes is that the rescue is only necessary because the system is built to need rescuing. Relief now is bought with a bigger structural problem later. That describes a trap. It doesn't defend one.

"Deflation is the disaster the fixes prevent."

Two different things share the word. Deflation from a credit collapse, where demand dies and forced selling feeds on itself, is destructive. Deflation from productivity, where things get cheaper because we got better at making them, is progress, and you already enjoy it in TVs and phone plans. What the rescues are built to stop is the first, a sudden broad fall in the prices credit pushed up. In a system this loaded with debt, a sudden broad fall really would be a disaster. The danger is the debt design, not the cheaper goods.

"Better leaders would fix it."

Changing the shop manager doesn't help if the till miscounts. Whoever sits in the seat faces collapse-now versus worse-later, and rationally picks worse-later. That wasn't always true. When most of the debt sat on private books, a central banker could force the reckoning and the state survived it. Now the debt sits on the state's own books too. At the interest rates that free buyers and sellers would set, the government's own borrowing fails alongside the private borrowers, and that's why those rates get capped instead of reached. So the reckoning gets reversed rather than finished. The state doesn't miss a payment. It pays on the day in money that buys less, and the loss falls on whoever holds the debt and on savers. You fix the till, or you move to one that can't be rigged.

"We can taper off gradually."

It was promised after 2008, and again after 2020. So far it has gone the same way each time. Credit tightens, something in the system breaks, and the support comes back. Support can be pulled back part of the way for a time, as it was from 2022 to 2024, when rates rose and bond holdings shrank. But each place the pull-back strained got new support within days, the Bank of England's in September 2022 and the Federal Reserve's in March 2023, and the promise to step in was never withdrawn. That isn't weakness of will. The system now runs on so much borrowed money that even small withdrawals expose the fragility the fixes papered over.

One boundary, so the claim doesn't overreach. This isn't "everything a government does makes things worse". Courts, fraud enforcement, even clear rules for new technology do help, because they harden the rules of the game rather than bend them. Any fix that tries to hold prices up against technology, or to patch the symptoms of doing so, is paid for, in the end, through money creation, and money creation feeds the cause. That's why the fixes keep arriving, and why each one works today and leaves the problem bigger than it found it.

## Sources

What this essay rests on, as checked on 2026-10-10.

1. "Nearly all our money is created through lending."
   Bank of England, Quarterly Bulletin 2014 Q1, “Money creation in the modern economy”, published 14 March 2014: “the majority of money in the modern economy is created by commercial banks making loans”, and the article’s line that “97% of the money held by the public is in the form of deposits with banks”. https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy

2. "When a bank writes a mortgage, new money comes into existence with a matching debt attached."
   Deutsche Bundesbank, Monthly Report, April 2017, “The role of banks, non-banks and the central bank in the money creation process”: Banks create deposits when they extend credit; repayment of the credit eliminates the deposits. https://www.bundesbank.de/en/publications/search/the-role-of-banks-non-banks-and-the-centralbank-in-the-money-creation-process-654284
   Bank of England, Quarterly Bulletin 2014 Q1, “Money creation in the modern economy”, published 14 March 2014: “the majority of money in the modern economy is created by commercial banks making loans”. https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy

3. "So the economy carries a mountain of debt, and most of that debt is fixed in pounds."
   HM Treasury, Debt Management Report 2026-27: Index-linked gilts “around £688.5 billion at end-December 2025, making up 25.2% of the government’s wholesale debt portfolio”, in nominal uplifted terms; 24.5% at end-2024. The share covers government wholesale debt, not all debt in the economy. https://www.gov.uk/government/publications/debt-management-report-2026-27/debt-management-report-2026-27

4. "Under a money nobody can add to, prices would fall almost everywhere, the way they already do in electronics, and the force is accelerating, because with software, and now AI, each improvement makes the next one come faster."
   U.S. Bureau of Labor Statistics, The Economics Daily, “Long-term price trends for computers, TVs, and related items”: “The price index for TVs decreased 94 percent from December 1997 to August 2015.” Also printed for the same period: “audio equipment (−60 percent)” and “photographic equipment and supplies (−59 percent)”. https://www.bls.gov/opub/ted/2015/long-term-price-trends-for-computers-tvs-and-related-items.htm
   Office for National Statistics, CPI index 09.1: Audio-visual equipment and related products, 2015=100 (series D7CS): Annual index, 2015=100: 1995 658.4; 2000 400.0; 2005 249.4; 2010 144.9; 2015 100.0; 2020 91.9; 2024 96.5; 2025 95.7. https://www.ons.gov.uk/economy/inflationandpriceindices/timeseries/d7cs/mm23

5. "So every time a sudden fall in the prices credit pushed up threatens, the system is rescued with new money, and the rescues keep getting bigger."
   Bank of England Independent Evaluation Office, IEO evaluation of the Bank of England’s approach to quantitative easing, January 2021: £200 billion of gilts bought in the first programme, 2009 to early 2010; £895 billion total authorised by 2021. https://www.bankofengland.co.uk/independent-evaluation-office/ieo-report-january-2021/ieo-evaluation-of-the-bank-of-englands-approach-to-quantitative-easing
   Federal Reserve Bank of St. Louis, FRED series WALCL, Assets: Total Assets (Less Eliminations from Consolidation): Wednesday Level: Millions of U.S. dollars, weekly Wednesday level: $4,158,637 million on 26 February 2020; $7,168,936 million on 10 June 2020. https://fred.stlouisfed.org/series/WALCL

6. "The rescue can come as cheaper borrowing, as new money created to buy bonds [quantitative easing], as cheques in the post, or as loans guaranteed by the state, and every one of those is more money and credit."
   Bank of England, Quarterly Bulletin 2014 Q1, “Money creation in the modern economy”, 14 March 2014: “The central bank can also affect the amount of money directly through purchasing assets or ‘quantitative easing’.” And: “the majority of money in the modern economy is created by commercial banks making loans”. https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy

7. "In between the rescues, policy targets rising prices of about 2% a year, forever."
   Federal Reserve, Statement on Longer-Run Goals and Monetary Policy Strategy, 25 January 2012: "The Committee judges that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve's statutory mandate." https://www.federalreserve.gov/newsevents/pressreleases/monetary20120125c.htm
   European Central Bank, An overview of the ECB's monetary policy strategy, 2021 strategy review: "at this juncture the Governing Council considers that price stability is best maintained by aiming for a two per cent inflation target over the medium term." https://www.ecb.europa.eu/mopo/strategy/strategy-review/ecb.strategyreview_monpol_strategy_overview.en.html
   Bank of England, Inflation and the 2% target: "The Government sets us a 2% inflation target"; "If we miss the inflation target by more than 1 percentage point either side of the target, we must tell the Government why." https://www.bankofengland.co.uk/monetary-policy/inflation

8. "They want room to cut interest rates in a downturn, they know wages resist falling, and they say the official measure of prices overstates the rise."
   ECB, An overview of the ECB's monetary policy strategy, 2021 strategy review: "Three additional factors, which were present already in 2003 and which have remained broadly unchanged since then, call for a sufficient inflation buffer": room for interest rate cuts, measurement bias, and "downward nominal wage rigidities". https://www.ecb.europa.eu/mopo/strategy/strategy-review/ecb.strategyreview_monpol_strategy_overview.en.html
   Bank of Canada, Renewal of the Inflation-Control Target: Background Information, November 2011: Names "measurement bias in the CPI and downward nominal wage rigidities", with the lower bound, as costs of a target below 2 per cent. The Bank sees neither of the last two as a significant impediment to a lower target. https://www.bankofcanada.ca/wp-content/uploads/2011/11/background_nov11.pdf

9. "Those are the reasons they give, and the debts aren't among them."
   ECB, An overview of the ECB's monetary policy strategy, 2021 strategy review: The stated reasons are a buffer for interest rate cuts, measurement bias and "downward nominal wage rigidities", plus cross-country adjustment: "Three additional factors … call for a sufficient inflation buffer." Debt is not among them. https://www.ecb.europa.eu/mopo/strategy/strategy-review/ecb.strategyreview_monpol_strategy_overview.en.html
   Federal Reserve, FAQ: Why does the Federal Reserve aim for inflation of 2 percent over the longer run? (page updated 22 August 2025): "inflation of 2 percent over the longer run … is most consistent with the Federal Reserve's mandate for maximum employment and price stability." The reason given is that low, stable inflation aids saving, borrowing and investment decisions; debt is not mentioned. https://www.federalreserve.gov/faqs/economy_14400.htm

10. "If you own a house or shares, the fix makes you richer on paper."
   Bank of England, Explainer: What is quantitative easing?: "When we buy bonds, their price tends to increase"; "QE increases the price of financial assets other than bonds, such as equities." https://www.bankofengland.co.uk/monetary-policy/quantitative-easing
   Bunn, Pugh and Yeates, Bank of England, Staff Working Paper 720, "The distributional impact of monetary policy easing in the UK between 2008 and 2014", March 2018: "households around retirement age gained the most from the support to wealth, but that support to incomes disproportionately benefited the young"; "the overall effect of monetary policy on standard relative measures of income and wealth inequality has been small". https://www.bankofengland.co.uk/working-paper/2018/the-distributional-impact-of-monetary-policy-easing-in-the-uk-between-2008-and-2014
   Miles and Monro, Bank of England, Staff Working Paper 837, "UK house prices and three decades of decline in the risk-free real interest rate", 20 December 2019: "the rise in house prices relative to incomes between 1985 and 2018 can be more than accounted for by the substantial decline in the real risk-free interest rate observed over the period". https://www.bankofengland.co.uk/working-paper/2019/uk-house-prices-and-three-decades-of-decline-in-the-risk-free-real-interest-rate

11. "If you rent and earn a wage, your costs rise before your pay does."
   Bureau of Labor Statistics, Real average hourly earnings of all employees, total private, series CES0500000013, 12-month percent change: Real average hourly earnings, all employees, total private, 1982-84 dollars, seasonally adjusted: the 12-month change is negative every month from April 2021 (-3.4 percent) to April 2023 (-0.4 percent), first positive May 2023 (+0.2). https://data.bls.gov/timeseries/CES0500000013?output_view=pct_12mths

12. "Part of it reached you as higher pay, late and unevenly."
   Stansbury and Summers, NBER Working Paper 24165, "Productivity and Pay: Is the link broken?", 2017: "over 1973-2016, one percentage point higher productivity growth has been associated with 0.7 to 1 percentage points higher median and average compensation growth"; "other factors orthogonal to productivity have been acting to suppress typical compensation". https://www.nber.org/papers/w24165
   Pessoa and Van Reenen, Centre for Economic Performance Discussion Paper 1246, "Decoupling of Wage Growth and Productivity Growth? Myth and Reality", October 2013: UK, 1972 to 2010: "real productivity grew by 114 per cent" and "median real wages by 72 per cent"; "In the UK net decoupling is basically zero"; the gap is "inequality and non-wage labour costs". https://cep.lse.ac.uk/pubs/download/dp1246.pdf

13. "Firms that only survive because borrowing is nearly free soak up workers and capital that better firms should have had, so the economy gets less productive, which means more fixing."
   Caballero, Hoshi and Kashyap, “Zombie Lending and Depressed Restructuring in Japan”, American Economic Review, volume 98, number 5, December 2008: "Large Japanese banks often engaged in sham loan restructurings that kept credit flowing to otherwise insolvent borrowers (which we call zombies) ... zombie-dominated industries exhibit more depressed job creation and destruction, and lower productivity." The page prints no date range, so it confirms no period for this. https://www.aeaweb.org/articles?id=10.1257%2Faer.98.5.1943

14. "The share has grown across the turns so far and hasn't gone back to where it began."
   Office for National Statistics, Government expenditure in the UK: "Current expenditure, which covers day-to-day costs of providing public services, has increased from around 35% of GDP in 1995 to 40% of GDP in 2024." The page gives only those two endpoints, with no annual values and no step changes. https://www.ons.gov.uk/economy/governmentpublicsectorandtaxes/publicspending/articles/governmentexpenditureintheuk/2026-05-18

15. "The 2000 dot-com crash was met with cheap credit, which inflated housing."
   Federal Reserve Bank of St. Louis (FRED), Federal Funds Effective Rate (FEDFUNDS), series page: Effective federal funds rate, monthly average, percent: June 2000 6.53; December 2000 6.40; December 2001 1.82; December 2002 1.24; December 2003 0.98. The page prints the rate cuts but nothing tying them to housing. https://fred.stlouisfed.org/series/FEDFUNDS

16. "Housing collapsed in 2008 and was met with bank bailouts, near-zero rates, and central banks creating money to buy bonds."
   Federal Reserve Bank of St. Louis (FRED), S&P Cotality Case-Shiller U.S. National Home Price Index (CSUSHPINSA), data series: Index Jan 2000=100, not seasonally adjusted: peak 184.608 in July 2006, falling to 152.543 in December 2008. The series shows a multi-year decline, not a 2008 event, and was still falling into 2009 to 2012. https://fred.stlouisfed.org/series/CSUSHPINSA
   United States Congress, Emergency Economic Stabilization Act of 2008, Public Law 110-343: "An Act To provide authority for the Federal Government to purchase and insure certain types of troubled assets"; enacted October 3, 2008; authority to buy up to $700 billion of troubled assets. https://www.congress.gov/110/plaws/publ343/PLAW-110publ343.htm
   Federal Reserve, Federal Open Market Committee statement, 16 December 2008: "establish a target range for the federal funds rate of 0 to 1/4 percent"; "the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities", effective December 16, 2008. https://www.federalreserve.gov/newsevents/pressreleases/monetary20081216b.htm

17. "Then 2020 was met with trillions in months."
   International Monetary Fund, IMF blog, “Tracking the $9 Trillion Global Fiscal Support to Fight COVID-19”, 20 May 2020: "The total global fiscal support in response to the COVID-19 pandemic is about $9 trillion. This is $1 trillion more than estimates reported just over a month earlier." About $9 trillion as of May 20, 2020. https://www.imf.org/en/blogs/articles/2020/05/20/tracking-the-9-trillion-global-fiscal-support-to-fight-covid-19
   IMF, Fiscal Monitor, October 2020: Policies for the Recovery, executive summary: "The COVID-19 pandemic and associated lock-downs prompted fiscal actions amounting to $11.7 trillion, or close to 12 percent of global GDP, as of September 11, 2020." https://www.imf.org/-/media/files/publications/fiscal-monitor/2020/october/english/execsum.pdf
   Congressional Budget Office, H.R. 748, CARES Act, Public Law 116-136, cost estimate: "The CARES Act appropriates roughly $2.2 trillion of spending, tax breaks, loans, and other resources over the next decade." $2.2 trillion, CARES Act, enacted March 2020. https://www.cbo.gov/publication/56334

18. "Iceland in 2008 let its banks fail and wiped out the bad debts."
   Yale Program on Financial Stability (New Bagehot Project), Iceland: Landsbanki Restructuring, 2008: "Equity and subordinated debt holders were wiped out, while other general creditors of the three banks recovered 29%, on average"; write-off for general creditors EUR 28.1 billion; restructuring actions dated October 2008. https://newbagehot.yale.edu/node/368

19. "The yearly pace of new money hasn't trended up."
   Board of Governors of the Federal Reserve System, via the Federal Reserve Bank of St. Louis (FRED), M2 money stock, percent change from a year ago, annual average (FRED series M2SL): Percent change from a year ago, annual average: 1975 9.4; 1977 12.4; 1985 8.9; 1990 5.5; 2000 6.1; 2015 5.8. The page prints sampled years only, and 1960 at 3.7 and 1970 at 3.9 sit below 1990, 2000 and 2015. https://fred.stlouisfed.org/series/M2SL
   Bank of England, Interactive Database series LPMVQJW, monthly twelve-month growth rate of M4, seasonally adjusted: December values of the twelve-month M4 growth rate, per cent: 1983 13.3; 1989 18; the 1990s 3.5 to 12; the 2000s 6.8 to 15.6; the 2010s −2.5 to 6.3. The series begins July 1983, so it covers no 1970s. https://www.bankofengland.co.uk/boeapps/database/_iadb-fromshowcolumns.asp?csv.x=yes&Datefrom=01/Jan/1963&Dateto=01/Sep/2026&SeriesCodes=LPMVQJW&CSVF=TN&UsingCodes=Y&VPD=Y&VFD=N

20. "What the record shows growing is the stock of debt and the size of the rescue that each downturn gets."
   International Monetary Fund, Annual Report 2022, “Debt Dynamics”: “Overall borrowing jumped by 28 percentage points to 256 percent of GDP in 2020.” “Government borrowing accounted for about half of this increase, with the remainder from nonfinancial corporations and households.” https://www.imf.org/external/pubs/ft/ar/2022/in-focus/debt-dynamics/
   Federal Reserve Bank of St. Louis (FRED), Assets: Total Assets (Less Eliminations from Consolidation): Wednesday Level (FRED series WALCL): Millions of U.S. dollars, Wednesday levels: 890,662 on 26 December 2007 rising to 2,232,311 on 24 December 2008; 4,158,637 on 26 February 2020 rising to 8,965,487 on 13 April 2022. https://fred.stlouisfed.org/series/WALCL

21. "A spell of tightening can interrupt the run, as one did from 2022."
   Bank of England, Monetary Policy Summary, September 2022: “reduce the stock of purchased UK government bonds, financed by the issuance of central bank reserves, by £80 billion over the next twelve months, to a total of £758 billion” https://www.bankofengland.co.uk/monetary-policy-summary-and-minutes/2022/september-2022
   Bank of England, Asset Purchase Facility Quarterly Report, 2026 Q2: “gilts holdings peaked at £875 billion in 2022 before beginning to decline steadily to around £520 billion by 2026 Q2”; the unwind runs from February 2022. The page prints no intermediate totals between the 2022 peak and 2026. https://www.bankofengland.co.uk/asset-purchase-facility/2026/2026-q2

22. "The earlier spells ended in a return to support when something broke, and the forecast is that this one ends the same way."
   Federal Reserve Bank of St. Louis (FRED), Assets: Total Assets (Less Eliminations from Consolidation): Wednesday Level (FRED series WALCL): Millions of U.S. dollars: 4,509,462 on 24 December 2014 falling to 3,759,946 on 28 August 2019, then 4,158,637 on 26 February 2020 rising to 7,168,936 on 10 June 2020. https://fred.stlouisfed.org/series/WALCL

23. "Deflation from a credit collapse, where demand dies and forced selling feeds on itself, is destructive."
   Fisher, “The Debt-Deflation Theory of Great Depressions”, Econometrica, volume 1, October 1933, pages 337 to 357: "Debt liquidation leads to distress selling and to Contraction of the money supply, as bank loans are paid off, and to a slowing down of velocity of circulation." https://www.econometricsociety.org/publications/econometrica/1933/10/01/debt-deflation-theory-great-depressions

24. "Support can be pulled back part of the way for a time, as it was from 2022 to 2024, when rates rose and bond holdings shrank."
   Federal Reserve, Open Market Operations, record of changes in the federal funds target range: Target level, per cent: 0.25-0.50 on March 17, 2022 (increase 25); 5.25-5.50 on July 27, 2023 (increase 25); 4.75-5.00 on September 19, 2024 (decrease 50). https://www.federalreserve.gov/monetarypolicy/openmarket.htm
   Bank of England, Monetary Policy Summary and minutes, “Bank Rate increased to 5.25%”, August 2023: "At its meeting ending on 2 August 2023, the MPC voted by a majority of 6–3 to increase Bank Rate by 0.25 percentage points, to 5.25%." https://www.bankofengland.co.uk/monetary-policy-summary-and-minutes/2023/august-2023
   Bank of England, Asset Purchase Facility Quarterly Report, 2024 Q4: Gilts held for monetary policy purposes: £655 billion at 31 December 2024, against a peak stock of £895 billion. https://www.bankofengland.co.uk/asset-purchase-facility/2024/2024-q4

25. "But each place the pull-back strained got new support within days, the Bank of England's in September 2022 and the Federal Reserve's in March 2023, and the promise to step in was never withdrawn."
   Bank of England, News release, “Bank of England announces gilt market operation”, 28 September 2022: "The Bank will carry out temporary purchases of long-dated UK government bonds from 28 September. The purpose of these purchases will be to restore orderly market conditions." https://www.bankofengland.co.uk/news/2022/september/bank-of-england-announces-gilt-market-operation
   Federal Reserve, Press release, 12 March 2023, announcing the Bank Term Funding Program: "The additional funding will be made available through the creation of a new Bank Term Funding Program (BTFP), offering loans of up to one year in length to banks, savings associations, credit unions"; release dated March 12, 2023. https://www.federalreserve.gov/newsevents/pressreleases/monetary20230312a.htm


---

# Why Everything Feels Like a Scam
Date: 2026-07-15
Canonical: https://thenaturalstate.org/essays/why-everything-feels-like-a-scam/

Everything feels like a scam now, and that feeling is worth trusting.

It's not paranoia or nostalgia. Something real is happening, and most people are pointed at the wrong culprit.

One distortion, a thousand points of contact

Everything feels like a scam because the unit everything is priced in loses value on purpose, year after year. When the money itself leaks, everyone holding it has reason to stop holding it. Whoever sets a price passes the loss on, and whoever doesn't is left holding it. You meet that scramble at a thousand points of contact, the chocolate bar that shrank, the £6 coffee, the subscription that creeps up while the service gets worse, the pay rise that somehow left you poorer, the fees charged for what used to be included, the sense that saving is for suckers and everyone you know is flipping something. Each contact reads as a separate little con. It's actually one distortion at the money layer, spreading through everything built on top of it.

What should be happening

Technology makes things cheaper to produce. Your phone swallowed the camera, the film, the postage, the map, the CD collection, the torch. In a free market, under a money nobody can add to, those gains show up as falling prices, because when one producer gets more efficient, a competitor copies the method and undercuts them until the saving reaches you. Where nobody can copy it, the saving stays with the business. Everywhere else, the natural state of a market full of improving technology is that your money slowly buys more. You work the same hours. Life should be getting cheaper.

So everyone asks "why is everything so expensive?" The better question is "where did the saving go?"

Why the system can't allow it

Nearly all our money is created through lending, so nearly every pound in existence is also someone's debt. Those debts are fixed in pounds. If prices broadly fall and nothing is done to stop it, wages eventually follow, but the mortgage payment doesn't shrink.

A system built on this much debt can take a slow fall that comes with better tools. In that fall it's the cost of making things that drops, and pay drifts down slowly behind it, so the money to meet a fixed payment is still there. What it can't take is a sudden fall in the prices credit pushed up, houses first, because then the losses spread through the banks. In that fall it's the lending that has stopped, so incomes and the house fall together and at once, and the fixed payment is hit from both sides in the same year. Houses come first because people buy them with borrowed money. The debt takes a bigger bite of every income. And where the loan was written against a house, the house is worth less too, so the bank stands to lose more on that loan. So every time a sudden fall in those prices threatens, the system is rescued with new money, and the rescues keep getting bigger.

In between, governments and central banks create more money and credit to keep prices rising by about 2% a year, deliberately, as policy. Central banks publish why they aim there. They want room to cut interest rates in a downturn, they know wages resist falling, and they say the official measure of prices overstates the rise. Those are the reasons they give, and the debts aren't among them. The debts show up in the rescues, not in the everyday 2%.

Technology should be making your cost of living fall by about as much as output per hour of work grows, a point or two a year on the published productivity figures. Instead policy pushes prices up by about 2%. The real gap between what you should pay and what you do pay is bigger than the headline inflation number, because the fall you should have had is hidden inside that number. No official statistic reports that fall, because statistics measure what happened, and this is the distance between what happened and what should have happened. That gap has two parts. One is the saving you never received as lower prices, and the other is the rise you paid on top of it. Both compound, year after year, for decades.

The saving didn't all vanish. Part of it reached you as higher pay, late and unevenly. Part of it was never made, because cheap credit kept alive firms that would otherwise have closed and freed their workers, their buildings, and their machines for better uses, so some output was never produced and nobody holds it. The rest was transferred. New money usually enters the system through financial markets and cheap loans, so the people closest to it catch the gains first. Banks, governments, people who already own assets. House and share prices rise while your wages lag behind. The money you hold stands in for hours of work already done, and what those hours will buy is set by prices when you spend. When money and credit are created faster than the economy makes things, your stored hours buy less. So there is a scam, in the strict sense of value taken without consent, by a method almost nobody is shown. But it's one scam, at the base of the system, not a million little ones.

Why it feels like a million little ones

It feels like a million little cons because the small businesses you deal with are being squeezed much the way you are. The café's rent, ingredients, wages, and card fees all rise, but customers revolt at a £7 flat white, so the cup shrinks, the beans get cheaper, the staff get cut. Shrinkflation is cutting the size or quality of a product instead of raising its sticker price. It's a price rise wearing a disguise, and that's what makes it feel dishonest. Stretched staff read as a company that stopped caring. Auto-renewing subscriptions and drip-priced airline seats read as traps. A drip-priced seat is a low headline price with fees added at every step. The auto-renewals and the drip pricing aren't the squeeze, because they work on how people read a price, and they were measured and regulated before the recent cost rise. Those two are a sales trick, a bet that you'll read the first number and not the last. The smaller cup, the thinner service, and the cut staff are the same squeeze being passed down the line to the last person who can't pass it further, which is you.

Then there's the change in how people behave, and I think this is the part you're really smelling. When money loses value by design, sitting still means falling behind. Cash in the bank is a guaranteed loss in real terms, so ordinary people are pushed to take risks they wouldn't otherwise take, just to stand still. When taking those risks becomes an ordinary thing to do, culture follows. Side hustles, day trading, meme coins, courses about selling courses. The payoff for patient, honest work falls against the payoff for owning assets, and money set aside loses ground while it waits, so the tilt runs toward grabbing something now. People can feel that shift in the people around them even when they can't name the cause. A society's honesty rests on its incentives as well as its morals. When the measuring stick itself can be bent, bending things pays better than building things. The 2% target is published, but what it does isn't. Nobody shows you the fall it had to cancel first, so the saver can't see the size of what the target takes.

And at the top, the pattern is out in the open. A bank that gambles and wins keeps the bonuses. A bank that gambles and loses gets rescued with newly created money, while the small firm down the road goes under. Big companies borrow at rates you aren't offered and buy up their competitors. Losses get socialised, gains stay private. Lobbying for the policies that keep asset prices rising beats building, so that's what gets funded. People watch that and conclude the game is rigged. They're right. They just usually aim the anger at the wrong level, the landlord, the manager, the other political tribe, rather than the design that rewards all of them for behaving this way.

Why now, specifically

It feels worse now because the gap keeps growing. Technology's downward pull on the cost of making things compounds, and the push behind it keeps getting stronger, because the tools are improving faster than they did, as software and now AI spread into more of the economy. You won't see that in the official productivity figures yet. With the target fixed at 2%, the bigger the fall technology would deliver, the bigger the offset needed to cancel it. That's why each rescue is bigger than the last, from hundreds of billions of dollars of government spending and bond-buying in 2008 to trillions in 2020. Between 2000 and early 2018 the world added roughly 185 trillion dollars of debt to buy about 46 trillion of growth. The bigger the dose, the bigger the transfer, the more distortion leaks into daily life, and the worse everything feels. Your instinct that "it wasn't like this" isn't memory playing tricks.

And there's a modern amplifier. When an app is free, you're the product, so even your idle attention is being farmed and sold, and that traces back to the same money, because cheap money and ad models are what made those platforms giant. That completes the feeling that every single interaction now has an angle.

Greed, wars, and supply shocks can't explain it

Corporate greed is the popular answer, and it fails a simple test. Greed is nothing new, so the wanting isn't what changed. What people point at when they say greed is margins [the profit on each sale], and margins did change, so the question is what let them widen. What changed is the restraint. In an honest system, a greedy firm that overcharges gets undercut by a hungrier rival. Cheap credit and inflated asset values protect the firms already in place from that discipline, so the greedy get shielded instead of competed away. That's the rescued bank. That's the competitor bought with cheap credit. Wars and supply shocks are real too, but a shock moves prices for a year or two. It can't explain a fifty-year slide in what a pound buys while production got radically more efficient. What runs underneath all of it is the expanding money. It has been there the whole time, and it grows with each decade.

And the clearest sign that the pound price is telling you mostly about the pound, not about the house, is what happens when you measure in a money nobody can create more of. Over the multi-year windows so far, most prices have fallen in bitcoin. A house that cost around 300 bitcoin fell to a small fraction of that within a few years, even as its pound price climbed. Same house, different ruler. The whole of that fall is bitcoin buying more as adoption grew, not the house getting cheaper to make. In pounds the house was moving the other way, working against the fall rather than causing it, so read the direction, not the size. The gains from better tools are real, they're just being absorbed before they reach you.

Inside the scramble

The scam feeling is accurate perception. It's what a slowly debasing unit feels like from the inside. Everyone scrambling, and the scramble indistinguishable from universal dishonesty. The reason I ended up at bitcoin is that it's the first money whose whole future supply is fixed and published in advance, which anyone can check by running the software, so it's the first ruler that can't be stretched, for as long as it stays decentralised and secure. In that unit the whole picture inverts. Prices fall, saving works, patience pays.

But the core answer stands on its own. It's not that everyone became a crook. The money everyone is forced to use rewards crook-like behaviour, and people respond to rewards. One scam, not a million. Fix the money layer at its base, and most of the little ones lose their reason to exist.

## Sources

What this essay rests on, as checked on 2026-10-01.

1. "Your phone swallowed the camera, the film, the postage, the map, the CD collection, the torch."
   CIPA, Press release on camera shipments, 2022 figures: Shipments rose "from 5.1 million units to 121.5 million units" by 2010, then "declined by 4.2% in 2022 to 8 million units"; 8,011,598 units in 2022. https://www.cipa.jp/documents/e/PRESSRELEASE20230224_e.pdf

2. "Nearly all our money is created through lending, so nearly every pound in existence is also someone's debt."
   Bank of England, Quarterly Bulletin 2014 Q1, “Money creation in the modern economy”, published 14 March 2014: "the majority of money in the modern economy is created by commercial banks making loans"; "The central bank can also affect the amount of money directly through purchasing assets or 'quantitative easing'." https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy

3. "In between, governments and central banks create more money and credit to keep prices rising by about 2% a year, deliberately, as policy."
   Federal Reserve, FOMC statement of longer-run goals and policy strategy, 25 January 2012: "The Committee judges that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve's statutory mandate." https://www.federalreserve.gov/newsevents/pressreleases/monetary20120125c.htm
   European Central Bank, Press release, 8 July 2021, "ECB's Governing Council approves its new monetary policy strategy": "The Governing Council considers that price stability is best maintained by aiming for a 2% inflation target over the medium term. This target is symmetric, meaning negative and positive deviations of inflation from the target are equally undesirable." https://www.ecb.europa.eu/press/pr/date/2021/html/ecb.pr210708~dc78cc4b0d.en.html
   Bank of England, Web page, "Inflation and the 2% target": "The Government sets us a 2% inflation target"; "The Government has set us a target of keeping inflation at 2%". https://www.bankofengland.co.uk/monetary-policy/inflation

4. "They want room to cut interest rates in a downturn, they know wages resist falling, and they say the official measure of prices overstates the rise."
   European Central Bank, "An overview of the ECB's monetary policy strategy", 2021 strategy review: "Three additional factors ... call for a sufficient inflation buffer", the buffer giving room for "interest rate cuts", allowing for "measurement bias" and "taking account of downward nominal wage rigidities". https://www.ecb.europa.eu/mopo/strategy/strategy-review/ecb.strategyreview_monpol_strategy_overview.en.html
   Bank of Canada, "Renewal of the Inflation-Control Target: Background Information", November 2011: "In addition to the risks associated with the ZLB, two other potential costs of moving to an inflation target lower than 2 per cent were identified ... : measurement bias in the CPI and downward nominal wage rigidities." The Bank adds that it views neither of those two as a significant impediment to a lower target. https://www.bankofcanada.ca/wp-content/uploads/2011/11/background_nov11.pdf

5. "Technology should be making your cost of living fall by about as much as output per hour of work grows, a point or two a year on the published productivity figures."
   United States Bureau of Labor Statistics, in the St. Louis Fed's FRED database, Series OPHNFB, "Nonfarm Business Sector: Labor Productivity (Output per Hour) for All Workers", index 2017=100, seasonally adjusted: Annual index (2017=100): 72.455 in 2000, 86.758 in 2007, 103.636 in 2019 — 2.6% a year from 2000 to 2007 and 1.5% a year from 2007 to 2019. https://fred.stlouisfed.org/series/OPHNFB
   Office for National Statistics, Series LZVB, "UK Whole Economy: Output per hour worked SA: Index 2023 = 100", released 18 August 2026: Index (2023=100), seasonally adjusted: 92.6 in 2008 to 100.0 in 2023, about 0.6% a year. That UK pace is slower than a point or two a year. https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/labourproductivity/timeseries/lzvb/prdy

6. "Instead policy pushes prices up by about 2%."
   Bank of England, Web page, "Inflation and the 2% target": "The Government sets us a 2% inflation target"; "The Government has set us a target of keeping inflation at 2%". https://www.bankofengland.co.uk/monetary-policy/inflation
   European Central Bank, "An overview of the ECB's monetary policy strategy", 2021 strategy review: "at this juncture the Governing Council considers that price stability is best maintained by aiming for a two per cent inflation target over the medium term" (printed in words as "two per cent"). https://www.ecb.europa.eu/mopo/strategy/strategy-review/ecb.strategyreview_monpol_strategy_overview.en.html

7. "Part of it reached you as higher pay, late and unevenly."
   Pessoa and Van Reenen, Centre for Economic Performance Discussion Paper 1246, October 2013, “Decoupling of Wage Growth and Productivity Growth? Myth and Reality”: “In the UK net decoupling is basically zero: both wages and productivity rose by the same amount since 1972.” UK, 1972 to 2010: “real productivity grew by 114 per cent” and “median real wages by 72 per cent”. https://cep.lse.ac.uk/pubs/download/dp1246.pdf
   Stansbury and Summers, National Bureau of Economic Research Working Paper 24165, 2017, “Productivity and Pay: Is the link broken?”: “over 1973-2016, one percentage point higher productivity growth has been associated with 0.7 to 1 percentage points higher median and average compensation growth”; “other factors orthogonal to productivity have been acting to suppress typical compensation”. https://www.nber.org/papers/w24165
   Federal Reserve Bank of St. Louis, FRED series MEPAINUSA672N, annual values, 1974 to 2023: $28,720 in 1974 rising to $43,310 in 2023, in 2024 dollars. https://fred.stlouisfed.org/series/MEPAINUSA672N

8. "New money usually enters the system through financial markets and cheap loans, so the people closest to it catch the gains first."
   Bank of England, Explainer, “Quantitative easing”: “we can create money digitally in the form of ‘central bank reserves’. We use these reserves to buy bonds”; “lower government bond yields feed through to lower interest rates on household mortgages”. https://www.bankofengland.co.uk/monetary-policy/quantitative-easing
   Cantillon, “Essai sur la nature du commerce en général”, published 1755: Written between 1730 and 1734, published in French in 1755; the essay describes new money raising prices unevenly, first for those who receive it. https://www.econlib.org/library/NPDBooks/Cantillon/cntNT.html

9. "House and share prices rise while your wages lag behind."
   Miles and Monro, Bank of England Staff Working Paper 837, 20 December 2019, “UK house prices and three decades of decline in the risk-free real interest rate”: “the rise in house prices relative to incomes between 1985 and 2018 can be more than accounted for by the substantial decline in the real risk-free interest rate observed over the period”. https://www.bankofengland.co.uk/working-paper/2019/uk-house-prices-and-three-decades-of-decline-in-the-risk-free-real-interest-rate
   Bank of England, Explainer, “Quantitative easing”: “When we buy bonds, their price tends to increase”; “QE increases the price of financial assets other than bonds, such as equities.” https://www.bankofengland.co.uk/monetary-policy/quantitative-easing

10. "It feels like a million little cons because the small businesses you deal with are being squeezed much the way you are."
   Bank of England, Agents' summary of business conditions, December 2025: “Many firms continue to report squeezed profit margins and ongoing efficiency initiatives as mitigation”; “More firms report not replacing leavers”. https://www.bankofengland.co.uk/agents-summary/2025/december-2025

11. "The auto-renewals and the drip pricing aren't the squeeze, because they work on how people read a price, and they were measured and regulated before the recent cost rise."
   Financial Conduct Authority, General insurance pricing practices market study, final report, 22 September 2020: “Final Report 22/09/2020”; “Firms use complex techniques to identify consumers who are more likely to renew with them. Firms then increase prices to these customers at renewal each year”, and make it “more difficult to cancel automatic renewal”. https://www.fca.org.uk/publications/market-studies/ms18-1-general-insurance-pricing-practices-market-study
   Gabaix and Laibson, “Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets”, Quarterly Journal of Economics, 2006: “We show that informational shrouding flourishes even in highly competitive markets, even in markets with costless advertising, and even when the shrouding generates allocational inefficiencies.” https://www.nber.org/papers/w11755

12. "Cash in the bank is a guaranteed loss in real terms, so ordinary people are pushed to take risks they wouldn't otherwise take, just to stand still."
   Bank for International Settlements, BIS Working Papers No 363, “The Liquidation of Government Debt”: “For the advanced economies in our sample, real interest rates were negative roughly ½ of the time during 1945-1980.” The paper's window is fixed at 1945 to 1980, the rates are on government debt, and they were negative roughly half the time, not always. https://www.bis.org/publ/work363.pdf

13. "The 2% target is published, but what it does isn't."
   Bank of England, “Inflation and the 2% target”: “To keep inflation low and stable, the Government sets us an inflation target of 2%.” https://www.bankofengland.co.uk/monetary%20policy/Inflation
   Chancellor of the Exchequer, HM Treasury, Letter from the Chancellor of the Exchequer to the Governor of the Bank of England, monetary policy remit, 26 November 2025: “I hereby re-confirm the inflation target as 2 per cent as measured by the 12-month increase in the Consumer Prices Index (CPI). The inflation target of 2 per cent is symmetric and applies at all times.” https://www.gov.uk/government/publications/monetary-policy-remit-budget-2025/letter-from-chancellor-of-the-exchequer-to-govenor-of-the-bank-of-england
   Federal Reserve, Federal Open Market Committee, “Statement on Longer-Run Goals and Monetary Policy Strategy”, 25 January 2012: “The Committee judges that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve's statutory mandate.” https://www.federalreserve.gov/newsevents/pressreleases/monetary20120125c.htm

14. "You won't see that in the official productivity figures yet."
   U.S. Bureau of Labor Statistics, Monthly Labor Review, April 2021, “The U.S. productivity slowdown: an economy-wide and industry-level analysis”: "Labor productivity—defined as output per labor hour—has grown at a below-average rate since 2005, representing a dramatic reversal of the above-average growth of the late 1990s and early 2000s." https://www.bls.gov/opub/mlr/2021/article/the-us-productivity-slowdown-the-economy-wide-and-industry-level-analysis.htm

15. "That's why each rescue is bigger than the last, from hundreds of billions of dollars of government spending and bond-buying in 2008 to trillions in 2020."
   United States Congress, Emergency Economic Stabilization Act of 2008, Public Law 110-343, enacted October 3, 2008: "An Act To provide authority for the Federal Government to purchase and insure certain types of troubled assets"; authority to buy up to $700 billion of troubled assets; enacted October 3, 2008. https://www.congress.gov/110/plaws/publ343/PLAW-110publ343.htm
   Congressional Budget Office, H.R. 748, CARES Act, Public Law 116-136, enacted March 2020: "The CARES Act appropriates roughly $2.2 trillion of spending, tax breaks, loans, and other resources over the next decade." https://www.cbo.gov/publication/56334
   Board of Governors of the Federal Reserve System, via FRED (Federal Reserve Bank of St. Louis), Total assets of the Federal Reserve, weekly Wednesday levels, series WALCL: Millions of U.S. dollars: 905,253 at 2008-09-03 rising to 2,254,983 at 2008-12-17; 4,241,507 at 2020-03-04 rising to 7,168,936 at 2020-06-10. https://fred.stlouisfed.org/series/WALCL

16. "Between 2000 and early 2018 the world added roughly 185 trillion dollars of debt to buy about 46 trillion of growth."
   World Bank, World Development Indicators, GDP (current US$), World, series NY.GDP.MKTP.CD: World GDP (current US$): 2000, 33,965,806,441,911.9; 2018, 87,310,840,056,717.8. That is growth of about $53.3 trillion from 2000 to 2018, not about 46 trillion. https://data.worldbank.org/indicator/NY.GDP.MKTP.CD?locations=1W
   International Monetary Fund, Debt Dynamics, IMF Annual Report 2022: "Overall borrowing jumped by 28 percentage points to 256 percent of GDP in 2020." The page prints no dollar total of global debt and no figure for debt added between 2000 and early 2018. https://www.imf.org/external/pubs/ft/ar/2022/in-focus/debt-dynamics/

17. "What people point at when they say greed is margins [the profit on each sale], and margins did change, so the question is what let them widen."
   De Loecker, Eeckhout and Unger, Quarterly Journal of Economics paper, 2020: Aggregate markups: 21% above marginal cost in 1980, rising to 61%. https://academic.oup.com/qje/article-abstract/135/2/561/5714769

18. "It can't explain a fifty-year slide in what a pound buys while production got radically more efficient."
   Office for National Statistics, CPI INDEX 00: ALL ITEMS 2015=100, series D7BT, dataset MM23: CPI index (2015=100): 49.6 in 1988 rising to 142.3 in 2026 H1, a rise of about 187%. The series printed here starts in 1988 and ends in 2026, not a fifty-year window. https://www.ons.gov.uk/economy/inflationandpriceindices/timeseries/d7bt/mm23

19. "The reason I ended up at bitcoin is that it's the first money whose whole future supply is fixed and published in advance, which anyone can check by running the software, so it's the first ruler that can't be stretched, for as long as it stays decentralised and secure."
   bitcoin.org, Frequently Asked Questions: "only 21 million bitcoins will ever be created"; "running a full node, which offers the highest level of verification". The page carries nothing on the fixed issuance schedule. https://bitcoin.org/en/faq


---

# The Patience Collapse
Date: 2026-07-15
Canonical: https://thenaturalstate.org/essays/the-patience-collapse/

Money is stored time. People talk about patience as a character trait, something a society has or lacks, like a national virtue. But patience is a strategy, and people run it when it pays. So when the store leaks, patience stops paying and people rationally stop doing it. Savings, gambling, family formation, and business horizons are the same flip showing up in four different rooms of the same house.

The payoff flip

You work a week, you get paid, and the part you don't spend is hours you've already worked, held in a form you can use later. In honest money, waiting pays you twice. Your stored hours keep their value, and the things you're waiting for get cheaper, because technology keeps finding ways to make the same goods with less work. Patience earns a return without you taking any risk. In leaking money, waiting costs you twice. The government and central bank create more money and credit year after year to keep the debt system serviceable, so each stored hour buys less later than it did when you earned it. And the new money flows into the very assets you were saving toward, houses first, so the target moves away from you while your savings shrink. When waiting costs you twice, "later" becomes the losing move. Everything else follows from that.

Savings

The savings account is the first casualty because the loss there is guaranteed. If your account pays 2% and your weekly shop rises 6%, you don't need a forecast. You're certain to lose. And you don't need a gap that wide. Take the gentle version, the two or three percent a year that gets defended as healthy. Lose that much year after year and it compounds. Set a pound aside at the start of a forty-year working life and by the end it buys less than half of what it did. And it hits from the income side too, because wages are sticky [pay adjusts slower than prices], so your payslip chases your costs and rarely quite catches them. Saving, the ordinary act of a hairdresser putting £300 a month away, stops being a plan. She's told the answer is to invest. The system now forces everyone to become an investor just to stand still. She's pushed into risks she never wanted, in markets she doesn't follow, not to get ahead but to avoid falling behind. A society where the default safe behaviour is guaranteed to lose has already made its people less patient, before anyone has made a single bad choice.

Gambling

Gambling is the far end of the same treadmill. Once cash is a guaranteed loss, everyone gets pushed up the risk curve, and how far you get pushed depends on how far behind you are. If you own a house and an index fund, you drift up politely. If you're in your twenties and renting, you can see that the straight path, save carefully for ten years, arithmetically can't reach a deposit because prices are rising faster than you can save. Then a long-shot bet is the only visible door. So you get the midnight trading apps, the meme stocks, the casino corners of crypto. People go there to escape a unit that leaks, and easy money keeps the casino lit. The same behaviour wears a suit up on the corporate floors. When holding cash is penalised, a company borrows cheap money to buy back its own shares instead of building anything, because the gain shows up in the share price, and it shows up now. Then when the big, debt-fuelled bets fail, the largest players get rescued, which teaches markets that size beats prudence. That has a name too, moral hazard [protection from losses invites more reckless behaviour]. The prudent look foolish and the reckless look clever for years at a stretch. That's the leak rewriting a society's morals through its payoff table.

Family formation

The mechanics I can give you firmly are the household economics. When money leaks you can't hold your savings in money, so people hold them in houses instead. New money and credit are lent into property at the same time. Both bids land on the same houses, and the price picks up a monetary premium [extra price an asset carries because people use it to store savings as well as to live in]. That is why the first home, the launchpad of family life, becomes one of the most inflated things an ordinary family ever buys. A couple saving for a deposit is running against that inflation. If the house rises 7% a year and their savings earn 2%, the house pulls further ahead each year than they can put away, even though they never miss a month. Both partners end up working full-time to service the attempt, and if they do stretch onto the ladder, a small rate move can break the monthly maths, so the household lives hostage to policy. Now the extension, reasoned from those mechanics plus the general data. Family formation runs on secure ground. People partner, marry, and have children when they can see stable footing a few years out. Push the footing away faster than a couple can walk toward it and they delay. Rent longer, commit later, have children later, and have fewer. The pattern in the data matches the mechanism, first-time buyers getting older, birth rates falling across the indebted world, but I'm reasoning to it, not proving it, so hold it with that confidence and no more. What I can say firmly from the other side is that where families hold savings that can't be diluted, they report lower stress, and with prices falling against savings one income starts to cover more of a life. A deposit becomes something you save for and reach, rather than a receding target. Parents save for a child's education without needing a speculative scheme to outrun the leak.

Business horizons

A business decides its horizon with a discount rate [the rate used to weigh future money against money today]. In this system, policy sets the risk-free rate [the benchmark yield on government debt] for that calculation instead of savers and borrowers, and holds it low so the debt stays serviceable. Get that rate wrong and every calculation built on it bends the same way. Cheap borrowed money makes marginal projects look profitable on paper when they destroy value in reality. It keeps zombie firms alive [companies that survive only due to easy credit, not real profits], and every zombie ties up capital, staff, and market share that a better firm can't reach. And because the unit itself loses value, the near win beats the far one, so the boardroom reaches for the buyback rather than the seven-year research programme. And it moves effort to the worst place of all. When policy decides who gets cheap money, lobbying for favour pays better than serving customers, so the firm's sharpest people end up working on the government rather than on the product. Flip the money and the horizon flips back. When money can't be diluted, there's no return from the dilution game. The baseline return in the economy becomes real productivity growth, and the only way to earn is to make something people want, for less. Credit doesn't vanish, but it gets dearer, smaller, and more careful, used where it creates more than it costs. A craftsman spends years mastering a trade instead of flipping assets, because mastery keeps paying.

Where the stored time goes

"Leaks" is right about the saver's experience and wrong about the physics. A leak sounds like value evaporating, lost to nobody, an engineering fault someone forgot to fix. But the stored time transfers. The new money enters somewhere specific, at the banks and the borrowers closest to its creation, and whoever gets it first spends it before prices adjust. Meanwhile the people furthest away, wage earners and savers, get the higher prices without the new money. That has a name, the Cantillon effect [the first receivers of new money benefit at the expense of the later receivers]. Someone is holding a bucket under the drip. Your hours didn't evaporate. They changed hands.

The arguments for keeping the leak, and where I land

"Without inflation nobody spends, so the leak is what keeps the economy moving." I'd say that argument accidentally confesses. It claims people must be quietly robbed or they won't buy things. But you buy a winter coat because you're cold, food because you're hungry, and a phone because it's useful, and none of those decisions waits on next year's price. We already have a case where prices fall and people carry on regardless. A new television is better and cheaper each year, and people buy one when they want to watch something. What falling prices actually kill is waste and the spending you only do to outrun the leak, not living.

"People can invest their way out, so nothing is really lost." Some can. But a system where everyone must take investment risk merely to preserve what they've already earned isn't a neutral baseline. The people with the least slack are the least able to play, so the ladder gets pulled up behind the asset owners.

The strongest argument, and the one I'd take most seriously, is that falling prices inside today's debt-loaded system are a real danger, because the debts are fixed in pounds while incomes fall, and defaults cascade. That's true, and it's the trap. The system can't stop leaking without breaking itself, which is why the fix was never going to be a policy choice inside the old unit. The fix arrives as a parallel unit people can opt into, money with a supply nobody can expand, which is the thing bitcoin was built to be. Under that unit the payoff table flips back, and patience returns for the least mysterious reason in the world.

Because patience was never gone. It was just unpaid.

---

# The Quiet Tightening
Date: 2026-07-15
Canonical: https://thenaturalstate.org/essays/the-quiet-tightening/

A money system that needs your confidence ends up watching what you say and what you buy. It gets there by arithmetic.

Belief is the collateral

The money in your bank account is a promise. The bank owes you that number. The bank's own health rests on its borrowers keeping their promises, and the government's debt rests on lenders believing they'll be repaid in money that still buys something. Nearly everything we call money is somebody's IOU, because money in this system is loaned into existence. When a bank writes a mortgage, it creates the deposit in the same moment. If every loan were repaid at once, most of the money would vanish with it.

An IOU has value only while people believe it will be honoured. So in this system, belief isn't decoration. Belief is the collateral [the thing of value standing behind a loan]. That holds for every promise in this system that carries no public cover, and for what every promise buys. Where a public scheme covers the number, the scheme carries that number up to its cap, and the scheme is itself a promise. When an official says "confidence must be maintained", the sentence is literal. It's an engineering requirement.

The world carries about 365 trillion dollars of debt against a world economy that produces roughly a third of that in a year. That debt as a whole can't be repaid in money that holds its value. One borrower can shrink its own debt against what it produces in a year, and Canada, Belgium, and Sweden did, each by a third or more, with prices rising about 2% a year. What can't happen is all of them at once, because the money they'd repay with is made of those same loans. There are only two exits. Default, which breaks the promise openly. Or creating more money and credit so each unit is worth less, which breaks the promise quietly. The second exit is quiet while it's taught as health rather than named as a transfer, and looking at it directly breaks the story, not the mechanism.

A system standing on belief in a promise it can't keep must manage belief. It manages belief first with stories. When rival stories threaten the belief, it polices stories. And when people stop believing anyway and act on their doubt, which they do through payments, it watches and then controls payments. Speech is doubt forming. Doubt acted on shows up as a payment, and most payments carry no doubt, so the ones that do have to be told apart from ordinary traffic. The system ends up watching both because they're the same threat at two different stages.

The bridge between broken money and less freedom

This is the bridge between "the money is broken" and "society gets less free". A monetary design problem becomes a civil liberties problem through ordinary incentives, with no bad intent needed anywhere in it. Walk across this bridge and the surveillance headlines you already see stop looking like separate news items and start looking like one system defending itself.

Step one: confidence holds everything up

This isn't abstract. In late 2008 some letters of credit froze for days. A letter of credit is a bank's guarantee to a foreign seller that an importer's payment will arrive. The ones that froze were fully backed, paperwork in order. Across world trade as a whole, the record shows fewer letters of credit and tighter credit lines between banks, not a general halt, and most of the fall in trade that year came from falling demand. But where belief flickered, the goods stopped moving. Containers sat on docks because banks had stopped trusting each other's promises. The ships existed, the goods existed, the crews existed. A tower of IOUs works only while each party believes the next will pay. The moment that belief breaks, credit that took decades to build can evaporate in days.

Step two: the promise can't be kept, so confidence must be manufactured

Two forces are colliding. Technology keeps making things cheaper to produce, so under a money nobody can add to prices would fall and your money would buy more. But debts are fixed in pounds. A system that runs on debt can take a slow fall that comes with better tools. In that fall it's the cost of making things that drops, and pay drifts down slowly behind it, so the money to meet a fixed payment is still there. What it can't take is a sudden fall in the prices credit pushed up, houses first, because then the losses spread through the banks. In that fall it's the lending that has stopped, so incomes and the house fall together and at once, and the fixed payment is hit from both sides in the same year. Houses come first because people buy them with borrowed money. The debt takes a bigger bite of every income. And where the loan was written against a house, the house is worth less too, so the bank stands to lose more on that loan. So every time a sudden fall in those prices threatens, the system is rescued with new money, and the rescues keep getting bigger.

In between, policy targets rising prices of about 2% a year, forever. Central banks publish why they aim there. They want room to cut interest rates in a downturn, they know wages resist falling, and they say the official measure of prices overstates the rise. Those are the reasons they give, and the debts aren't among them. The debts show up in the rescues, not in the everyday 2%. Getting there takes new money that first cancels the fall better tools would have delivered, and then adds two on top. Governments and central banks create that money and credit to push prices up. They mean to.

Follow what that means for the saver. If the interest you're paid is below the rate at which prices rise, you're guaranteed to lose purchasing power [what your money actually buys] by holding the "safe" asset. That's the mechanism working as designed, because holding returns below the rate prices rise is how the unpayable debt gets shrunk, and the bias runs that way whenever paying savers above inflation would threaten the debt. The pages a saver reads don't name that debt. The system's own research does, plainly and free to read. What varies is who the document is written for, and a saver who sees the transfer clearly stops volunteering for it.

The strain also grows on its own. Between 2000 and early 2018 the world added roughly 185 trillion dollars of debt to get about 46 trillion dollars of growth. Each new pound of debt buys less real output than the last. Meanwhile the tools are improving faster than they did, as software and AI spread, so the fall in prices they would deliver keeps getting steeper. What the record shows growing is the stock of debt and the size of each rescue, from hundreds of billions in 2008 to trillions in 2020, not the yearly pace of new money. A gap that reopens every time the new money is withdrawn has to be explained for as long as the system stands, and each new round needs a public reason.

Step three: the story becomes a policy instrument

In a credit system, what people expect decides which outcome arrives among those a bank's books allow. If everyone believes the banks are sound, they keep going. If everyone stops believing on a Saturday, the banks fail by Monday, because no bank can pay everyone at once. Central banks know this, which is why they reach for "forward guidance" [official statements designed to steer what markets expect] as readily as for interest rates. In this system, talking is doing.

Where saying a true thing about a bank or about the system would cause the thing it describes, the system treats that statement as a risk to stability rather than as opinion. For whoever owes a duty over the information, the law already says so. The bank may delay telling you, and its regulator may not tell you at all. You can hear it in the language. "Quantitative easing" instead of "the central bank creating new money to buy bonds". "Transitory" instead of "we misjudged". A 2% inflation target taught as health, when it's a 2% yearly transfer of purchasing power away from everyone who saves or works for wages, compounding for life. Even the vocabulary helps the story along, because we have everyday words for prices rising and almost none for the good kind of falling prices, so most people never even consider the alternative.

No one has to plan those euphemisms. Each choice is locally reasonable. Calm the market. Don't spark a run. Reassure. But add up thousands of locally reasonable choices and you get institutions that speak to keep belief up rather than to describe what's happening.

Step four: from telling stories to policing rival stories

As the strain grows, the pressure lands on speech.

When the transfer stays quiet, the anger it causes goes somewhere other than the money. New money reaches asset owners first, before wages adjust, so the people closest to its creation gain and everyone further from it falls behind them, and that widening gap produces real fury that needs a target. Renters versus landlords, old versus young, one tribe versus another. The division serves the system, because every hour spent fighting each other is an hour not spent looking at the base layer, the money underneath everything, where the transfer happens.

Rival explanations become dangerous to the system, and I mean that in a mechanical sense, not a rhetorical one. In a system where belief is the collateral, a rumour about a bank's health can cause the run it describes. A clear explanation of what inflation does can change how millions save. So when the strain is on, the system experiences critical speech as an attack on the collateral rather than as opinion. That's the internal logic by which speech about money, banks, and the health of the system starts being policed. It gets policed under the labels already to hand, which are "market abuse", "financial promotion", "scam", and "public order". Crises make people accept it, because in a crisis safety feels urgent and dissent feels risky, and the tools an emergency brings in rarely leave with it.

This is also why constitutions don't hold the line. Money outranks law. When preserving the monetary system requires control, laws get reinterpreted to fit the need. In 1933 the United States ordered private citizens to hand in their gold and made keeping it a crime. In 1971 it ended the dollar's link to gold by decree. Neither was the act of a fringe state. The rules changed once the promise required it.

Step five: from policing stories to controlling transactions

The final move is forced. Stories keep people believing. They don't keep people in. And staying in is what the arithmetic requires, because holding returns below the rate prices rise only shrinks the debt while the holders of the currency and its bonds keep holding them, and a credible exit limits how far that can be pushed against the holders who are free to leave.

A person who stops believing doesn't have to say a word. They act. They move deposits out of a shaky bank, buy dollars, buy gold, buy bitcoin, move money abroad. The payment is the dissent. From the system's side, a sell order is a rumour made real. So control follows doubt down the same path it travelled. As the strain rises, managing the story and managing the exits escalate together, and the exits get managed because stories on their own don't keep people in. Some get closed bluntly, for everyone at once. Withdrawal limits, penalties on cash, frozen accounts, capital controls. Capital controls are rules restricting moving money out of the country or into certain assets. Closing an exit for one person and not another needs surveillance first, because you can only aim at what you can see.

A devaluation compresses the sequence into days. In December 2023 Argentina's new government cut the peso's official value by more than half in one televised address, issued a protocol against blocking the streets two days later, and lined the route of the first march with riot police six days after that. The controls that cap how many dollars you can buy were still in place a year later. The population took a massive pay cut by decree, and no parliament would have passed that cut as a tax.

The endpoint is the central bank digital currency, which is government money issued as programmable entries on the central bank's own ledger, not as a claim on your bank. Once money is software run by the state, the issuer watches the payments on its own ledger and can set conditions on whatever that ledger carries, so the step from watching to controlling is a keystroke for a limit or an expiry on a balance. A rule about what you're buying or where you're standing needs the purpose or the place on that ledger too, and that's the kind of rule programmable money can enforce. Expiry dates on your balance. Deeply negative rates you can't escape into cash because cash is gone. Spending that fails because of what you're buying or where you're standing. An account switched off by keystroke where the state holds the account and the name together, and by a legal order through your bank where the bank still holds the name. Every feature is optional at launch. Crises afterwards make each one tempting, because now the switch exists. And AI drops the cost of both ends of this, the narrative shaping and the transaction watching, at exactly the moment the system's need for both is rising.

Each step is forced by the one before

Money loaned into existence runs on belief. The belief is in a promise the arithmetic says can't be kept. So doubt is the enemy. Doubt forms as speech and is acted on as payments. A system defending the promise therefore ends up watching speech and controlling payments, because each step was the locally rational defence of the promise once the step before it stopped being enough, and nobody had to choose surveillance as a goal for that to happen.

The four places people break the chain

"Strong constitutions and courts will stop this."

They bend. If the survival of the money system requires control, laws get adjusted or reinterpreted to fit, as 1933 and 1971 showed. Institutions are only as strong as the incentives pressing on them. Weimar Germany had a constitution too.

"Payment monitoring fights crime, and some misinformation really is false."

Both partly true, and I take them seriously. But tools can target crime without watching everyone. The scope of financial surveillance widens as monetary strain rises. So where crime is the reason given for an expansion, ask whether targeted tools could have reached the crime. Watch what triggers each expansion.

"Better leaders would resist."

Incentives beat intent. Put anyone decent in the seat and they face the same choice. They can let the debt collapse now, on their watch, or extend support and control. They were appointed to stop exactly that. The structure produces the behaviour regardless of the person.

"This reads as paranoia about tools that mostly don't exist yet."

The direction is already on the record in currencies under real stress. Bank freezes, capital controls, forced conversion, and policed protest. They arrive with the stress. One may be lifted when the stress eases, but they tend to persist, and the next crisis brings them back. The disagreement is only about timing and about whether your jurisdiction is special.

A money that makes no promise

The whole machine defends a promise. A money that makes no promise needs no such machine. Nobody manages narratives to protect a fixed supply, because no story, no vote, no panic, and no decree can change it. There's nothing to take on trust, only rules anyone can verify. Two things have to hold. The network stays spread out enough that nobody can rewrite the rules, and the work that keeps it secure goes on being paid for. Unlike a promise, both are things you can check yourself. That's why fixing the money comes before fixing speech. Remove the lie at the base and the machine built to defend the lie loses its purpose.

## Sources

What this essay rests on, as checked on 2026-10-06.

1. "Nearly everything we call money is somebody's IOU, because money in this system is loaned into existence."
   Bank of England, Quarterly Bulletin 2014 Q1, “Money creation in the modern economy”, published 14 March 2014: The page prints: "the majority of money in the modern economy is created by commercial banks making loans". https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy
   Deutsche Bundesbank, Monthly Report, April 2017, “The role of banks, non-banks and the central bank in the money creation process”: The report has banks creating deposits when they extend credit, and repayment eliminating those deposits. https://www.bundesbank.de/en/publications/search/the-role-of-banks-non-banks-and-the-centralbank-in-the-money-creation-process-654284

2. "When a bank writes a mortgage, it creates the deposit in the same moment."
   Deutsche Bundesbank, Monthly Report, April 2017, “The role of banks, non-banks and the central bank in the money creation process”: The report has banks creating deposits when they extend credit, and repayment eliminating those deposits. https://www.bundesbank.de/en/publications/search/the-role-of-banks-non-banks-and-the-centralbank-in-the-money-creation-process-654284

3. "Where a public scheme covers the number, the scheme carries that number up to its cap, and the scheme is itself a promise."
   Financial Conduct Authority, FCA Handbook, COMP 10, “Limits on the amount of compensation payable”: "The limits on the maximum compensation sums payable by the FSCS for protected claims are set out in COMP 10.2.3 R." The rules read print no amount for the limit. https://handbook.fca.org.uk/handbook/comp10

4. "The world carries about 365 trillion dollars of debt against a world economy that produces roughly a third of that in a year."
   Institute of International Finance, Global Debt Monitor, “A Debt-intensive Future—and Growing Risks for Global Markets”, listed 23 September 2026: "Global debt surpassed $365 trillion in H1 2026, with emerging markets accounting for the bulk of the rise." A 6 May 2026 listing prints the global debt/GDP ratio stable at 305%. https://www.iif.com/Publications/publications-filter/c/Global%20Debt%20Monitor

5. "One borrower can shrink its own debt against what it produces in a year, and Canada, Belgium, and Sweden did, each by a third or more, with prices rising about 2% a year."
   Department of Finance Canada, Release on the 2008-09 Annual Financial Report and the Fiscal Reference Tables, 2009: "federal debt-to-gross domestic product (GDP) ratio was 29.0 per cent in 2008–09 … down 39.4 percentage points from its peak of 68.4 per cent in 1995–96." https://www.canada.ca/en/news/archive/2009/10/government-canada-releases-2008-09-annual-financial-report-fiscal-reference-tables.html

6. "Across world trade as a whole, the record shows fewer letters of credit and tighter credit lines between banks, not a general halt, and most of the fall in trade that year came from falling demand."
   International Chamber of Commerce, News release, “Trade volume and value decline sharply as a result of crisis”, 23 March 2009: “47% of the 122 banks surveyed reported a decrease in export Letter of Credit (LC) volume”; 51% reported trade credit lines for financial institutions decreased, last quarter 2007 to last quarter 2008. The 59-country count is not printed. https://iccwbo.org/news-publications/news/trade-volume-and-value-decline-sharply-as-a-result-of-crisis/
   International Monetary Fund, Working Paper 11/16, “Trade and Trade Finance in the 2008-09 Financial Crisis”, January 2011: “Global merchandise trade sharply declined in late 2008 and early 2009”; “bank-intermediated trade finance fell in value during the crisis, it fell by less than merchandise trade”. It prints no figure attributing part of the fall to reduced credit. https://www.bookstore.imf.org/books/trade-and-trade-finance-in-the-2008-09-financial-crisis
   Bems, Johnson and Yi, “The Great Trade Collapse”, Annual Review of Economics 2013, volume 5, pages 375 to 400: Names “the collapse in aggregate expenditure, concentrated on trade-intensive durable goods, as the main driver,” with credit shocks “further exacerbating the decline.” https://www.nber.org/papers/w18632

7. "In between, policy targets rising prices of about 2% a year, forever."
   Federal Reserve, Statement on Longer-Run Goals and Monetary Policy Strategy, 25 January 2012: "The Committee judges that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve's statutory mandate." https://www.federalreserve.gov/newsevents/pressreleases/monetary20120125c.htm
   HM Treasury, Remit for the Monetary Policy Committee and the new inflation target, December 2003: "the Bank of England's inflation target was redefined from 2.5 percent measured by RPIX inflation to 2 percent measured by annual CPI inflation", "Announced in June 2003 and implemented on 10th December 2003". https://www.bankofengland.co.uk/letter/2003/chancellor-letter-101203
   European Central Bank, Press release, “ECB's Governing Council approves its new monetary policy strategy”, 8 July 2021: "The Governing Council considers that price stability is best maintained by aiming for a 2% inflation target over the medium term. This target is symmetric, meaning negative and positive deviations of inflation from the target are equally undesirable." https://www.ecb.europa.eu/press/pr/date/2021/html/ecb.pr210708~dc78cc4b0d.en.html

8. "They want room to cut interest rates in a downturn, they know wages resist falling, and they say the official measure of prices overstates the rise."
   ECB, An overview of the ECB's monetary policy strategy, 2021: "Three additional factors ... call for a sufficient inflation buffer": a buffer for "interest rate cuts", "measurement bias" and "downward nominal wage rigidities", and "an adequate safety margin to guard against the risk of deflation". https://www.ecb.europa.eu/mopo/strategy/strategy-review/ecb.strategyreview_monpol_strategy_overview.en.html
   Bank of Canada, Renewal of the Inflation-Control Target: Background Information, November 2011: "two other potential costs of moving to an inflation target lower than 2 per cent ... measurement bias in the CPI and downward nominal wage rigidities", named alongside "the risks associated with the ZLB". The Bank views neither of the last two as a significant impediment to a lower target. https://www.bankofcanada.ca/wp-content/uploads/2011/11/background_nov11.pdf

9. "Those are the reasons they give, and the debts aren't among them."
   ECB, An overview of the ECB's monetary policy strategy, 2021: "Three additional factors ... call for a sufficient inflation buffer": interest rate cuts, measurement bias, downward nominal wage rigidities and cross-country adjustment. The page gives no debt reason. https://www.ecb.europa.eu/mopo/strategy/strategy-review/ecb.strategyreview_monpol_strategy_overview.en.html
   HM Treasury, Monetary policy remit: Mansion House 2024: "I hereby re-confirm the inflation target as 2 per cent as measured by the 12-month increase in the Consumer Prices Index (CPI)." This remit gives no reason for 2 per cent rather than zero and does not mention debt. https://www.gov.uk/government/publications/monetary-policy-remit-mansion-house-2024/monetary-policy-remit-mansion-house-2024

10. "Governments and central banks create that money and credit to push prices up."
   Bank of England, Quarterly Bulletin 2014 Q1, “Money creation in the modern economy”, 14 March 2014: "the majority of money in the modern economy is created by commercial banks making loans"; "The central bank can also affect the amount of money directly through purchasing assets or 'quantitative easing'." https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy

11. "That's the mechanism working as designed, because holding returns below the rate prices rise is how the unpayable debt gets shrunk, and the bias runs that way whenever paying savers above inflation would threaten the debt."
   Reinhart and Sbrancia, for the International Monetary Fund, IMF working paper, “The Liquidation of Government Debt”, 21 January 2015: "High public debt can be reduced not only through default and restructuring but also through financial repression, described as a tax on bondholders and savers via negative or belowmarket real interest rates." https://www.imf.org/en/Publications/WP/Issues/2016/12/31/The-Liquidation-of-Government-Debt-42610

12. "The pages a saver reads don't name that debt."
   Bank of England, Inflation and the 2% target, page updated 16 September 2026: "To keep inflation low and stable, the Government sets us an inflation target of 2%"; "some people may put off spending because they expect prices to fall". This is one Bank of England page; the words debt, deflation, wage, measurement and bias do not appear on it. https://www.bankofengland.co.uk/monetary%20policy/Inflation

13. "The system's own research does, plainly and free to read."
   Reinhart and Sbrancia, for the Bank for International Settlements, BIS Working Papers No 363, “The Liquidation of Government Debt”: "For the United States and the United Kingdom our estimates of the annual liquidation of debt via negative real interest rates amounted on average from 2 to 3 percent of GDP a year." The same paper on the NBER page prints 3 to 4 per cent. https://www.bis.org/publ/work363.pdf

14. "Between 2000 and early 2018 the world added roughly 185 trillion dollars of debt to get about 46 trillion dollars of growth."
   World Bank, World Development Indicators, GDP (current US$), World, 2000 to 2020: "Date: 2000 | Value: 33,965,806,441,911.9"; "Date: 2018 | Value: 87,310,840,056,717.8" (current US dollars). That is a rise of about 53.3 trillion dollars, not the about 46 trillion the sentence gives. https://data.worldbank.org/indicator/NY.GDP.MKTP.CD?locations=1W
   International Monetary Fund, Annual Report 2022, “Debt Dynamics”, drawing on the Global Debt Database: "Overall borrowing jumped by 28 percentage points to 256 percent of GDP in 2020." The record gives a share of world output for 2020, not an amount of debt added between 2000 and early 2018. https://www.imf.org/external/pubs/ft/ar/2022/in-focus/debt-dynamics/

15. "What the record shows growing is the stock of debt and the size of each rescue, from hundreds of billions in 2008 to trillions in 2020, not the yearly pace of new money."
   Federal Reserve Bank of St. Louis (FRED), Series WALCL, total assets of the Federal Reserve, weekly Wednesday levels: 905,253 (2008-09-03) rising to 2,254,983 (2008-12-17), millions of U.S. dollars; 4,241,507 (2020-03-04) rising to 7,168,936 (2020-06-10), millions of U.S. dollars. The page prints weekly levels, not the amount of each rescue. https://fred.stlouisfed.org/series/WALCL
   International Monetary Fund, Annual Report 2022, “Debt Dynamics”, drawing on the Global Debt Database: "According to the IMF's Global Debt Database (Figure 1.4), overall borrowing jumped by 28 percentage points to 256 percent of GDP in 2020." The figure is for the single year 2020. https://www.imf.org/external/pubs/ft/ar/2022/in-focus/debt-dynamics/

16. "The bank may delay telling you, and its regulator may not tell you at all."
   European Parliament and Council of the European Union, Regulation (EU) No 596/2014 on market abuse, 16 April 2014, Article 17(5): "In order to preserve the stability of the financial system, an issuer that is a credit institution or a financial institution, may, on its own responsibility, delay the public disclosure of inside information" https://eur-lex.europa.eu/eli/reg/2014/596/oj/eng
   United Kingdom Parliament, Financial Services and Markets Act 2000, section 348: "Confidential information must not be disclosed by a primary recipient … without the consent of", covering information "received by the primary recipient for the purposes of, or in the discharge of, any functions of the [FCA, the PRA]" https://www.legislation.gov.uk/ukpga/2000/8/section/348?view=plain

17. ""Quantitative easing" instead of "the central bank creating new money to buy bonds"."
   Bank of England, Explainer, “Quantitative easing”: "we can create money digitally in the form of 'central bank reserves'. We use these reserves to buy bonds"; "We first began using QE in March 2009" https://www.bankofengland.co.uk/monetary-policy/quantitative-easing

18. "A 2% inflation target taught as health, when it's a 2% yearly transfer of purchasing power away from everyone who saves or works for wages, compounding for life."
   Bank of England, “Inflation and the 2% target”, page last updated 16 September 2026: "To keep inflation low and stable, the Government sets us an inflation target of 2%"; "This helps everyone plan for the future" https://www.bankofengland.co.uk/monetary%20policy/Inflation
   Federal Reserve, Statement on Longer-Run Goals and Monetary Policy Strategy, reaffirmed effective 27 January 2026: "inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures". It prints a policy target for annual price change, not a transfer of purchasing power. https://www.federalreserve.gov/monetarypolicy/2026-07-mpr-statement.htm
   European Central Bank, “An overview of the ECB's monetary policy strategy”, 8 July 2021: "An inflation target of two per cent underlines the ECB's commitment to providing an adequate safety margin to guard against the risk of deflation and protect the effectiveness of monetary policy" https://www.ecb.europa.eu/home/search/review/html/ecb.strategyreview_monpol_strategy_overview.en.html

19. "It gets policed under the labels already to hand, which are "market abuse", "financial promotion", "scam", and "public order"."
   European Parliament and Council of the European Union, UK Market Abuse Regulation, Article 12(1)(c) of Regulation (EU) No 596/2014: “disseminating information through the media, including the internet, or by any other means, which gives, or is likely to give, false or misleading signals as to the supply of, demand for, or price of, a financial instrument”. The prohibition bites only where the person who made the dissemination knew, or ought to have known, that the information was false or misleading. https://www.legislation.gov.uk/eur/2014/596/article/12
   United Kingdom Parliament, Financial Services and Markets Act 2000, section 21, “Restrictions on financial promotion”: “A person ("A") must not, in the course of business, communicate an invitation or inducement to (a) engage in investment activity, or (b) to engage in claims management activity.” https://www.legislation.gov.uk/ukpga/2000/8/section/21

20. "In 1933 the United States ordered private citizens to hand in their gold and made keeping it a crime."
   The White House, Executive Order 6102, “Forbidding the Hoarding of Gold Coin, Gold Bullion and Gold Certificates”, 5 April 1933: “All persons are hereby required to deliver on or before May 1, 1933, to a Federal Reserve Bank … all gold coin, gold bullion and gold certificates now owned by them”; date line “The White House, April 5, 1933.” https://presidency.ucsb.edu/node/208042

21. "In 1971 it ended the dollar's link to gold by decree."
   President Richard Nixon, Address to the Nation Outlining a New Economic Policy: “The Challenge of Peace”, 15 August 1971: “I have directed Secretary Connally to suspend temporarily the convertibility of the dollar into gold or other reserve assets”; the address is printed as August 15, 1971. https://fraser.stlouisfed.org/archival-collection/papers-richard-m-nixon-1173/address-nation-outlining-a-new-economic-policy-3390/fulltext

22. "And staying in is what the arithmetic requires, because holding returns below the rate prices rise only shrinks the debt while the holders of the currency and its bonds keep holding them, and a credible exit limits how far that can be pushed against the holders who are free to leave."
   Reinhart and Sbrancia, “The Liquidation of Government Debt”, International Monetary Fund Working Paper 15/7, 2015: “financial repression, described as a tax on bondholders and savers via negative or belowmarket real interest rates”; “After WWII, capital controls and regulatory restrictions created a captive audience for government debt”. The paper's evidence is for the advanced economies over 1945–1980, when real interest rates were negative half the time. https://www.imf.org/en/Publications/WP/Issues/2016/12/31/The-Liquidation-of-Government-Debt-42610

23. "If the survival of the money system requires control, laws get adjusted or reinterpreted to fit, as 1933 and 1971 showed."
   Franklin D. Roosevelt, President of the United States, Executive Order 6102, “Forbidding the Hoarding of Gold Coin, Gold Bullion and Gold Certificates,” 5 April 1933: "All persons are hereby required to deliver on or before May 1, 1933, to a Federal Reserve Bank ... all gold coin, gold bullion and gold certificates now owned by them"; date line "The White House, April 5, 1933." https://presidency.ucsb.edu/node/208042
   Supreme Court of the United States, Norman v. Baltimore and Ohio Railroad, 294 U.S. 240, decided 18 February 1935: "These cases present the question of the validity of the Joint Resolution of the Congress, of June 5, 1933, with respect to the 'gold clauses' of private contracts"; "Contracts, however express, cannot fetter the constitutional authority of the Congress." https://www.govinfo.gov/content/pkg/USREPORTS-294/pdf/USREPORTS-294-240.pdf
   Richard Nixon, President of the United States, Address to the Nation Outlining a New Economic Policy: “The Challenge of Peace,” 15 August 1971: "I have directed Secretary Connally to suspend temporarily the convertibility of the dollar into gold or other reserve assets, except in amounts and conditions determined to be in the interest of monetary stability"; dated August 15, 1971. https://www.presidency.ucsb.edu/documents/address-the-nation-outlining-new-economic-policy-the-challenge-peace


---

# How Money Wars Become Real Wars
Date: 2026-07-15
Canonical: https://thenaturalstate.org/essays/how-money-wars-become-real-wars/

One decision can cut every wage and every saving in a country at once. Nobody votes for it and nobody negotiates it. The damage doesn't stop at that country's border. The same power that cuts wages at home pays for wars abroad, and it never sends the bill up front.

That decision is a devaluation, a pay cut imposed on a whole country at once, and the same stroke makes the country's goods cheaper for foreigners. Those cheaper goods take orders and jobs from workers in other countries. Those countries carry debts fixed in money terms, and their politics rewards promises funded by more money over letting prices and pay fall, so absorbing the hit costs the government that chooses it. The moves that answer it, cutting their own currency in reply, holding wages down at home, taxing money coming in, buying foreign currency to hold their own currency down, or tariffs [taxes on imported goods], all leave the adjustment with somebody else. Holding wages down does the same job as cutting the currency, because cheaper labour makes the country's exports cheaper, and those exports still take orders from workers somewhere else. Every defensive move injures the next country, so the moves multiply. That's the staircase. A devaluation, a round of devaluations in reply, and a trade war are the moves a currency fight runs through. Each country picks the move it can reach, and the fight as a whole still climbs. History shows this path often ending in a shooting war, and the 1930s are one decade of that record. A shooting war is where the fight can end, though it doesn't have to.

Then printing pays for it. A war eats real things. Someone must hand over the labour, the steel, the fuel, and the food. If the bill arrives as a visible tax, citizens weigh the war against it, and the war has to keep earning its keep. If the government and central bank create new money to cover the bill, the cost still lands on citizens, but it arrives a year or more later, spread across every shopping basket, with no label on it. Hiding the bill lowers the political price of starting a war and cuts the feedback that would end one. That's the whole trick, and it's centuries old.

The mechanism is the same one the rest of the argument runs on. Our money is built on debt, and those debts are fixed in money terms. A system built on debt can take a slow fall that comes with better tools. In that fall it's the cost of making things that drops, and pay drifts down slowly behind it, so the money to meet a fixed payment is still there. What it can't take is a sudden fall in the prices credit pushed up, houses first, because then the losses spread through the banks. So every time a sudden fall in those prices threatens, the system is rescued with new money, and the rescues keep getting bigger. In between, policy targets rising prices of about 2% a year, forever. Central banks publish why they aim there. Getting there takes new money that first cancels the fall better tools would have delivered, and then adds two on top. Either way, governments and central banks hold a lever that changes the value of everyone's money without asking them. Most of the time they pull it to keep prices rising, so you don't get the saving as a lower average price. Part of it reaches you as higher pay, late and unevenly, and the part that doesn't goes to whoever got the new money first, through house and share prices. In wartime the same lever funds the war. Money outranks law. When a state can fund itself by diluting the currency, your consent becomes decorative on its biggest decisions, and war is the biggest.

How one country's devaluation becomes everybody's trade war

A devaluation does its first damage at home. When a government cuts its currency's exchange rate, everything imported jumps in price at once, and every wage and every saving in that currency buys less. Nobody negotiated a pay cut with a single worker, but every worker got one. Zimbabwe is the cleanest recent example of that first damage. It launched a new currency in April 2024 with gold and foreign reserves behind it. Within six months the central bank cut that currency's official value by 43% in a day, from 13.9 to 24.4 against the dollar. The reserves didn't stop the cut, because the people holding them also set the rate. On the long-term exchange rate chart a devaluation shows up as a cliff rather than a slope, because someone decided it that day. Where a currency floats, the cut is slower and comes through interest rates and money creation instead of a decree. The direction and the victim are the same.

Why would a government do that to its own people? Debt and jobs. A country loaded with debt carries it fixed in money terms, and its politics rewards promises funded by more money over an accepted fall, so letting prices and pay fall costs the government that chooses it. And a devaluation is the fastest way to make its workers cheaper to the rest of the world without a single wage negotiation. Exports get cheaper abroad, order books fill for a while, and the government calls it restoring competitiveness. Strip the euphemism and it's a mass, involuntary wage cut that would never pass a vote if proposed as a wage law.

Say you're the government next door. Your competitor's goods just got cheaper in your own market. Your factories lose orders through no fault of their own. And you're carrying the same debts, fixed in money terms, and the same politics, so absorbing that hit costs you. You have three options. Accept the job losses, which puts the whole hit on your own workers and is politically fatal. Devalue your currency to match, which cuts your own citizens' wages and passes the problem to a third country. Or put up tariffs, which raises prices for your consumers and invites retaliation. There are less visible moves too, holding your own wages down, taxing money coming in, or buying foreign currency to hold your own currency down, and each of them leaves the adjustment with somebody else as well. Every option hands the pain to somebody else, because the move that started it wasn't creating anything. One country grabs a bigger slice of world demand by cutting its people's wages. Notice you didn't need a villain to get here. You inherited the debts and the politics, and the least bad move on your desk still injures somebody abroad. Everyone in this story is doing the reasonable thing from where they sit. The staircase doesn't need bad people. It only needs the lever.

That's why it escalates rather than settles. When a government can change what its own money is worth, it holds a lever that forces every other government's hand. Economists call the result competitive devaluation, a race where each country cheapens its money to defend exports, and each round leaves everyone's savings in those currencies worth less. When every state is cheapening its currency to keep jobs, the friction between them grows and protection follows. A country with its own currency cuts it. A country without one, or one that won't cut, reaches for tariffs and quotas instead.

Tariffs shrink trade. Shrinking trade raises the price of real things, and where that rise lands it feeds us-versus-them politics inside a country. Protection creates shortfalls, and essentials feel scarce. Groups made to compete over scarce resources turn hostile, inside a country and between countries alike. That resource fear is a reliable accelerant of the climb from trade war to hot war. Creating new money manufactures exactly that feeling across a whole country, because more money chasing the same goods makes essentials feel rarer than they are. When trade seizes up, force becomes one of the options. The state doing the blocking is using force from the start, because a blockade is force. The blocked state's usual answer is to find another route, and Japan in 1941, cut off from oil and unable to find one, answered with an attack within months.

You can find every piece of that chain in the 1930s. Tariff walls went up. Countries left gold one by one, and each departure gave a brief edge and forced the next country off. The value of world trade collapsed, and the decade ended in the worst war in history. Currency war becomes trade war, and often hot war, and afterwards the winners declare a currency reset under new rules, which begins the cycle again.

Tariffs don't even deliver what they promise, because they collide with technology. When imports get taxed, domestic firms face higher input costs while customers still demand low prices, so they automate faster instead of hiring. The trade war raises prices, sours relations between countries, and the jobs still don't come back.

Why printing makes wars easier to start and longer to run

What a war consumes each day is set by physics and logistics, not by how it's paid for. What the funding choice decides is who hands those resources over, whether they can see themselves doing it, and how many days the war goes on. A government has three ways to raise the resources. It can tax now, it can borrow, or it can create new money. Everything about a war's politics flows from which one you pick.

Easier to start

If war means a tax bill, the leader pays a political price on day one. Households see the deduction and know what it's for, and attach it to the leader's choice. The war has to clear a high bar of public conviction before the first shot. If war can be funded by creating money, the cost reaches households twelve to eighteen months later, because new money works through the economy with a lag, and it arrives as higher food, fuel, and rent prices that can be blamed on supply chains, speculators, the enemy, or anything else. The bar drops. Wars that could never have survived a visible bill now clear it. When leaders can push the cost onto savers without asking, aggression gets cheaper for the person deciding, and things that get cheaper happen more often.

What the hidden lever raises explains why states at war keep reaching for it, century after century. In 2019 the entire corporate profit of the United States, before tax, was about 2.4 trillion dollars. The country's stock of money [cash and bank deposits together] grew by about 3.8 trillion dollars in 2020 and by more than 6 trillion over the two Covid years. Seizing every dollar of profit from every company in the country couldn't have matched the growth in the money stock in a single year, and no one voted on the part the central bank financed. Taxes have a ceiling because people resist them. Dilution's ceiling is only the point where people abandon the currency itself, and that's much further away. The United States is the extreme case, because the world holds its bonds. Every state with a printing press has a smaller version of the same arithmetic.

Longer to run

Left to money, wars end through feedback. Either the public refuses to keep paying, or the treasury runs dry. Funding a war by debasement [funding the state by creating new money, which waters down everyone else's money] cuts both of those. The public can't refuse a cost it can't see or trace. And the treasury doesn't run dry, because it refills itself with new claims on the whole nation's savings. A reserve currency issuer [the country whose money the world uses for trade and savings] can go one better and draw on foreigners' savings too. The world holds its bonds, and the world's savings get diluted along with everyone else's. The long pattern is that empires fund war by issuing claims on other people's labour, and that currency regimes backed by conquest and extraction outlive the ones that aren't. The money funds the war and the war's extraction props up the money. When the extraction slows, the money goes with it.

Borrowing is the case in between, and where it ends up depends on who buys the bonds and at what rate. If citizens voluntarily buy war bonds at a rate the market sets, borrowing behaves like a tax you can see and agreed to. The moment the central bank buys the bonds, or caps the interest rate by promising to buy however many it takes, borrowing collapses into printing. The bond is the costume the new money wears.

The European powers cut their currencies loose from gold within days of the First World War starting. That was one of the first things they did, which tells you what keeping honest money would have cost them. Weimar is the direct case. Germany printed to meet its obligations, the printing destroyed the middle class's savings, and out of the wreckage people reached for the strongman, and then the next war. Debasement funded the last war, and the social breakdown it left behind invited the leaders who started the next one.

The same war, paid two ways

Paid by visible taxes

1. The government chooses war and must present the bill in the same breath. A tax rise, this year, on people who can see it's them.
2. The legislature votes. Cost and decision are welded together in public.
3. You see the deduction on your payslip and you know what it's for. The war has a price tag in every household's budget.
4. Consent stays on trial. As the tax bites, people weigh the war against the bill. If it stops being worth it, pressure builds and the war must shrink or end.
5. Spending can't outrun what taxation and honest borrowing can raise, and there's a real ceiling on both because people resist, evade, and vote. So the war must stay small, stay short, or keep proving itself.

Paid by debasement

1. The government chooses war and presents no bill. It issues bonds [government IOUs].
2. The central bank creates new money to buy those bonds, or holds the interest rate down by standing ready to buy. No household sees a new deduction anywhere.
3. The state spends the new money first, at today's prices, on weapons, contractors, and soldiers' pay. The first spender of new money gets full value. That step has a name, the Cantillon effect [whoever receives new money first wins, whoever receives it last loses].
4. The new money works outward through the economy. A year or more later, prices are higher for food, fuel, and rent. Wages adjust late and rarely catch up fully.
5. Everyone holding the currency pays a slice. It comes out of the cleaner's savings, the pensioner's fixed pension, and the bonds the foreigner holds. The tax is real, but it goes by the name inflation, and the government blames the weather, the supply chains, or the enemy. The excuses change by the decade. The lever doesn't.
6. Because there's no line item, there's no vote, no one to hold to account, and no natural stopping point. The war draws down the whole society's stored work, quietly, for as long as confidence in the money holds.
7. If nothing else stops it, the end is a currency crisis rather than a tax revolt. Inflation accelerates, confidence cracks, and the regime resets the money under new rules, usually after the war has consumed far more than any openly funded war could have.

A day of war costs the same steel, fuel, and labour whichever way it's paid for. What the funding changes is visibility, consent, feedback, and incidence [who actually ends up paying], and those four decide how many of those days there are. A tax-funded war has to convince you. A debasement-funded war only has to keep you from noticing. A visible tax can at least be designed, aimed at those most able to pay. The inflation tax aims itself, and it lands hardest on cash savers, pensioners, and anyone whose pay moves late, the people furthest from the new money.

What this argument has to survive

"War has many causes beyond money."

True, and I'd never write otherwise. Human motives are tangled, and money is usually not what people are fighting over. It's the enabler. The claim is about how often wars start, how long they run, and how a fight over currencies climbs into a fight with weapons. Money whose value a government can change without asking makes war cheaper to start and easier to sustain. The spark can come from anywhere, ambition, fear, ideology, and sometimes, as the staircase above shows, from a fight over money itself. The funding mechanism decides whether the fire can spread.

"Modern institutions prevent this escalation now."

Institutions run on monetary incentives, and when money breaks, those incentives break with it. Those institutions don't prevent devaluations. For an indebted country under funding stress, the standard rescue package arrives with conditions, and a devaluation is one of them, alongside subsidy cuts, tax rises, and reshaping the economy to earn foreign currency. Where the country has no currency of its own to cut, the same adjustment is asked of wages instead. On the trade side the institutions are late rather than absent. Their tariff-cutting work carried on through 1971 to 1973, the years when the dollar's link to gold was cut and fixed exchange rates ended. The protection of those years moved instead into quotas and into deals where a country agreed to limit its own exports, and the body that ran the world's trade rules didn't cover those deals. It took until 1995 for those deals to be prohibited.

"Printing and war is correlation, not causation."

The mechanism carries the argument without the correlation. When a leader can move the cost of aggression onto savers invisibly, aggression becomes easier for the person choosing it. You don't need a scatter plot to see that lowering the price of something produces more of it.

"Devaluation is a legitimate tool for rebalancing trade."

Whatever it does for exports and imports, at home it's an unvoted pay cut on every citizen at once. If a government proposed the same thing openly as a wage law, an unvoted pay cut across every payslip and pension, imposed on Tuesday, it would never pass. Doing it through the exchange rate changes the visibility, not the substance.

What changes when the lever goes

Remove the lever and accountability rises. A government that can't dilute must fund every project, including war, through visible taxes, honest borrowing, or savings it already holds, choices citizens can see and contest. That's the sense in which a money nobody can print is a peace technology. It works on cost, not character. Coercion gets expensive again, because on hard money every hour of war drains the war-maker's hoard instead of everyone else's, and the feedback that ends wars comes back to life. Fixing money doesn't abolish war. It re-prices war back to its true cost, and that's where the claim stops.

## Sources

What this essay rests on, as checked on 2026-10-08.

1. "Those cheaper goods take orders and jobs from workers in other countries."
   Barry Eichengreen and Jeffrey Sachs, “Exchange Rates and Economic Recovery in the 1930s”, Journal of Economic History, 1985: “We document first that currency depreciation was beneficial for the initiating countries”; “the foreign repercussions of individual devaluations were in fact negative”. The paper's finding is about devaluations in the 1930s and names negative repercussions abroad, not orders or jobs. https://www.nber.org/papers/w1498

2. "That's the whole trick, and it's centuries old."
   The Royal Mint, The Great Debasement and Tudor Coins: “By replacing precious metals with cheaper copper, Henry VIII was able to generate additional revenue to fund military operations and other royal expenditures.” The page dates one episode, the Great Debasement of 1544 to 1551, about 480 years before 2026, and states no span of centuries. https://www.royalmint.com/collect/coin-history-and-tradition/debasement-and-tudor-coinage/

3. "Our money is built on debt, and those debts are fixed in money terms."
   Bank of England, Quarterly Bulletin 2014 Q1, “Money creation in the modern economy”: “Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower's bank account, thereby creating new money”; “bank deposits make up the vast majority—97% of the amount currently in circulation.” The article also says quantitative easing “has a direct effect on the quantities of both base and broad money”. https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy

4. "In between, policy targets rising prices of about 2% a year, forever."
   Federal Reserve, Statement on Longer-Run Goals and Monetary Policy Strategy, 25 January 2012: “The Committee judges that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve's statutory mandate.” https://www.federalreserve.gov/newsevents/pressreleases/monetary20120125c.htm
   European Central Bank, Press release, 8 July 2021, “ECB's Governing Council approves its new monetary policy strategy”: “The Governing Council considers that price stability is best maintained by aiming for a 2% inflation target over the medium term. This target is symmetric, meaning negative and positive deviations of inflation from the target are equally undesirable.” https://www.ecb.europa.eu/press/pr/date/2021/html/ecb.pr210708~dc78cc4b0d.en.html
   Bank of England, Inflation and the 2% target: “The Government sets us a 2% inflation target”; “If we miss the inflation target by more than 1 percentage point either side of the target, we must tell the Government why.” https://www.bankofengland.co.uk/monetary-policy/inflation

5. "Central banks publish why they aim there."
   ECB, An overview of the ECB's monetary policy strategy, 2021: “An inflation target of two per cent underlines the ECB's commitment to providing an adequate safety margin to guard against the risk of deflation… by taking account of downward nominal wage rigidities…” https://www.ecb.europa.eu/mopo/strategy/strategy-review/ecb.strategyreview_monpol_strategy_overview.en.html
   Federal Reserve, 2020 Statement on Longer-Run Goals and Monetary Policy Strategy, as amended effective August 27, 2020: “Therefore, the federal funds rate is likely to be constrained by its effective lower bound more frequently than in the past”; “the Committee seeks to achieve inflation that averages 2 percent over time”. https://www.federalreserve.gov/monetarypolicy/monetary-policy-strategy-tools-and-communications-statement-on-longer-run-goals-monetary-policy-strategy-2019-2020.htm
   Bank of England, Inflation and the 2% target: “But if inflation is too low, or negative, then some people may put off spending because they expect prices to fall.” https://www.bankofengland.co.uk/monetary-policy/inflation

6. "Tariffs shrink trade."
   Pablo Fajgelbaum, Pinelopi Goldberg, Patrick Kennedy and Amit Khandelwal, “The Return to Protectionism”, National Bureau of Economic Research Working Paper No. 25638: "Import and retaliatory tariffs caused large declines in imports and exports." https://www.nber.org/papers/w25638

7. "The blocked state's usual answer is to find another route, and Japan in 1941, cut off from oil and unable to find one, answered with an attack within months."
   United States Department of State, Foreign Relations of the United States, Press Release Issued at Poughkeepsie, New York, by the White House on July 25, 1941: "he has today issued an Executive Order freezing Japanese assets in the United States"; Executive Order No. 8832 signed July 26, 1941. The page does not mention the December attack. https://history.state.gov/historicaldocuments/frus1931-41v02/d184

8. "If war can be funded by creating money, the cost reaches households twelve to eighteen months later, because new money works through the economy with a lag, and it arrives as higher food, fuel, and rent prices that can be blamed on supply chains, speculators, the enemy, or anything else."
   Ben S. Bernanke, Federal Reserve Board, Remarks, “The Legacy of Milton and Rose Friedman,” 24 October 2003: “twelve to eighteen months the effects of a monetary expansion or contraction are felt primarily on the rate of inflation”. The speech puts that lag on the rate of inflation generally, not on food, fuel, and rent prices for households. https://www.federalreserve.gov/boarddocs/speeches/2003/20031024/default.htm

9. "In 2019 the entire corporate profit of the United States, before tax, was about 2.4 trillion dollars."
   U.S. Bureau of Economic Analysis, on the Federal Reserve Bank of St. Louis FRED database, Corporate profits: Profits before taxes, NIPAs, series A053RC1A027NBEA, annual data: “2019-01-01   2375.483” — “Billions of Dollars, Not Seasonally Adjusted”. The series prints 2,375.483 billion dollars for 2019, a little above the sentence's rounded figure. https://fred.stlouisfed.org/series/A053RC1A027NBEA

10. "Their tariff-cutting work carried on through 1971 to 1973, the years when the dollar's link to gold was cut and fixed exchange rates ended."
   American Presidency Project, reproducing President Richard Nixon's address, Address to the Nation Outlining a New Economic Policy: “The Challenge of Peace,” 15 August 1971: “I have directed Secretary Connally to suspend temporarily the convertibility of the dollar into gold or other reserve assets”, dated August 15, 1971. The address covers that suspension only, not tariff-cutting work or the end of fixed exchange rates. https://www.presidency.ucsb.edu/documents/address-the-nation-outlining-new-economic-policy-the-challenge-peace


---

# What a Reset Looks Like
Date: 2026-07-15
Canonical: https://thenaturalstate.org/essays/what-a-reset-looks-like/

Confidence in a currency can drain for years. When it finally goes, it goes all at once. Weimar, the 1933 gold order, and 1971 are three versions of what happens next. Each one ended with a bill, and with a particular kind of person paying it.

Every currency is a promise that the money you hold today will buy roughly the same tomorrow. Confidence in that promise holds until it snaps. The reason is simple game theory. The moment enough people suspect the promise will be broken, the winning move is to get out before everyone else, and everyone knows everyone else is doing the same maths. Governments know it too. So the break arrives as a done deed, not a proposal you get to debate. It lands overnight or over a weekend, with the terms already changed. A decree, a banking holiday [banks ordered shut so no one can take money out], a "temporary" suspension.

And underneath, it's the same move, time after time. When the promise can't be kept, the issuer rewrites what the promise means rather than defaulting openly. It keeps the upside of the rewrite and leaves the loss with whoever was still holding the old promise. Weimar, 1933, and 1971 are that one move at three intensities.

Why the state ends up cornered

The three episodes look like three separate accidents until you see what they share. In our system, money is loaned into existence [new money is created when banks lend, so most money is someone's debt], so the whole structure needs prices and incomes to keep rising. The debts are fixed in money terms, and falling prices make them heavier. When losses appear, they get passed upward instead of taken. The firm is rescued by the bank, the bank by the state, and the state's own promise, the currency, is the last balance sheet [the list of what it owns and owes] in the chain. Suppressing every small failure works like suppressing every small forest fire. The fuel builds, and the fire you finally get burns the money itself.

By the time confidence breaks, the loss already exists. The wealth was spent or misallocated years earlier. The break doesn't create that loss. It decides who carries it.

Weimar, 1921 to 1923: the promise is destroyed outright

Germany came out of the war owing enormous sums. The cruellest part was that reparations were set in gold marks and foreign currency. Printing paper marks couldn't shrink that debt, because the debt wasn't in paper marks. The state printed anyway, to pay wages and obligations, to buy the foreign currency it owed, and eventually to pay striking workers in the Ruhr after France and Belgium occupied it. Each round of printing pushed prices up faster. People learned to spend marks the hour they received them, because holding money was the losing move. That's a crack-up boom [a late-stage rush out of money into anything real, as confidence in the unit erodes]. By November 1923 the unit was dead.

Almost every promise written in marks died together, from savings accounts and pensions to insurance policies and the war bonds people had bought patriotically. That included the state's own internal war debt, quietly wiped. Printing is a default on everything denominated in your own unit, your citizens' savings included. Meanwhile, anyone who owned real things with mark debts against them, factories, land, buildings, walked out the other side with the greater part of those debts gone. Then came the reset [replacing a failing currency with a fresh promise under new terms], a new unit called the Rentenmark. The gold-denominated external debt was restructured by negotiation under the Dawes Plan in 1924. The savers were never made whole. And the damage went further than money, because a wrecked middle class went looking for someone to blame and a strongman to fix it, and got both.

1933: the promise is rewritten mid-contract

The American version came from the opposite direction. Prices were falling, and not because anyone had got better at making things. Dollars were claims on gold at $20.67 an ounce. After 1929, prices and wages fell hard while debts stayed fixed, so every debt took a bigger bite of every shrinking income. That's debt deflation [falling prices making fixed debts heavier until defaults cascade]. The government wanted to create money and push prices back up. The gold peg blocked it, because printing more claims against the same gold invites a run on the vaults.

In April 1933 the state ordered citizens to hand in their monetary gold at the old price of $20.67 and made refusing a criminal offence. Congress also cancelled the gold clauses in contracts, the clauses savers and lenders had written in to protect themselves from this exact manoeuvre. Gold came in, out of bank vaults and out of household drawers. Then, in 1934, with that gold in official hands, the government repriced it at $35 an ounce. The dollar was worth roughly 40% less in gold, and the profit went to the Treasury, not to the people who had complied. The Supreme Court let the cancelled clauses stand in 1935, a year after the profit was banked. Britain, by the way, had run its own milder version in 1931, simply leaving the gold standard and letting the pound fall by about a quarter.

Gold didn't fail as a scarce thing. Its purchasing power was fine. Gold failed as a system, because using it for a whole economy meant vaults, custodians, and paper claims, and whoever controls the custody can change the rules in an afternoon. The seizure was cheap because the metal was already centralised.

1971: the promise is withdrawn from the last claimants

Bretton Woods rebuilt the world's money in 1944 with the dollar at the hub. Other currencies pegged to the dollar, and the dollar to gold at $35. But after 1933 only foreign governments held that conversion right. Citizens were already out. Through the 1960s the US created dollars for the Vietnam War and programmes at home, until dollar claims abroad were several times the gold available to honour them. Foreign governments did the arithmetic and began redeeming, France most famously. On 15 August 1971, rather than let the vault drain, Nixon suspended convertibility [the right to swap the paper claim for the underlying gold]. It was announced as temporary. It was never restored.

Every dollar on earth, including the reserves of other nations' central banks, became a promise with nothing behind it. The packaging fits the pattern. The same speech imposed a 90-day freeze on wages and prices and a surcharge on imports, all framed as defending citizens against speculators. The loss was then spread across a decade. The inflation of the 1970s repaid the world's dollar holders in units that bought less each year. That's an implicit default [reducing what a debt is really worth by devaluing the money, rather than missing a payment]. Much of that loss was pushed onto foreigners, who held the promise but had no vote on its terms.

Then came the second half of the move. It's why 1971 never looked like Weimar. With the gold link gone, the US made sure the world's oil stayed priced and settled in dollars. Any country that needed oil still needed dollars. The petrodollar arrangement extended the dollar's life without ever restoring the promise.

The same move, seen once

Strip the period detail away and every episode runs the same sequence. Promises are made that the money coming in can't cover. The gap is hidden with money creation for as long as the rules allow. Where the rules block that, as the gold peg did in 1933, the pressure comes out as falling prices and defaults instead, and the rule itself becomes the thing that has to give. Losses are passed upward until the currency is the only balance sheet left. Then, instead of open default, the money itself is redefined, by printing until the unit dies and a new one takes its place, by seizing and repricing the collateral, or by severing the link entirely. The redefinition arrives suddenly, because announcing it in advance causes the very run it's meant to prevent. It comes wrapped in emergency powers and a story about necessity, usually with an enemy attached, speculators, hoarders, foreigners. Afterwards, new rules restore calm, and the cycle begins again under the new promise.

This isn't ancient history either. In February 2023 Lebanon's central bank moved the Lebanese pound's official rate against the dollar from about 1,500, where it had been held for twenty five years, to 15,000, a 90% cut in one decision. Even the new number was a fraction of what a dollar cost on the street. The official rate was a promise that had already failed. February 2023 is where the state admitted it. On the long-run chart of a managed currency [a currency whose exchange rate the state sets] the fall comes in cliffs, not a slope. And every cliff is that same move.

So, who absorbs the loss?

Whoever is still holding the promise when the terms change, and can't exit.

That means savers in cash and bank deposits, pensioners, bondholders, and people who live on wages, because wages adjust slowly, so even if your pay packet is untouched, what it buys falls. It means the rule-followers, the Americans who handed in gold at $20.67, the lenders whose protective contract clauses were cancelled. It means the people furthest from the source of new money, because prices reach them before the money does, while those closest to the source, governments, banks, leveraged asset owners, get the money before prices adjust. And when the money is a reserve currency [the currency widely held by central banks and used for global trade], it means foreigners, because reserve status puts much of the promise in foreign hands, so that's where much of the loss is assigned.

The indebted don't absorb it, so long as the debt is written in the money being rewritten. The biggest such debtor is the state itself, and its obligations in its own unit shrink or vanish. Owners of real assets carried on borrowed money come through enriched. So inflation and resets are a transfer with a direction, from holders of promises to issuers of promises.

And there's a second loss the ledger doesn't show. Trust itself gets consumed. The zeros on the banknotes were the cheap part of Weimar. What cost more was a society that stopped believing the rules were fair and reached for scapegoats and a strongman. When the money breaks, division and control rise together.

The four best arguments against me

"Modern institutions would prevent all this now."

I'd answer with 1933. It happened inside a strong constitutional order, with courts and a free press, and it went through anyway. The contracts were still cancelled, and the courts still let it stand. 1971 ran through that same order too, where a single speech imposed a 90-day freeze on wages and prices. When the survival of the money system is at stake, law bends to money, not money to law. Institutions are only as strong as the incentives pressing on them.

"Devaluation is a legitimate adjustment tool, not theft."

It's a mass pay cut and a levy on savings, imposed in a day, without consent. Describe it for what it is and put it to a vote. Would it pass? The mechanism only works because nobody is asked.

"Gold worked for centuries, so surely the metal wasn't the problem."

Agreed, and that's the point. Scarcity never failed. Custody failed. Any money that has to be warehoused and used through claims ends up governed by whoever holds the warehouse.

"1971 wasn't really a break, since the dollar is still here."

The promise broke completely. What survived was demand for the unit, re-anchored to oil and to the lack of anywhere else to go. Spreading a loss thinly across the world and across a decade doesn't cancel it. Delay isn't repair.

Why this history carries the thesis

The loss always lands on whoever holds the promise and can't exit. So every version of the move depended on people not being able to get out. Sometimes the exits were locked, by gold in vaults, banking holidays, capital controls [restrictions on moving money across borders], and cancelled clauses. Sometimes what people held had no exit in the first place, like a pension, an insurance policy, or a war bond. And today's system is the post-1971 arrangement running at full stretch, roughly 185 trillion dollars of new debt in the two decades before the pandemic to buy about 46 trillion of growth. The debt is now too large for the sharp Volcker-style cure [the early-1980s fix, when the US central bank raised rates hard enough to crush inflation], so the loss is being assigned instead, through financial repression [holding the return on savings below inflation so that debts melt gradually at savers' expense]. That is the drain, not the break. It is the same implicit default as the 1970s, running ahead of the rewrite this time instead of after it. If markets push back, the central bank can cap borrowing costs directly, buying bonds to hold rates where it needs them.

For the first time, both kinds of trap have a structural counter. A money you can hold yourself, without a vault, and carry across a border in memory, isn't a claim on anyone. There is no custodian to hand it to and no issuer who can rewrite what it means. That removes the choke point every previous version of the move relied on. The move can still be tried. What's changed is that you no longer have to be holding the promise when the terms change.

---

# The Programmable Cage
Date: 2026-07-15
Canonical: https://thenaturalstate.org/essays/the-programmable-cage/

Today's money lets the state punish you after the fact, through other people, with plenty of leaks. A central bank digital currency plus AI lets the system decide in advance, automatically and person by person, what your money will and won't do. And nobody has to intend it. Every step toward it is a reasonable person doing their job, and a crisis is what makes the next step look obvious.

What today's money can't do

The pounds you spend live in two forms. Notes and coins in your pocket, and deposits at a commercial bank, which are an IOU from the bank to you [the bank owes you that money and promises to pay it when you ask]. The state is at a distance from both. If it wants to freeze your account, it needs a legal order and a bank willing to act on it, one holder at a time. If it wants to stop you buying something, it passes a law and then has to catch you afterwards, through police and courts. If it wants to get money to millions of people quickly, it pushes payments through banks and waits. And if it sets interest rates below zero, you can walk to a cash machine, take out notes, and opt out. That's a large part of why rates never went far below zero anywhere. Cash is a floor.

The control that exists today is slow and blunt. It needs people at every step, applies one rule to everyone, and leaks. Most of that friction wasn't designed as a protection, but it works as one.

What a CBDC changes

A central bank digital currency [money issued directly by the central bank, where your balance is a line on its own ledger rather than a claim on a high-street bank] changes the architecture of the money, while what you see on your phone stays familiar. The central bank issues the money and keeps the account your balance sits in, whoever hands you the app. And once your balance is on the issuer's own ledger, the money itself can carry rules. That's what programmable means [the money enforces rules about how, when, and where it can be spent, inside the payment itself].

None of this fits inside today's money.

- Interest below zero, with no exit. The wallet can take it straight from your balance. Once cash is gone, or too marginal to matter, the floor is gone. A committee can decide savers lose 4% this year, and the decision executes itself.
- Money that expires. A balance that decays unless you spend it, say 6% a year, or a stimulus payment that vanishes if unspent after a month. Today notes and bank deposits don't have clocks in them. On a ledger, spending deadlines are a setting.
- Payments that fail at the till. Today a law says what you may not buy, and someone else has to enforce it. A shopkeeper who checks your age, a card issuer who blocks a category, or police and courts after the fact. In a CBDC the rule runs inside the transaction. The payment for the flight, or the second tank of petrol this week, or anything outside your area in an emergency, simply doesn't go through, with no officer, no court, and no appeal in the moment. The rule and the enforcement become the same event.
- Freezing at a keystroke. Today, freezing assets is done one holder at a time, through institutions that each have to act. On a single ledger it can be done to everyone at once. Any balance, any group of balances, instantly.
- Transfers with strings attached. Support payments that arrive tied to your digital identity, spendable only on approved categories, only by a certain date. The furlough payment, but with the conditions built into the money.
- Total visibility. Every transaction by every person, visible to the issuer in real time. Today's system is surveilled, but the records sit in separate banks that never share one view. One ledger removes that separation.

What AI adds

The ledger gives the levers. AI supplies the hands to pull millions of them at once. Each control above still sounds like it needs an army of officials, and it doesn't.

1. Reading

No workforce on earth could watch tens of millions of transactions a day. A model can, in real time, and it gets better at spotting whatever it's told to spot, because every flag a person confirms or rejects becomes training data for the next pass. On a narrow, well-defined job like this one, they correct their own errors faster than any human process.

2. Personalising

Today policy is one interest rate and one rulebook for everyone, and not because anyone chose fairness. Administering different rules for each person was impossibly expensive. AI makes per-person rules cheap. Your money can carry different limits from your neighbour's, set by a model scoring your behaviour, updated continuously. And the pitch writes itself. Personalised policy means shorter recessions, targeted help, less fraud.

3. Enforcing

The rules execute without staff. People may still review the model's flags, but that checks the model's work, not your case. What goes is the bank clerk between the rule and your payment, the person who could have looked at it and said no, this one's not right.

Put identity, payments, and AI in the same system and you get the end state. A person can be switched off from economic life, unable to pay or be paid, by a flag in a database. Today that takes a bank here and a platform there, each deciding separately, and it leaks. In that system, it's instant and total.

Why it arrives through the next crisis, with no villain required

Our money is debt-based. Nearly all new pounds are created when banks make loans, and those debts are fixed in pounds. If prices and wages broadly fall, the repayments don't shrink with them, so the debt takes a bigger bite of every income. Enough of that means defaults cascading through the banks. So the system must keep prices rising, whatever anyone prefers. It's a survival condition of the structure.

AI pushes prices down harder every year, because its entire purpose is more output from less labour. It also cuts jobs fast when firms get squeezed. So the deflationary pressure the system must offset gets stronger every year, and the next downturn likely arrives with a lot of people losing income at once.

What do governments do then? We rehearsed the answer in the pandemic. Direct payments and payment holidays, fast and to millions. The central banker who refuses to ease [cut rates and create new money] sees banks fail on their watch, so they ease. The politician promising relief beats the one promising a hard lesson in sound money, election after election. The Treasury official told to reach every citizen by Friday looks at bank transfers and the million people with no bank account, and concludes that a digital wallet at the central bank is the efficient answer. And the voter takes the payment, because the relief is immediate and certain, while the cost, less freedom later, is uncertain and far off. Humans under stress take the certain thing. Every actor in that chain does their job reasonably, and none of them has to want the result.

The controls arrive switched off. The Bank of England's promises about a digital pound haven't changed. No programmability by the Bank or the government, privacy protected, cash to remain. I don't doubt the sincerity. But those promises are launch-day settings, and settings get revisited under pressure. Once the switch exists, the next emergency finds it. In a crisis speed beats deliberation, the carve-out arrives labelled temporary, and emergency powers persist because removing them re-exposes the fragility they were covering. And each round of relief manufactures the next emergency. The new money pushes prices up faster than wages, which makes people angrier, which invites spending rules and capital controls [rules that stop money moving across borders or into certain assets] to manage the anger the last round created.

A conspiracy would be a more comforting story, because you could remove the conspirators. Incentives stay when the people change.

The reasons not to worry

"Safeguards will be legislated."

They will, and I'd still expect them to bend, because money outranks law in practice. When preserving the monetary system requires a power, laws get reinterpreted to fit. Emergency after emergency has bent them before. The only protection that survives is the one that's structurally impossible to override.

"Banks already see everything, so nothing changes."

Partly true, and it misses the change. Today's surveillance is fragmented, slow, and has a cash exit. The change is architectural, with one ledger, rules executing inside the payment, and, once cash is gone, no floor under rates. Concentration is the difference.

"Personalised policy is good. Shorter recessions, targeted help."

The benefits are real, which is exactly why it gets adopted. But the same fine-grained control that targets help targets punishment, and which one it does is decided by whoever holds the controls in the next crisis. The launch-day intent doesn't get a vote.

The same AI running on a money nobody can expand produces the opposite world. The gains show up as falling prices, so people need less income to live, and the case for mass transfers, and the conditions that ride along with them, shrinks rather than grows. That's why the two systems can't share the future. One needs control to survive. The other removes the lever the control depends on. Which money we all stand on when the AI wave fully lands is what decides which of those two worlds we get.

---

# Why Voting Can't Fix It
Date: 2026-07-15
Canonical: https://thenaturalstate.org/essays/why-voting-cant-fix-it/

You can't elect your way out. The debasement [the government and central bank creating more money and credit, so each pound buys less] is the survival requirement of the system each new leader inherits, and a better person in the same seat inherits the same requirement.

A leader who does stop it triggers the crash the system has been expanding to avoid, takes the blame for it, and is replaced by someone promising rescue. That leaves two doors. Stop now and take a deflationary depression [a slump where prices and incomes fall but the debts fixed in pounds don't, so defaults spread], or keep going and take widening inequality, rising control, and an eventual currency failure. Governments pick door two almost every time, because door one's costs are immediate, visible, and land on whoever chose it, while door two's costs are spread across millions of people and arrive after the chooser has left office.

Why we can't just elect better people

A candidate who intends to stop it has to get past two filters, one on the system side and one on the voter side.

On the system side, most money is loaned into existence. A bank makes a loan, and new money appears. Those debts are nominal [fixed in pound terms, the amount owed doesn't change when prices change]. Technology keeps making things cheaper to produce, so in an honest system prices would fall. But when prices and wages fall, the fixed debts take a bigger bite of every income, yours, your employer's, the bank's, the government's. Enough of that and defaults cascade through the banks. So whoever sits in the seat faces the same choice on day one. Expand money and credit, or preside over cascading failure. Both the honest chancellor and the cynical one back expansion, because the requirement comes with the job. That's what "incentives beat intent" means.

The funding side makes it worse. The promises politicians get elected on can't be paid from taxes alone. The clearest numbers are American, and the mechanism is the same here. In 2019 total US corporate profits were about 2.25 trillion dollars, while money creation during the Covid years ran at roughly 5 trillion a year. Take every dollar of profit in tax and you still couldn't cover what was simply created. Taxes still pay for much of what the state does. So a leader who gives up money creation has to either break the promises or raise visible taxes to levels no electorate will accept. Money creation is how the gap gets paid for.

On the voter side, politics selects for promises of more money because nearly all of us prefer the bigger number. Offer people a rise from £50,000 to £52,000, or a cut to £48,000 while their cost of living falls by more. The first offer wins, even though the second leaves them better off. So even a fully informed electorate keeps electing whoever promises expansion. The filter works on the candidate before they ever reach office.

You've never had a vote on the money itself. Elections decide who spends. The unit has never been on your ballot paper. That's why democracy without a vote on money is theatre. Changing governments changes who benefits from the expansion, not whether it happens. Changing the shop manager doesn't help if the till miscounts the money. You fix the till, or you move to one that can't be rigged.

What happens to the leader who stops it

Say a chancellor and a central bank governor announce the end together. They'll create no more money, rescue no more banks, and let savers and borrowers set interest rates between them.

The announcement itself is the trigger. People holding assets priced on continuing support try to sell before it ends, because being early out of a falling market beats being late. Declaring you'll never rescue the banks causes the bank run today, not someday.

Then rates rise toward the level savers and borrowers would set between them [what lending would actually cost, with no central bank buying to hold rates down]. A firm that borrowed at 3% refinances at 9% or not at all, so it cuts staff or fails. Mortgages reset and house prices fall. Falling prices and incomes hit fixed debts, defaults roll through the banks, unemployment spikes, and pension pots shrink as the bonds inside them fall.

Then the political bill arrives. The crash is immediate, certain, and has one address. The person who stopped. The benefits arrive years later and are invisible. Prices fall with technology, savings hold their value, savers and borrowers set interest rates, and nothing dramatic happens when life simply gets cheaper. People weigh immediate certain pain far above distant uncertain gain. So the leader who stopped loses to a candidate promising rescue, the rescue is the biggest expansion yet, and politicians watching learn never to try.

The trap has already shown up in miniature. Time after time, a hint at reducing support has been enough. Markets convulsed and the support came back. And the counterexample people reach for, Paul Volcker [the American central bank chief who pushed interest rates to nearly 20% around 1980 and broke that era's inflation], can't be repeated. Back then the debt was mostly private, owed by households and firms, so the pain landed on borrowers while the state stood behind the system. Today the state itself is the biggest debtor. Crushing rates now would blow up the government's own interest bill, trigger losses across the banks, and force the next rescue. So the system chooses financial repression [holding interest rates below inflation so debts shrink while savers quietly pay] instead.

A system whose rules can be bent selects for people willing to bend them and removes the ones who won't. That happens whether or not anyone means harm. Argue with the system, not the souls in it.

The two doors

Door one is to stop the expansion and let the market clear [let prices fall, with no support, until real buyers set them]. In a system where total debt is about three times what the world produces in a year, that's a deflationary depression. Bank failures, mass bankruptcies, unemployment, savings inside the system wiped out by defaults. Deflation from productivity is the natural, healthy state of a free market. The bomb goes off when honest prices land on a mountain of fixed debts that were only ever payable if prices kept rising. The debt structure explodes, not the cheaper goods.

Door two is to keep going. And because technology's downward push on prices is accelerating, the offsetting expansion has to accelerate too. Each crisis needs a bigger dose than the last, and each dose buys less. The consequences compound. Asset owners pull away from wage earners, savers get pushed into speculation just to stand still, trust decays, politics hardens into us versus them, and the state reaches for more control to hold the structure together. Financial surveillance, capital controls [rules stopping you moving your money out of the country or into certain assets], pressure on speech, and eventually programmable state money [money with rules built in about where, when and on what it can be spent]. Door two ends, historically, in a currency failure and a reset [the failing money replaced with a new one under new rules], sometimes through war. Weimar Germany is the standing example. Printing to meet obligations destroyed savings, desperate people reached for a strongman, and liberty went down with the currency.

Door two keeps winning because its costs are diffuse, delayed, and deniable. The debasement never sends a bill with its name on it. Nothing you can point at says "this is what took my pay rise". Door one's costs are concentrated, immediate, and attributable. So door one almost always loses, the dose grows, and the exit gets harder. Depression now versus repression later, and later wins vote after vote.

The exit was never either door. Both doors assume the same thing, that money must be somebody's policy. The way out is at the base. A money nobody can expand. If the unit can't be created at will, productivity shows up as falling prices for everyone, the hidden transfer from savers to borrowers stops, and governments have to fund themselves with taxes that citizens can see, contest, and refuse. What voters won't fund, governments can't promise. Accountability rises, because the stealth option is off the table. And it's the first transition path that doesn't run through collapse or conquest, because nobody has to win an election to take it. People opt out one at a time, and that's why it can work where politics can't. A vote changes nothing until a majority agrees, but leaving needs no majority and nobody's permission. Each person who leaves puts their savings out of the debasement's reach, so each round of expansion has less left to work on. It isn't painless. No path from here is. But this is the one where faster take-up lowers the damage instead of raising the dose.

The argument isn't that politics is useless. Politics can protect the exit. It can protect the right to hold your own keys [to control your savings yourself, with no bank in between]. It can write sane rules, and it can reduce harm at the margin. What it can't do is fix the base from inside, because the seat itself carries the requirement to expand, whoever sits in it.

The case for trying anyway

"A gradual taper [winding the support down slowly] avoids the crash."

With total debt at about three times what the world produces in a year, even a small withdrawal of support exposes fragile credit built on the earlier rounds. Taper attempts keep ending in reversal, and announcing the path is itself the event.

"Volcker proves a strong leader can do it."

Covered above. The precondition no longer holds. Back then the debt was mostly private, owed by households and firms. Today the state itself is the biggest debtor.

"Once voters understand, democracy corrects it."

The voter-side filter survives understanding, because the certain nominal rise still beats the abstract gain in what the money buys, and the unit isn't on the ballot. Understanding changes what people do far more than how they vote. They exit, not to fix the system, but to stop their own savings paying for the expansion. The fix is what those exits add up to.

---

# Why Gold Failed
Date: 2026-07-15
Canonical: https://thenaturalstate.org/essays/why-gold-failed/

We had sound money with gold, and we lost it. Gold's scarcity never failed. Its custody did. The metal stayed scarce the whole way through. What failed was everything people had to build around the metal to use it. The mints, the vaults, the paper receipts, the banks, and finally the central banks. Collapse after collapse of the gold standard was a failure of that custody layer, not of the asset. That distinction tells you where the next attack comes from.

Why gold needed a custody layer at all

The failure is built into the metal's physical properties.

Gold is heavy, slow to move, and hard to verify in bulk. None of that matters when you're paying someone in the same room. But money means paying someone in another city or another country, in amounts too big for coins. Shipping bars is costly and risky, and when they arrive the receiver can't easily check what they're made of, because testing purity is a specialist job. So from the beginning, using gold beyond the same room forced trusted parties into the middle. Mints to standardise coins, vaults to store metal, banks to move value on paper instead of in metal.

Then the sequence runs, and each step is rational, and each step hands over more control.

You deposit gold in a vault and get a paper receipt. The receipt is light, easy to hand over, and divisible, so receipts start circulating as the actual money. People hold promises. The bank holds the metal.

The banker notices most of the gold never leaves. So they issue more receipts than they have metal and lend the extra ones out, earning interest on money they created [fractional reserve, keeping less metal on hand than the receipts issued against it]. A banker who declines that trade loses ground to one who takes it, so competition pushes reserves lower and lower.

At that point, the money people use every day is no longer bound by the scarcity of gold. The metal's supply grows by a small, slow percentage each year. The supply of receipts grows at whatever pace bankers can issue them. The scarce asset has been separated from the circulating money.

Eventually doubt arrives, everyone redeems at once, and the bank can't deliver. Runs repeat across banks and decades. The political fix for repeated runs was a lender of last resort [a central bank that creates money to rescue failing banks], and gold consolidated out of many private vaults into a few national ones. Custody centralised as the cure for the instability that custody itself created.

Once the metal sits in one place and the population holds paper, the rules change by decree. Countries suspended convertibility [the right to swap a paper claim for the metal behind it] in 1914 to print for war. Britain left gold in 1931. In 1933 the United States ordered citizens to hand their gold to the banks. On paper, that order reached every private holding in the country above a hundred dollars in coin a person. In practice, most of what the state collected came through the banks, because that's where the gold already sat. The state almost never prosecuted anyone who kept coins at home, and it didn't need to. The order carried a fine of up to ten thousand dollars and up to ten years in prison, and coin after coin came in from households without an official ever knocking. A law can reach a mattress. Searching millions of them is a different job, and the state never had to do it, because the threat did most of the work and custody had already built the choke point. In 1934 the state devalued the dollar against the gold it now held, raising the official price from $20.67 an ounce to $35, so every remaining paper claim bought roughly 40% less metal overnight. The post-war Bretton Woods agreement then narrowed convertibility to foreign central banks only, so one country's vault effectively backed the world. In 1971 the United States suspended even that, and the last link snapped.

A verification failure ran underneath it all. At no point could an ordinary holder of claims verify the reserves. Gold has no public, continuous audit. You trusted the bank, then the central bank, then a government's word. So the whole gold system stood on trust in the people holding the metal, not the metal itself. That trust is the surface that got attacked, again and again.

You don't need villains for this story. Plenty of the individual steps were deliberate. Someone signed the order in 1933 and someone set the new price in 1934. What nobody designed is the pattern that kept producing those steps. Each one was the locally sensible move given the incentives in front of the person taking it, and the failure is in the arrangement rather than in anyone's plan for it. It was not harmless. Devaluing a currency makes every saver's money buy less overnight, without their consent and without a vote, and nobody has to intend that for it to be a real loss. Structure explains why it kept happening. It doesn't make it fine.

Separating the two properties cleanly

Scarcity is a property of the asset, and it answers one question. How hard is it to make more of the thing? Gold never lost that property, because mining stayed expensive.

Gold's supply did grow. Miners dig up new metal every year, and they dig up more of it when the price is high enough to pay for the work. Between 1900 and 1971 the amount of gold sitting above ground roughly tripled. Someone holding a coin in 1900 owned a smaller share of all the gold in the world by 1971, without doing anything wrong and without anyone taking anything from them. That dilution was real and slow.

At its fastest, in the gold rushes of the 1850s, the biggest supply shock gold ever had, its stock grew by perhaps 2 or 3% a year. Set that beside 1934, when the dollar was cut against gold by about 40% in a single announcement, or 1971, when the right to swap dollars for metal was cancelled on a Sunday evening. One of those is a slow leak you can measure. The rest is someone reaching in and changing the number. They're not the same problem, and only one of them killed gold as money.

The mine was a leak. The vault was the failure.

Custody is a property of the system around the asset, and it answers a different question. Who stands between you and the thing, whose promise are you actually holding, and who can change the terms? That's where the failures happened. Fractional issuance diluted the claims. Suspension dishonoured the claims. Devaluation rewrote the claims. The metal was untouched throughout.

Scarcity protects you against dilution of the asset. It can't protect you against dilution or repudiation of claims on the asset. And a money whose physical nature forces claims to do the daily work will, in practice, be the claims. Gold in your hand had no counterparty [nobody else's promise has to hold for your asset to be good]. Gold as a working monetary system was almost nothing but counterparty. Its scarcity stayed in the metal while its usefulness moved into the claims, and no scarcity rule stood behind the claims.

"We tried sound money and it failed" is the standard dismissal of trying again. Spell it out and it says something narrower. We tried scarce money that you could hold and roughly check yourself in small amounts, but not across a whole economy, and the custody layer that filled that gap is what failed. Which hands you the specification for any successor. Scarcity alone was never enough. You need scarcity, plus the ability for ordinary people to hold the asset itself without a promise in between, plus the ability to verify the whole system cheaply, plus rules that nobody can rewrite by owning enough of the thing itself.

That fourth one only holds if something stronger than wealth stands behind it, and in bitcoin two things do. The rules are enforced by every node. A block that breaks them, one that creates extra coins, say, is rejected by every node that sees it, no matter how many coins the person who built it holds. The record is defended by energy. Rewriting it means buying enough energy and hardware to redo the work faster than the rest of the network combined, and then paying for that every day you want the rewrite to stick. Neither defence bends to wealth. Owning more coins doesn't buy a vote at the nodes, and it doesn't cut the energy bill by a penny. A design where the biggest holders decide the rules fails this test, because the rules become whatever the biggest holders want. That's where gold's system arrived by a slower road. Gold in the hand offered scarcity. Gold as a system, once a whole economy ran on it, could not offer the other three. A new gold standard wouldn't fix that, because it would re-install the same custody layer and ask it to behave this time.

Still, the leak tells you what gold could never offer. Gold is hard to make more of. It isn't impossible to make more of. Its scarcity rests on two things that can change. Where the ore is, and what it costs to get it out. Both are facts about the physical world, not rules. Every time the engineering improves, a bit more gold becomes worth digging up. People now talk about mining metal from asteroids. Nobody has done it beyond samples, two well known companies tried and folded, and the total amount of asteroid material ever brought back to Earth would fit in a teacup. But the argument doesn't depend on whether it works, because even if it works it arrives over decades, through rockets and refineries and capital, on a schedule anyone can watch.

Gold's scarcity was always a bet on the frontier moving slowly.

A bet isn't a rule. With bitcoin there will only ever be 21 million, and there's no price at which more appear, no discovery that changes it, and no amount of energy or money that buys an extra one. Gold gives you scarcity that no government can change by decree, but the ore and the engineering can still change it between them. Bitcoin's scarcity rests on a rule instead, and the only way past a rule is to get the people who enforce it to give it up. Nobody can buy that.

What that failure teaches us to watch for now

The scarce asset's supply is the hard path, so the attack doesn't go there. It goes at the layer where people hold and use it. Bitcoin's supply is checked by every node [software anyone can run that verifies every transaction against the rules], and changing it would need the network to agree to create more of it than the rules allow, so the pressure moves to custody, claims, and narrative. Gold's playbook, re-run one layer higher.

1. Custody concentration

What share of coins pools inside a few exchanges and funds? An ETF [a fund traded on the stock market that holds bitcoin for you] puts a custodian back between you and the asset, since the fund's custodian holds the coins and you hold a claim on the fund. As a bridge for access it's useful. As a destination it rebuilds the choke point, because a large regulated pool can be pressured, gated, or lent out in ways the people holding its shares never see.

2. Claims outgrowing coins

Watch for bitcoin IOUs and derivatives [contracts whose value tracks bitcoin, typically without moving actual coins] doing more of the daily work than coins themselves. Receipts beyond reserves is the exact move that broke gold, and paper claims can blur the visible price for a while.

3. The bailout

This one you can read off a single event. Leverage built on bitcoin tends to blow up fast and stay contained, but only if failures are allowed to fail. The moment a failing firm that issued more bitcoin IOUs than it holds coins gets rescued instead of liquidated, the old dynamic is back, because rescue lets fractional claims persist instead of dying young. Gold's claims layer survived issuing more claims than it could honour because the state kept absorbing the losses. And what would a rescue be made of? Nobody can print bitcoin to cover a bitcoin shortfall, so any bailout has to be paid in the state's own currency, created for the purpose. That buys the failing issuer time and costs the currency, because the rescue is new money and everyone holding that money pays for it. The Bitcoin ledger doesn't move at all. So a state can still do it. Each rescue strengthens the case for the thing the state was trying to contain.

4. The "asset, not money" split

Watch rules and stories that welcome bitcoin as an investment inside custodial wrappers while discouraging its use as money. "Hold the ETF, spend the stablecoin, self-custody is dangerous." A stablecoin is a company's token that tracks the dollar or the pound, so that slogan keeps your spending on custodial rails too. That was gold's endgame. You could own exposure, you just couldn't use metal as money. A rule that raises the cost of holding your own keys or paying peer to peer is the same move again, whatever reason is given for it.

5. Redemption friction

Gold's convertibility died in steps, not all at once. The modern equivalent is withdrawal getting slower, costlier, or treated as suspicious. Watch whether moving coins from a custodian into your own keys stays cheap, fast, and normal.

The difference from gold is the whole point of the design. Gold's ordinary holders had no countermove that let them keep using gold as money. You could keep coins in a drawer, and plenty did, but the moment you wanted to pay someone in another city you were back in the custody layer. You couldn't verify a vault from your kitchen table or carry a tonne of settlement across a border. This time the countermove is personal and cheap. Hold your own keys and no custodian's promise stands between you and the asset. Run a node and you personally audit the supply every ten minutes, which no gold holder in history could do. Use it as money and the economic weight stays spread across the network instead of pooling in a few hubs. That third one is a condition. If bitcoin is only ever saved and never spent, everyday payments keep running on custodial rails, the economic weight and the fees pool in a few large hubs, and those hubs become the same choke point the vaults were. Held but never spent, it fails. That doesn't mean paying for your coffee in bitcoin tomorrow. Fiat rails are a reasonable bridge while the payment layers mature. The destination still has to be money people spend. The way gold failed can happen here too, but for the first time avoiding it is a choice individuals can make rather than a favour custodians must grant. That's also why the outcome depends on more than the code. It depends on whether enough people make that choice.

Where this argument gets attacked

"Gold worked for centuries, so the design was fine." It worked until it scaled, and scaling it ran the same sequence again and again. Receipts, fractional issuance, runs, rescue, centralisation, decree. Before paper, the route was shorter and the end was the same. The mint held the standard, and rulers cut the metal content of the coin while keeping its name. One failure is an accident. The same failure across centuries and continents is a structural property of the design.

"Then just go back to a gold standard." Ask what that requires. Every major country has to agree to it at the same time, and each one has to trust that the others really hold the reserves they claim, in the amounts they claim, checked by someone everyone accepts. That's a great deal of trust to ask for between governments that currently agree on very little. And the moment one of them is suspected of overstating its reserves, the argument stops being a technical one about accounting and becomes an argument about whether a country's money is real. Those arguments have ended in force before now. Bitcoin asks for none of that agreement. Nobody has to trust a stated reserve, because anyone can check the entire supply from a laptop, and no country has to say yes before a person can start using it.

"The state will just do 1933 to bitcoin." 1933 worked because the gold was already sitting in the banks, and because the penalty attached to the order was heavy enough that gold came out of drawers without the state having to ask twice. The order was written to cover privately held gold too, and that part was barely enforced, because chasing dispersed holdings costs more than it collects. The state took the choke point, which was cheap, and it reached into the mattresses too, not by searching them but by making it frightening to keep one shut. Facing tens of millions of dispersed key-holders across many jurisdictions is the same trade for a government, only far worse, because the cost of seizure explodes while the yield from each one shrinks, and many of the holders are outside its reach entirely. States can still lean on exchanges and custodians, though, which is exactly why custody concentration is first on the watch-list.

"Derivatives suppressed gold's price and will do the same here." They can mute the visible signal for a time, and they did with gold. But paper never stopped the metal being metal, and it can't stop bitcoin settling. The difference is that a bitcoin claim-holder can take delivery within hours by withdrawing to their own keys, whereas a gold claim-holder practically couldn't. Every withdrawal shrinks the suppression lever. Gold had that escape too, but only a few players could use it. Foreign central banks redeemed dollars for metal through the 1960s and drained the American stock. That's why the window shut in 1971. With gold, the right to take delivery had narrowed to a handful of governments, and one announcement closed the only window, for everyone, at once. With bitcoin, that right belongs to anyone holding coins at a custodian, not to a shortlist of states. Hold a share in a fund instead and you have no right to take delivery at all, which is why custody concentration heads the watch-list. An announcement can still freeze withdrawals at this custodian or that one. Redemption friction is on the watch-list for that reason. What no announcement can close is the network the coins withdraw into.

Gold failed because using it beyond the same room required trusting custodians, and custodians turned a scarce asset into an elastic promise. So watch anything that moves bitcoin's daily usefulness back into promises.

---

# The Checklist
Date: 2026-07-15
Canonical: https://thenaturalstate.org/essays/the-checklist/

Say we had to design money that nobody, however powerful, could make more of. It would need certain properties, each one there for a reason. Then the question is what, if anything, satisfies the list.

You can't get "nobody can make more of it" by writing it down. A promised supply limit is only as fixed as the people keeping the promise, and monetary history is mostly a list of those promises breaking. Rome put less silver in its coins. Governments on the gold standard suspended redemption the moment keeping the promise got expensive. Every fiat currency [government money whose supply and rules are set by policy] has an institution whose job is to manage the supply. So the design brief has to go past "pick something scarce" to "remove every route by which the most powerful actor in the room can reach the money". Do it that way and the properties stop being a wish list. Each one exists to close a specific route of attack.

Why the brief matters at all

Money is stored time. A teacher in Leeds saving £300 a month is storing hours of her life to spend later. When someone makes more of the money, they move purchasing power from everyone holding it to themselves, without asking, because the new units buy real things before prices adjust. So this question decides whether saving works at all, and whether the gains from technology reach people as lower prices or get absorbed on the way through.

The five routes, and the properties that close them

Route 1. Issue more units

Kings did it with a mint, central banks do it with a keyboard. The close is brutal. No issuer at all. The supply schedule has to be an automatic rule that's nobody's job to administer, because any administrator, however constrained or well meaning, holds a lever, and levers get pulled in emergencies. The rule also has to hold against effort. If ten times the effort produced the money faster, a state could outspend everyone. So production has to get automatically harder as more effort chases it, which keeps issuance on schedule no matter who shows up with how much power.

Route 2. Change the rule

A fixed rule enforced by a small committee is fixed only until the committee finds it inconvenient. That's what happened to gold convertibility in 1933 and 1971. The close is distributed enforcement. Every user must be able to hold the complete rulebook and automatically reject money that breaks it, and anyone must be free to join as an enforcer with no gatekeeper deciding who qualifies. Then changing the rules requires near-universal voluntary agreement, because a powerful group that "upgrades" the rules alone just creates a separate currency the rest of the network ignores.

Route 3. Multiply claims instead of money

You don't need to counterfeit gold if everyone's gold sits in your vault and trades as your paper. The claims become the money, and claims can be printed. Two properties close the route together. The money must be a bearer asset [something you own by holding it, with no custodian in between], so you don't need a custodian. That is self-custody. You hold the money itself, not a claim on someone who holds it for you. And verifying the real thing must cost nearly nothing, so dilution has nowhere to hide. If verification is expensive, it centralises into a few trusted auditors, and the auditors become the new vault.

Route 4. Rewrite the record

Purely digital money has a special problem, because digital information copies for free. Something physical has to anchor it. Writing the ledger has to cost real energy while checking the ledger stays nearly free. Then rewriting history means redoing all the accumulated work faster than the rest of the network combined, and cheating becomes a losing trade rather than a forbidden act. Systems that skip the physical cost and let the largest holders vote on the rules haven't removed the committee. They've rebuilt it, weighted by wealth.

Route 5. Seize it

Scarcity you can confiscate is scarcity that serves whoever holds the guns. In 1933 the US called in private gold, and the vaults made enforcement easy. The close is money you can hold as pure information. If value can be carried as words in your head across a border, mass seizure stops working. You can raid a vault once. You can't raid millions of memories.

There's a sixth, quieter requirement. The money must be practical at every scale. Divisible enough to buy coffee, portable enough to settle across an ocean, durable forever. This is a security requirement. Impracticality reopens route 3. Gold's physics is the proof, because you couldn't slice it for groceries or ship it cheaply, so people wrapped it in paper and parked it in vaults, and the wrapping is where it was captured.

And these properties interlock. Scarcity without distributed enforcement is a promise. Enforcement without cheap verification decays back into trust. Verification without self-custody just documents how your custodian is diluting you. Self-custody without divisibility drives people back to custodians. Take any one away and what's left stops being money nobody can make more of, even when the thing itself stays scarce.

The audit

Fiat fails by design. Loaned into existence, it must expand to keep yesterday's debts serviceable, and money pegged to it, like a dollar stablecoin, inherits the design. It's the thing the brief exists to escape.

Gold is the near miss, and the most instructive failure. It very nearly passes route 1, because you can't will gold into existence. You have to dig it up at real cost. What it lacks is the automatic brake. Nothing holds gold's issuance to a schedule, so more effort still means more gold. But it fails cheap verification, divisibility, and portability, and those failures forced it into vaults and paper claims, and the claims were multiplied and the rules changed. In practice the metal stayed scarce. What broke was custody, and once the paper was doing the work of money, the money's supply broke with it. And a physical money tends to re-run that film, because its physics forces intermediaries between people and the asset.

Most other cryptocurrencies fail the list by choice. They trade away distributed enforcement to gain speed or features, and a foundation that can pause or patch the chain is an issuer in waiting. Stake-based systems hand the rulebook to the largest holders. And anyone can copy Bitcoin's code tonight, which proves the cap was never what made it scarce. The unit is scarce because one specific network exists, made of enforcers, holders, and accumulated energy history. A copy starts with none of that.

A central bank digital currency [money the central bank issues direct to the public, on its own ledger] is the brief inverted. Every route held open, plus programmability, so the issuer can decide how much money exists and what yours is allowed to do.

Which leaves one artefact. Bitcoin is the list, item by item. No issuer, just a schedule that stops at 21 million coins, enforced by everyone who runs a node [software that checks every transaction against the rules]. Production that gets harder as more effort chases it. A rulebook a home computer can enforce, and a supply anyone can audit in full. A bearer asset held as twelve words. A ledger anchored to energy through proof of work [spending real electricity to write each block, so faking history costs more than it pays]. Divisible to a hundred million units per coin, and settled globally in minutes, with faster payment layers on top. Durable in the way information is durable, because every node keeps a full copy of the record.

Bitcoin satisfies the list if, and only if, it stays decentralised and secure. The design closed the five protocol routes, and seventeen years of attack haven't opened one. The biggest route still open is social. If most coins end up pooled inside a few regulated custodians, and most people keep measuring their life in pounds, the old lever gets rebuilt one layer up, paper claims on bitcoin the way there were paper claims on gold. The defence is people holding their own keys, running nodes, and actually using the thing. So the design guarantees nothing. It makes the guarantee available, and keeping it is a job.

Arguing back

"Just run fiat with better people." Incentives beat intent. Whoever holds the lever eventually pulls it, usually in an emergency, almost always described as temporary, and no committee can know enough to set the price of money, which is what an interest rate is, anyway. The fix is removing the lever, not auditioning better hands for it.

"The energy cost is waste." The cost is the mechanism. It's what turns the rules from opinions into physics, because breaking them means outspending the rest of the network combined. Strip the cost out and you're back to a database run on goodwill.

"Developers could just change the cap." Developers propose, nodes dispose. A cap change without near-universal agreement creates a minority coin the market can ignore, and the people who'd have to adopt the change are the same people it would rob.

The list wasn't written after Bitcoin to flatter it. The cypherpunks [the people who set out to build private digital money out of cryptography rather than institutions] wrote the brief first and spent two decades failing at it, and they weren't alone. DigiCash, a company that issued, died with its issuer. E-gold, whose gold sat in a custodian the state could reach, died on routes 3 and 5. Bitcoin is the first artefact that closed all five routes at once. The only question that matters long term is whether it stays decentralised and secure. Everything else follows from that.

And kept, the design buys one thing. Not a number that goes up. A ruler that can't stretch. Measured against a fixed ruler, technology finally reads as what it's always been, prices falling as we get better at making things. That's the rest of the thesis.

---

# The Neutral Ruler
Date: 2026-07-15
Canonical: https://thenaturalstate.org/essays/the-neutral-ruler/

You'll hear two objections in the same breath. Bitcoin is far too volatile to be money, and bitcoin itself makes prices fall.

Both are fair, and they're linked. The volatility one usually comes first, and the answer to both starts with flipping the unit you measure in. The second one gets the effect right and the cause wrong, which is why it needs the more careful answer.

Those large swings are what the transition looks like. They fall as adoption grows and the market deepens, and the far end looks like prices drifting down steadily in bitcoin. And no, bitcoin's rules add no downward force to prices. Technology pushes prices down, and bitcoin is the first money nobody can expand to stop that from happening, so measured in bitcoin the falls finally show. Over a cycle or more, about four years, most things have cost fewer bitcoin at the end than at the start, and a house has a fall that goods priced on what they cost to make don't have. Over multi-year windows that fall has two drivers you have to keep apart, because one arrives once and the other keeps going. The first is a one-time repricing as the world adopts a fixed unit. The second is a gentler fall at the pace we get better at making things.

Too volatile to be money?

The swings have a reason. Bitcoin's supply follows a fixed schedule that no single party can change, and it stays that way as long as the network stays decentralised and secure. Pounds can be created, so when more are wanted, more appear. The price of a pound stays "one pound" while its value changes underneath. Nobody can create more coins when more people want them, so there's no issuer who will print to meet demand. What adjusts instead is the price and how much holders choose to offer, and paper claims written against coins [contracts that promise coins rather than the coins themselves] can absorb some of a shift for a while. On top of that, many holders are new, many bought with borrowed money, and each cycle flushes out people who still think in pounds and sell back into them. Billions of people changing what they use as money is a phase change in human behaviour, and phase changes are turbulent. The big falls also track the old system's own tides. Credit gets scarce and everything sells off for cash, bitcoin included. The money floods back in. Nothing about bitcoin changes when that happens, so its price is where the extra pounds show up.

The two currencies fail in different ways. Fiat [government money issued by decree and managed by policy] is volatile too, but reliably in one direction. The £80 weekly shop becomes £88 and it doesn't come back. Egypt has cut its currency five times since 2016, the last time by nearly 40% in a single day, from 31 to 50 against the dollar. Nobody calls that volatility, because the number printed on the note stays the same. The pound is stable in name and falling in fact. Bitcoin is violent in both directions around a long-run rise in what it buys. So the question is which kind of instability you want to hold your working life in for the next twenty years.

The objection also shrinks the closer you look. Volatility depends on how big the market is and how easily you can trade in it, and it falls as adoption grows. A small asset repricing the whole world can't be smooth. As the market deepens and more people hold bitcoin as savings rather than as a trade, the swings won't vanish soon, but they damp. You can already see bitcoin shifting from trading like a tech stock toward being held as protection against the old system's risks.

And nobody says bitcoin has to do every job of money today. Money does three jobs. It's something you spend, something you save in, and the unit you measure with. Today you bridge. Keep next month's bills in pounds, save long term in bitcoin, and spend over Lightning [a payment network built on Bitcoin that settles instantly for fractions of a penny] where it makes sense. The claim was never that bitcoin is finished money this afternoon. The claim is about where the two systems are heading.

For measurement, what makes a good measuring stick over years is that nobody can bend it. The pound is steady from Tuesday to Wednesday and bends year after year by policy. Bitcoin swings from Tuesday to Wednesday and can't be bent by anyone. For a unit of account [the unit prices and debts are quoted and compared in], that's the property you need. The official measure of prices can tell you roughly how much a ruler that changes length stretched, but it can't show you how far the goods it prices would have fallen under a unit nobody can expand, because it does all its sums in the same stretched pound.

Does bitcoin itself make prices fall?

No, and the distinction matters. Bitcoin is neutral. The deflation belongs to the free market.

When someone finds a way to make the same thing with fewer inputs, they can cut the price and win customers. Where rivals can copy the cheaper way, they have to match that price or lose those customers, so the saving is competed away and prices get pushed down toward the cost of making one more unit. Where nobody can copy the cheaper way, the saving stays with the business. That force never stopped. You don't see that fall in pounds because nearly all our money is borrowed into existence, and enough new money and credit has been created, so far, to keep the average of consumer prices rising. A system built on debts fixed in pounds can take a slow fall that comes with better tools. In that fall it's the cost of making things that drops, and pay drifts down slowly behind it, so the money to meet a fixed payment is still there. What it can't take is a sudden fall in the prices credit pushed up, houses first, because then the losses spread through the banks. In that fall it's the lending that has stopped, so incomes and the house fall together and at once, and the fixed payment is hit from both sides in the same year. Houses come first because people buy them with borrowed money. The debt takes a bigger bite of every income, yours, your employer's, the government's. And where the loan was written against a house, the house is worth less too, so the bank stands to lose more on that loan.

So every time a sudden fall in the prices credit pushed up threatens, the system is rescued with new money, and the rescues keep getting bigger. In between the rescues, policy targets rising prices of about 2% a year, forever. Central banks publish why they aim there. They want room to cut interest rates in a downturn, they know wages resist falling, and they say the official measure of prices overstates the rise. Those are the reasons they give, and the debts aren't among them. The debts show up in the rescues, not in the everyday 2%. The starting line for that 2% isn't zero, because technology keeps pushing prices down. So when a central bank targets 2% inflation, it doesn't need two points of push. It first has to cancel whatever better tools would have taken off prices that year, then add two on top. How big that fall would be is about how fast output per hour of work grows, which is what the productivity figures measure. On the published figures that's a point or two a year. No statistic records that fall, because it never happened.

The gain from the better tools is real. Part of it reached you as higher pay, late and unevenly. The rest went to whoever got the new money first, through house and share prices. The scale of the effort tells you how strong the underlying force is. Between 2000 and early 2018 the world added roughly 185 trillion dollars of debt to buy about 46 trillion dollars of measured growth, and measured is doing work in that sentence, as you'll see. Bitcoin doesn't add a downward force to any of this. It removes the upward one. Nobody can create more of it, so productivity has nowhere to hide.

There's a second reason prices fall in bitcoin during the transition, and it needs stating carefully, because it's where the two effects get confused. The world is repricing itself into a money with only 21 million units, so bitcoin rises against most things while technology is also making them cheaper, and the two falls compound. Goods getting cheaper and the ruler strengthening are two different kinds of event, and neither one is bitcoin acting on prices. A house that cost around 300 bitcoin fell to about 40 in a few years even though its price in pounds went up, and it has kept falling since. Builders didn't get seven and a half times more productive. The house's price in pounds went up over those same years. All of the fall was the ruler strengthening as adoption grew, and then some. The monetisation effect [the world adopting a thing as money, which raises its value] is a change of level, not a rate that keeps going, so it ends when the savings that are going to move have moved, and it can run backwards, because nothing in the rules stops that. The move is spread over decades and arrives in violent steps all the same. The productivity effect keeps going.

The world measured in bitcoin, over years

Once the transition is mostly behind us, prices drift down at roughly the pace we get better at making things. Call it 1% to 5% a year as a baseline, faster as AI and robotics spread. No committee sets that pace. Some years it's quicker, some slower, and a war or a bad harvest still makes oil or wheat dearer for a while. Hard money [money that can't be easily debased] doesn't abolish scarcity. It stops the ruler lying about it.

Different things fall at different speeds. Anything digital races toward free, because one more copy costs almost nothing to make. Where the software is run for you as a service, the price heads toward the small cost of one more user rather than to zero. Physical goods follow as more of their cost becomes software, automation, and cheap energy. Housing is the odd one out, because much of a house's price is what people pay to store savings in it, a monetary premium, and that part drains out as money holds its value. That's a fall goods priced on what they cost to make don't have. It belongs to the one-time repricing, not to the fall that keeps going. What's left underneath is what the house is worth as a place to live, plus something for real scarcity where land is short. After that, housing gets cheaper at the pace building gets cheaper, which is slower than software. You save for one instead of borrowing for most of your working life.

Under a money that holds its value, what your pay buys rises, because prices fall faster than pay changes. Your pay in bitcoin may drift down or hold steady, and either way the gain comes from the gap between the two. Where pay holds steady, the gain comes without constant renegotiation, because everyday costs trend down underneath it. That's the exact mirror of today, where your pay rises and buys less. Savings grow in what they buy just by sitting there. Ordinary people stop being forced to become investors simply to stand still. Once people expect the money to gain value, a project has to beat what the money itself would gain just by sitting there. Borrowing gets dear and rare, because repaying in money that buys more year after year is heavy, so the economy runs more on savings and ownership stakes and less on borrowed money. And GDP looks flat or even shrinking while life visibly improves, because GDP counts paid transactions, and abundance keeps turning valuable things free.

What people say back

"If prices fall, nobody spends." People buy phones, laptops, and TVs today expecting next year's model to be better or cheaper. Needing it now beats waiting for a cheaper one. What falling prices trim is the waste, the spending we only do because holding cash is punished.

"Deflation causes depressions." I don't dodge that. In a system this loaded with debt, a sudden broad fall really would be a disaster. But that's an indictment of the debt design, not of cheaper goods. Most people have the 1930s in mind, when falling prices hit a system already loaded with debt. Prices falling because we got better at making things is progress arriving as lower prices.

"You're cherry-picking the house dates." On any single example, fair. The claim is about a cycle or more, about four years. Across a cycle, most things have cost fewer bitcoin at the end than at the start, and nothing in the mechanism rules out a shorter stretch of several years where they don't. And inside a single year two more things move the number, how much people want that particular good and how much cash people want right now, and those two can swamp both drivers, which is why the split between the drivers can't be read off one window. Over months the number can run the other way, because in a cash crunch bitcoin falls with everything in fiat terms and goods briefly get dearer in bitcoin.

The one condition

One caveat is better said plainly now than discovered later. Everything above holds only if Bitcoin stays decentralised and secure. Those are two things, not one, and together they're the only long-term variable that matters. Security has a bill. The new coins that pay most of it today are cut in half on a fixed schedule, so over decades the fees people pay to use the chain have to carry it. Those fees go to the miners [the people whose computers add new transactions to the chain]. Paying the miners is what makes it worth burning the energy the work takes, and that spent energy is what makes the record costly to rewrite. That's what keeps the chain secure as the new coins shrink. I can't put a number or a date on it. If most coins end up pooled inside a few firms holding coins for other people and wrapped in paper claims, the signal can be muted and the old system rebuilt with new branding. That's why self-custody [holding your own keys rather than leaving your coins with a firm] and real usage matter more than the price does. Coins that only ever sit still leave the spending on the old rails, and the old rails are where the control is.

Flip the question the price chart asks you. "What's bitcoin worth in pounds" measures the pound. "What does the house cost in bitcoin" measures the free market, and across cycles that number falls. Ask the second one, and you can watch the free market finally doing what it always wanted to do, which is hand the gains back to you as lower prices.

## Sources

What this essay rests on, as checked on 2026-10-13.

1. "Technology pushes prices down, and bitcoin is the first money nobody can expand to stop that from happening, so measured in bitcoin the falls finally show."
   U.S. Bureau of Labor Statistics, The Economics Daily, “Long-term price trends for computers, TVs, and related items”: "The price index for TVs decreased 94 percent from December 1997 to August 2015." Also "audio equipment (−60 percent)" and "photographic equipment and supplies (−59 percent)" over the same period. https://www.bls.gov/opub/ted/2015/long-term-price-trends-for-computers-tvs-and-related-items.htm
   Office for National Statistics, CPI INDEX 09.1: Audio-visual equipment and related products, 2015=100 (series D7CS): Annual index (2015=100): 1988 739.1, 2000 400.0, 2005 249.4, 2010 144.9, 2015 100.0, 2020 91.9, 2024 96.5. https://www.ons.gov.uk/economy/inflationandpriceindices/timeseries/d7cs/mm23
   Stanford Institute for Human-Centered Artificial Intelligence, AI Index Report 2025: Inference cost at GPT-3.5 level fell "over 280-fold between November 2022 and October 2024", from $20 to $0.07 per million tokens. https://hai.stanford.edu/ai-index/2025-ai-index-report

2. "Bitcoin's supply follows a fixed schedule that no single party can change, and it stays that way as long as the network stays decentralised and secure."
   Bitcoin Core project, src/kernel/chainparams.cpp, master branch: "consensus.nSubsidyHalvingInterval = 210000;" and initial subsidy "50 * COIN" in the mainnet consensus parameters. https://github.com/bitcoin/bitcoin/blob/master/src/kernel/chainparams.cpp
   Bitcoin Core, src/validation.cpp, master branch, the GetBlockSubsidy function: "Subsidy is cut in half every 210,000 blocks which will occur approximately every 4 years"; "if (halvings >= 64) return 0". The 21 million coin cap is not printed in this function. https://github.com/bitcoin/bitcoin/blob/master/src/validation.cpp

3. "The £80 weekly shop becomes £88 and it doesn't come back."
   ONS, CPI INDEX 00: ALL ITEMS 2015=100 (series D7BT): Annual all-items index (2015=100): 107.8 in 2019, 133.9 in 2024, a rise of 24.2%. The record's rise over 2019 to 2024 is about a quarter, not the tenth in the example. https://www.ons.gov.uk/economy/inflationandpriceindices/timeseries/d7bt/mm23

4. "Money does three jobs."
   W. Stanley Jevons, Money and the Mechanism of Exchange, 1875, Chapter III: The Functions of Money: "performs two distinct functions of high importance, acting as— (1) A medium of exchange. (2) A common measure of value"; "A third function of money soon develops itself", "a standard of value"; a fourth, store of value. The source names four functions, not three. https://www.econlib.org/library/YPDBooks/Jevons/jvnMME.html?chapter_num=4#book-reader

5. "Keep next month's bills in pounds, save long term in bitcoin, and spend over Lightning [a payment network built on Bitcoin that settles instantly for fractions of a penny] where it makes sense."
   Lightning Network, Lightning Network project site, “Scalable, Instant Bitcoin/Blockchain Transactions”: "Payment speed measured in milliseconds to seconds"; fees "exceptionally low", allowing "instant micropayments". The page prints no cent amount, so "fractions of a penny" is not shown on it. https://lightning.network/

6. "Bitcoin swings from Tuesday to Wednesday and can't be bent by anyone."
   Satoshi Nakamoto, Bitcoin: A Peer-to-Peer Electronic Cash System, 2008: "there is no central authority to issue them"; "Once a predetermined number of coins have entered circulation, the incentive can transition entirely to transaction fees and be completely inflation free". https://nakamotoinstitute.org/library/bitcoin/

7. "You don't see that fall in pounds because nearly all our money is borrowed into existence, and enough new money and credit has been created, so far, to keep the average of consumer prices rising."
   Bank of England, Quarterly Bulletin 2014 Q1, “Money creation in the modern economy”, published 14 March 2014: “the majority of money in the modern economy is created by commercial banks making loans.” The page prints “the majority” of money, where the sentence says nearly all. https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy

8. "In between the rescues, policy targets rising prices of about 2% a year, forever."
   Federal Reserve, Statement on Longer-Run Goals and Monetary Policy Strategy, 25 January 2012: “The Committee judges that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve's statutory mandate.” https://www.federalreserve.gov/newsevents/pressreleases/monetary20120125c.htm
   European Central Bank, An overview of the ECB's monetary policy strategy, 2021: “at this juncture the Governing Council considers that price stability is best maintained by aiming for a two per cent inflation target over the medium term.” https://www.ecb.europa.eu/mopo/strategy/strategy-review/ecb.strategyreview_monpol_strategy_overview.en.html
   Bank of England, Inflation and the 2% target: “The Government sets us a 2% inflation target”; “The Government has set us a target of keeping inflation at 2%”. https://www.bankofengland.co.uk/monetary-policy/inflation

9. "They want room to cut interest rates in a downturn, they know wages resist falling, and they say the official measure of prices overstates the rise."
   European Central Bank, An overview of the ECB's monetary policy strategy, 2021: “Three additional factors, which were present already in 2003 and which have remained broadly unchanged since then, call for a sufficient inflation buffer”; the buffer is given for “interest rate cuts”, “measurement bias” and “downward nominal wage rigidities”. https://www.ecb.europa.eu/mopo/strategy/strategy-review/ecb.strategyreview_monpol_strategy_overview.en.html
   Bank of Canada, Renewal of the Inflation-Control Target: Background Information, November 2011: “the risks associated with the ZLB, two other potential costs of moving to an inflation target lower than 2 per cent … measurement bias in the CPI and downward nominal wage rigidities”. The Bank says it views neither of the last two as a significant impediment to a lower target. https://www.bankofcanada.ca/wp-content/uploads/2011/11/background_nov11.pdf

10. "Part of it reached you as higher pay, late and unevenly."
   Stansbury and Summers, National Bureau of Economic Research Working Paper 24165, “Productivity and Pay: Is the link broken?”, 2017: "over 1973-2016, one percentage point higher productivity growth has been associated with 0.7 to 1 percentage points higher median and average compensation growth" and "other factors orthogonal to productivity have been acting to suppress typical compensation" https://www.nber.org/papers/w24165
   Pessoa and Van Reenen, Centre for Economic Performance Discussion Paper 1246, “Decoupling of Wage Growth and Productivity Growth? Myth and Reality”, October 2013: UK, 1972–2010: "real productivity grew by 114 per cent" and "median real wages by 72 per cent" https://cep.lse.ac.uk/pubs/download/dp1246.pdf

11. "Between 2000 and early 2018 the world added roughly 185 trillion dollars of debt to buy about 46 trillion dollars of measured growth, and measured is doing work in that sentence, as you'll see."
   World Bank, World Development Indicators, GDP (current US$), World, series NY.GDP.MKTP.CD: GDP (current US$), World — 2000: 33,965,806,441,911.9; 2018: 87,310,840,056,717.8. That is a rise of about 53.3 trillion current US dollars from 2000 to 2018, not the 46 trillion the sentence gives. https://data.worldbank.org/indicator/NY.GDP.MKTP.CD?locations=1W

12. "The world is repricing itself into a money with only 21 million units, so bitcoin rises against most things while technology is also making them cheaper, and the two falls compound."
   bitcoin.org, Frequently Asked Questions: "Bitcoin is unique in that only 21 million bitcoins will ever be created." https://bitcoin.org/en/faq

13. "That's the exact mirror of today, where your pay rises and buys less."
   Office for National Statistics, Average Weekly Earnings time series A2F8, whole economy real terms index, seasonally adjusted regular pay: Nominal regular pay £405 (2008) to £442 (2014) and £543 (2021) to £613 (2023); real terms index 103.6 (2008) to 98.1 (2014) and 107.4 (2021) to 105.3 (2023), index base year = 100. https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/earningsandworkinghours/timeseries/a2f8/emp

14. "People buy phones, laptops, and TVs today expecting next year's model to be better or cheaper."
   Nielsen, Television Audience Report, "More than Half the Homes in U.S. Have Three or More TVs", July 2009: "in 2009 the average American home had 2.86 TV sets, which is roughly 18% higher than in 2000 (2.43 sets per home), and 43% higher than in 1990 (2.0 sets)" https://www.nielsen.com/insights/2009/more-than-half-the-homes-in-us-have-three-or-more-tvs/
   U.S. Bureau of Labor Statistics, The Economics Daily, "Long-term price trends for computers, TVs, and related items", 13 October 2015: "The price index for TVs decreased 94 percent from December 1997 to August 2015." https://www.bls.gov/opub/ted/2015/long-term-price-trends-for-computers-tvs-and-related-items.htm
   BLS, Consumer Price Index series CUUR0000SEEE01, computers, peripherals, and smart home assistants, U.S. city average, not seasonally adjusted: Index (December 2007=100), not seasonally adjusted: December 1997 = 1119.0; December 2013 = 54.869. https://data.bls.gov/timeseries/CUUR0000SEEE01?years_option=all_years

15. "Most people have the 1930s in mind, when falling prices hit a system already loaded with debt."
   Irving Fisher, “The Debt-Deflation Theory of Great Depressions”, Econometrica, volume 1, issue 4, October 1933, pages 337–357: "Debt liquidation leads to distress setting and to Contraction of deposit currency"; "By March, 1933, liquidation had reduced the debts about 20 per cent, but had increased the dollar about 75 per cent." The paper pairs two causes, the debt disease and the price-level disease. https://fraser.stlouisfed.org/title/debt-deflation-theory-great-depressions-3596/fulltext

16. "Over months the number can run the other way, because in a cash crunch bitcoin falls with everything in fiat terms and goods briefly get dearer in bitcoin."
   International Monetary Fund, IMF Blog, “Crypto Prices Move More in Sync With Stocks, Posing New Risks”, January 2022: "The correlation coefficient of their daily moves was just 0.01, but that measure jumped to 0.36 for 2020–21 as the assets moved more in lockstep, rising together or falling together"; spillovers "tend to increase in episodes of financial market volatility." https://www.imf.org/en/blogs/articles/2022/01/11/crypto-prices-move-more-in-sync-with-stocks-posing-new-risks
   Federal Reserve Bank of St. Louis (FRED), Coinbase data, FRED series CBBTCUSD, Coinbase Bitcoin, daily prices, March 2020: 2020-03-11 = 7957.02; 2020-03-12 = 4980.00; 2020-03-13 = 5592.77 (U.S. Dollars, Not Seasonally Adjusted), a fall of about 37% in a day and roughly half from the month's high. https://fred.stlouisfed.org/series/CBBTCUSD

17. "The new coins that pay most of it today are cut in half on a fixed schedule, so over decades the fees people pay to use the chain have to carry it."
   Carlsten, Kalodner, Weinberg and Narayanan, “On the Instability of Bitcoin Without the Block Reward”, ACM Conference on Computer and Communications Security, October 2016: "Bitcoin provides two incentives for miners: block rewards and transaction fees"; "The former accounts for the vast majority of miner revenues at the beginning of the system, but it is expected to transition to the latter as the block rewards dwindle." https://collaborate.princeton.edu/en/publications/on-the-instability-of-bitcoin-without-the-block-reward/
   Blockchain.com block explorer, Bitcoin Block 840,000, mined 20 April 2024: "This block marks the 4th bitcoin halving where the mining reward dropped from 6.25 to 3.125 bitcoin per block." Mining Reward: 3.125 BTC, block height 840,000. https://www.blockchain.com/explorer/blocks/btc/840000
   Bitcoin Core, Bitcoin Core source code, chainparams.cpp, consensus rules: "consensus.nSubsidyHalvingInterval = 210000;", that is one halving every 210,000 blocks. The page prints no 3.125 BTC figure and no April 2024 date. https://github.com/bitcoin/bitcoin/blob/master/src/kernel/chainparams.cpp

18. "Those fees go to the miners [the people whose computers add new transactions to the chain]."
   Carlsten, Kalodner, Weinberg and Narayanan, “On the Instability of Bitcoin Without the Block Reward”, ACM Conference on Computer and Communications Security, October 2016: "Bitcoin provides two incentives for miners: block rewards and transaction fees. The former accounts for the vast majority of miner revenues at the beginning of the system." https://collaborate.princeton.edu/en/publications/on-the-instability-of-bitcoin-without-the-block-reward/

19. "Paying the miners is what makes it worth burning the energy the work takes, and that spent energy is what makes the record costly to rewrite."
   Budish, National Bureau of Economic Research, “The Economic Limits of Bitcoin and the Blockchain”, NBER Working Paper 24717, June 2018: "the recurring, 'flow', payments to miners for running the blockchain must be large relative to the one-off, 'stock', benefits of attacking it. This is very expensive!" https://www.nber.org/papers/w24717
   Auer, Bank for International Settlements, “Beyond the doomsday economics of ‘proof-of-work’ in cryptocurrencies”, BIS Working Paper 765, 21 January 2019: "This paper discusses the economics of how Bitcoin achieves data immutability, and thus payment finality, via costly computations, ie "proof-of-work"." https://www.bis.org/publ/work765.htm


---

# The Capture Risk
Date: 2026-07-15
Canonical: https://thenaturalstate.org/essays/the-capture-risk/

The realistic capture path for bitcoin is the gold playbook run again. Custodians hold the coins, paper claims trade instead of the asset, and everyone still prices their life in pounds.

Bitcoin has a defence, and whether it's holding deserves the straight version, because the answer isn't "nobody can kill it".

Nobody needs to attack the maths

Nobody needs to kill Bitcoin at the protocol [a set of rules that lets a network operate without central control]. The maths was never the real target. The realistic path is the one that worked on gold. You don't attack the asset, you wrap it. Get the coins into a small number of regulated vaults, let paper claims trade instead of the asset, and keep everyone's mental accounting in the state's unit. Do those three things and you never need to ban anything. Bitcoin wouldn't die in that world. It would be domesticated. That word means a line item inside pension wrappers, priced in pounds, its discipline never binding anyone, while society's real spending runs on rails the state controls. Gold is doing fine, in a vault, changing nothing.

The defence against this is a behaviour of the holders. The code can make that behaviour possible, but no line of code can do it for them. That's why "is it holding" has a split answer. The parts machines enforce are holding completely today, and the parts people enforce are holding at best partly.

The gold playbook, move by move

Move one. Custody has to concentrate. Gold is heavy, expensive to secure, and expensive to verify. You can't tell a real bar from a tungsten fake without drilling it or bringing in specialist kit. So gold pooled into vaults out of physical necessity, first goldsmiths, then banks, then central banks. Once the metal sat in the vault, the claim on it circulated instead of the metal itself.

Move two. Claims outgrow the metal. A vault can issue more paper claims than it holds metal, because on any normal day almost nobody redeems. Convertibility [the right to swap the paper for the actual gold] becomes a promise, and promises get suspended when they're inconvenient. Britain cut the pound's link to gold in 1931. In 1933 the United States ordered citizens to hand their gold in, and that order worked because the gold was already pooled. The state didn't search houses, it worked through the custodians. In 1971 the last redemption window closed for good. At no point did a market choose this. A rule changed, and the holders of paper found out what their paper was.

Move three. The unit never switched. Even under the gold standard, people priced bread in pounds and dollars, not in ounces. So when the link was cut, nobody had to relearn how to price anything. Prices moved afterwards, sometimes sharply, but they moved in the same unit, so people read it as prices going up. What had changed was the money itself. Gold became an investment you watch, its visible price steered through derivative markets [contracts that track the metal's price, letting you sell "gold" you never own and never deliver]. It never got the monetary job back.

That's the whole trick. You don't need to break a hard asset. You need to make holding the claim more convenient than holding the asset, and keep prices quoted in your unit. Then the hard asset's discipline never constrains you, because you can issue claims against it, gate redemption when it matters, and mute what its price is telling people. Nobody has to be running this playbook for it to run. Each move is someone's reasonable business decision, and capture is what they add up to.

Playing it against bitcoin

The ETF [an exchange traded fund that gives exposure via a custodian] wave is move one running in real time. The pitch writes itself, and it's not even dishonest. Keys are scary, your uncle lost his seed phrase [a list of words that can recreate a bitcoin wallet], let a professional hold it, get it inside your ISA or pension where the tax treatment works. And it works as a bridge, it really does bring in people who'd never touch keys. But one custodian holds most of the ETF coins. That pile is a choke point. It can be pressured by a regulator, gated with withdrawal rules sold as consumer protection, or rehypothecated [the same coins pledged against more than one claim]. And it rebuilds the thing that made 1933 easy to enforce, a known vault with a legal address. A modern confiscation order takes one letter to the custodian instead of millions of doors.

Move two is running too. Cash-settled futures already let you trade bitcoin's price without ever touching a coin, so paper exposure can outgrow the real coins behind it and lean on the visible price. We watched decades of this with gold. Two things are true at once here. Yes, the visible price can be muted or steered for a while, and no, that doesn't stop the network. Blocks arrive every ten minutes regardless of what the futures market says. But price is the recruitment signal. A noisy signal slows the flow of new savers, and that's the damage, whether anyone intends it or not.

Move three, the unit itself, is the strongest wall the old system has, which makes it the front where the new system is weakest, and it's barely been touched. Wages, taxes, mortgages, the weekly shop, all in pounds. So almost everyone, including many of the people who hold bitcoin, measures it in pounds, feels clever when it's "up", feels sick when it's "down", and sells back into the melting unit each cycle. As long as bitcoin is an asset you own inside a pound-denominated life, rather than the unit you measure your life in, the pound keeps the throne. Unit of account [the unit in which prices are quoted and contracts are denominated] is the throne. And the modern playbook has a sharper edge than gold's ever did, because it welcomes bitcoin as an investment while steering everyday spending toward stablecoins [tokens that aim to track a fiat currency by holding assets with a custodian] and toward central bank digital currencies, which the issuing state can programme or freeze. That pairing, bitcoin as a caged asset plus state-controlled spending rails, is the full capture scenario. Same power structure as before, new reserve asset underneath it.

Where the analogy breaks, and the actual defence

Gold's custody was structural. Bitcoin's is optional.

Verification is nearly free. You can't audit a vault from your kitchen. Anyone can run a node [software that independently checks every rule and every transaction] on a cheap computer and verify the total supply and their own coins directly. So paper can lie about who owns bitcoin, but it can't lie about how much bitcoin exists. Nobody can issue more of the base asset in secret. Gold never had that property. Nobody could audit Fort Knox from home.

Exit is cheap and personal. Redeeming gold meant a vault visit and a wheelbarrow, so almost nobody did it, which is what let claims outgrow metal safely. Withdrawing bitcoin from an exchange to your own keys takes minutes, and settlement is final [done and irreversible] without anyone's permission. While withdrawals stay open, any holder can defect from the paper layer the moment trust wobbles. Twelve memorised words cross any border. The paper layer is built on a base people can leave, which disciplines it in a way gold's paper never faced.

The rules answer to users, not to the biggest holders or custodians. Every node enforces the 21 million cap by rejecting any block that breaks the rules, and neither the miners [participants who secure the network and earn fees and block rewards] nor the largest holders get a special say. A fund can buy a mountain of coins and it has bought zero votes on the protocol. We know this defence works under fire because it was tested in 2017, when the biggest miners and companies in the industry backed a rule change and lost to a swarm of individually run nodes. An attempt to capture the rules leaves Bitcoin where it was. It creates a fork [a split into two rival versions of the coin] that the economic majority [the people and businesses whose acceptance gives a chain its value] ignores, and the people holding the captured version take the loss.

The losses stop at the paper layer, too. Leverage built on top of bitcoin can wipe out the people who took it on, and it still can't reach the base layer. When the lenders promising 8% yield collapsed in 2022, people holding paper claims lost their coins, people holding keys lost nothing, and the base layer never missed a block. There was no bailout and no socialised loss on the bitcoin side. Every one of those failures was a brutal lesson that moved people through a one-way door toward keys. The feedback loop punishes trust in custodians instead of rewarding it, the opposite of how the fiat system trains people.

So, is it holding?

Front by front, no varnish.

The base layer is holding, and strengthening. China banned mining, which was the single biggest concentration risk at this layer, and the network rerouted within months. There's no credible protocol-level kill visible today. Quantum computing is a real long-term problem, but the fix is a slow, social, messy upgrade you can plan for, a lock you replace before the burglar arrives, not an ambush. I hold that with humility rather than certainty.

Custody is contested, and I won't dress this up. The ETF brought in capital and legitimacy, and it concentrated coins into exactly the structure the playbook needs. Both facts are true. The counterweights are real too, because long-term holders keep pulling coins into cold storage [keys kept offline to reduce theft risk], shrinking the freely tradable supply. And the bridge does move some people onward, from ETF to wallet to node, and they rarely go back. The bridge is doing bridge work and building the choke point at the same time. Which effect wins depends on whether people cross it or settle down and live on it.

Paper claims are partly holding. Derivatives can lean on the price for stretches, and that's a real cost because it dulls the signal that recruits savers. But paper can't stop settlement, can't inflate the base asset, and a shrinking float [units available for trading in the short term] eventually punishes anyone selling claims on coins they don't have, violently. Muted isn't dead.

The unit isn't holding yet, and it's the weakest front. I'd rather say so plainly than have you build on a soft foundation. Nearly everyone still prices their life in pounds, including many of the people who hold bitcoin. Fiat as the mental unit is itself a quiet form of capture, because it makes the ETF feel sensible, makes selling cycles feel rational, and keeps the economic gravity inside the old system. This is exactly why bitcoin has to become money people use, earn, and spend, rather than a number they watch. If it stays a hoarded investment on fiat rails forever, the gold outcome is available. Custodied, papered, priced in pounds, changing nothing. Nobody has to kill it to get there. That is the realistic defeat, and it arrives as convenience.

What tips the last front is usage and time. Payments over Lightning [a payment network built on Bitcoin that settles small payments fast and for almost nothing], circular economies [communities where people earn and spend in bitcoin without converting to fiat] growing at the edges where the old money is worst, spend-and-replace habits [spending bitcoin and immediately repurchasing to maintain holdings], each custodial failure teaching keys, each round of debasement [reducing a currency's purchasing power by increasing its supply] recruiting the people it hurt.

Money adoption runs in sequence. Store of value [holding purchasing power across time] first, medium of exchange [using money to buy and sell goods and services] second, unit of account last and slowest. We're early in that sequence. Store of value is established, medium of exchange is contested, unit of account has barely begun.

Bitcoin can't be killed from the outside while people verify and hold their own keys, and it can absolutely be hollowed out from the inside if they don't. Everything else I argue rests on this. If Bitcoin stays decentralised and secure, the rest follows. If it doesn't, it drifts back into the system it was built to leave. The code settles what's possible. The holders settle what actually happens. The defence is holding exactly where it's automatic, and only partly where it's chosen. And that's the one part of this story you decide.

---

# The Ban Question
Date: 2026-07-15
Canonical: https://thenaturalstate.org/essays/the-ban-question/

Any government can pass a law against bitcoin. The question is what that law reaches, what it can't, and what happened when China banned mining.

Everything else depends on the answer, because the thesis needs bitcoin to be neutral money, money whose rules no one can change alone. If a government could turn the network off or rewrite its rules, bitcoin would be a licensed product waiting for its licence to be revoked.

A ban is a law

A ban is a law, and a law reaches what's inside a government's borders. Companies, buildings, bank accounts, licences, people. Bitcoin's design puts what matters most outside that reach. The rules, the supply, and the keys, which a state can only reach one holder at a time. What's left inside the reach is the bridges, the custody, the domestic industry, and you, if you live there. So a government can make bitcoin slower, more expensive, and legally risky to use. It can't turn the network off, change its rules, or print more of it. And China ran the biggest live test of this in 2021.

What a ban can reach

The bridges are licensed companies. Exchanges [the businesses that convert pounds into bitcoin and back] and the banks that serve them have offices and directors, so a government can fine them, close them, or cut them off from the banking system. Every crossing gets slower and costlier.

Custody is reachable for the same reason. When one regulated company holds millions of people's coins, that pile has an address, a board, and a regulator. An ETF [a stock-market fund that has a custodian hold bitcoin on your behalf] is the clearest case. The pile can be pressured, frozen, or handed over. That's exactly how gold was reached in 1933. The American government ordered holders to hand their gold in, and it never had to search a house, because gold in any real quantity already sat in bank vaults with paper claims on top. Change the rules for a few vault-keepers and most of the metal was theirs. Custody was gold's weak point.

Domestic companies and jobs are inside the border. Miners, wallet developers, shops that accept it. A government can shut them down or drive them abroad.

A ban reaches you, if you live there. A state can criminalise spending, watch the bridges, tax punitively, prosecute publicly to spread fear. A ban doesn't have to kill the network to make your life inside that border worse. If a state turns openly hostile, the advice is to cut your exposure to that state, up to and including leaving it. Leaving isn't possible for most people, but reducing what that state can reach is possible for almost everyone.

The story is reachable as well. A government can push the line that holding your own keys is dangerous, and steer people toward supervised wrappers or a central bank digital currency [state-issued digital money that can be programmed, monitored, and frozen account by account].

What a ban can't reach

The rules are outside every border. There's no company, no chief executive, no headquarters, no switch. Everyone running a node [software anyone can run that checks every transaction and block against the rules] enforces the rules. A law that binds one country's node operators changes nothing for the rest, and nodes are globally distributed, many of them unnoticed.

So is the supply. Twenty one million coins, issued on a fixed schedule. No parliament can vote the supply higher, because supply is a rule, and the nodes enforce the rules.

A law can't round up keys people hold themselves. Self-custody [keeping the secret keys to your own coins rather than leaving them with a company] reduces the asset to information. Twelve memorised words, the seed phrase [a list of words that can recreate your wallet], walk through any airport. There's no vault to raid, because the vault is tens of millions of separate heads and drawers spread across jurisdictions. A state would have to knock on every door, and door-to-door doesn't work at that size.

And no law stops the network running. As long as one jurisdiction anywhere lets miners and nodes run, blocks keep arriving for anyone who can reach the network, including the citizens of the country that banned it, near ten minutes apart, and when a shock slows them the difficulty adjustment pulls them back.

That leaves an asymmetry. A ban has to work everywhere, forever, to beat the network. The network only has to keep working somewhere.

China, the live experiment

By spring 2021 roughly half the world's bitcoin mining ran in China, and not long before it had been closer to two thirds. China's mining was built on coal in the north and seasonal hydro in Sichuan. In May 2021 the State Council ordered a crackdown, and through May and June the provinces shut the farms. Around half the network's total computing power went dark within weeks. This was the largest state attack on bitcoin to date. The world's second-largest economy switched off its own dominant share of the network's security.

At the network level, blocks slowed, because fewer machines were working on puzzles set at the old difficulty. Then the difficulty adjustment [an automatic rule that retunes how hard mining is, roughly every two weeks, so blocks keep arriving near ten minutes apart] pulled the difficulty down in steps. The largest single step, about 28%, was the biggest downward reset in the network's history, and the steps together came close to matching the fall in machines. Blocks returned to schedule. No transaction was reversed. No balance changed. Not one extra coin was issued and not one was destroyed. Every coin stayed exactly where its keys said it was, including inside China. On the ledger, the whole event shows up as slower blocks for about seven weeks and the difficulty steps that fixed them. Nothing else.

At the market level, the ban paid the survivors. With half the machines gone, every remaining miner earned roughly twice as many coins per machine, because the same rewards went to fewer of them. That profit pulled the crated Chinese hardware into new homes in Texas, Kazakhstan, Canada, and elsewhere. Within months the network's computing power was climbing steeply, and inside a year it had passed its old peak and kept going. The United States ended up the largest mining country. And China came back. Later estimates put roughly a fifth of the network's computing power inside its borders again within a year, dispersed and hidden. The ban didn't hold even at home.

So what did China get? The supply rules didn't change and China won no say over the network. It handed its rivals most of the industry, the jobs, and the fees of a growing monetary network, free of charge. A national ban works on the network the way a road closure works on a city. The traffic reroutes, and the closed road loses the traffic.

What a state does instead

A ban fails against the network and gifts the industry to whoever defects, so the incentives run against prohibition. A ban that worked would need every jurisdiction on earth to join and hold the line forever, when each of them profits by breaking it. And bans advertise. Prohibiting a savings technology tells citizens it has power their own currency lacks. Adoption breaks through first where money is weakest and states most hostile, and two separate forces are at work there. Weak money sends people looking for an exit. The ban points at one.

So the realistic attack is the squeeze. Lean on the bridges, concentrate coins into regulated custody, frame self-custody as dangerous, keep bitcoin as an "investment" inside the old rails while people spend state money. The ban is loud and fails. The wrapper is quiet and might not. Which is why self-custody and actual use are what the defence rests on.

What the asymmetry doesn't settle

"1933 proves states win."

Gold lost because its custody was centralised. Bitcoin was designed to remove that exact weakness. But the point cuts both ways, and I'll be straight. The protection is conditional. Every coin that migrates into pooled custody rebuilds the 1933 target. A ban can't round up keys. It can absolutely reach an ETF. So whether governments "can ban bitcoin" depends partly on how people choose to hold it.

"The network surviving isn't the same as you being fine."

Correct. A hostile state can't kill the ledger, but it can hurt its own citizens with friction, fear, and prosecution. Venezuelans and Nigerians used bitcoin under hostility because the alternative was worse, and it was never painless.

"Never is a long time."

Also fair. The claim is about cost, not impossibility. Each escalation buys less and costs more, in savings and talent leaving, an industry gifted to rivals. Each attempt to ban it so far has ended up showing what the attacker couldn't do, and each survival left the network stronger.

A ban reaches the middlemen, the custody, and you if you live there, never the rules or the supply, and the keys only door by door. China tested what a ban can't reach at the largest scale any single state could, and the result is written on the chain. What a ban can reach is still being tested, and how people choose to hold their coins is part of that answer.

---

# The Energy Question
Date: 2026-07-15
Canonical: https://thenaturalstate.org/essays/the-energy-question/

Electricity is the one commodity we still mostly can't store cheaply, and moving it long distances is expensive. We have to build grids for the peak moment of the peak day, and renewables produce on nature's schedule, not ours. So every grid wastes energy constantly. Wind blows hard at 3am when demand is lowest. A hydro dam in a wet season, far from any city, spills water past its turbines. Oil wells flare gas [burn it off at the wellhead, because piping it anywhere isn't worth the cost]. In the UK we pay wind farms to switch off when the grid can't absorb what they produce, then pay other plants to make up the shortfall. Managing those constraints cost about £1.7 billion in 2024/25, much of it driven by wind, and all of it on everyone's bills. Stranded power [energy with no profitable route to demand, because of where or when it's produced] is everywhere, every day.

Why miners hunt the energy nobody wants

A bitcoin miner's product is digital and sells at one global price no matter where it's made. The main input is electricity. The hardware fits in a shipping container, can sit next to a dam in Malawi or a wind farm in Texas, and can switch off in seconds without spoiling anything. No other industrial load works like that. A smelter can't follow cheap power around, and a data centre can't go dark every evening.

So competition drives miners toward the cheapest watt on earth. And the cheapest watt on earth is almost always the one nobody else can use, the 3am wind, the spilled hydro, the flared gas. Miners don't go there because they're green. They go there because they're greedy, and the greed points in the right direction.

What the energy buys

Is bitcoin's energy use a bug or a feature? It's a feature. The energy cost is the mechanism itself, not a side effect. Bitcoin spends energy the way a vault spends steel.

Bitcoin's record is secured by proof of work [miners burn electricity racing to solve a puzzle, and the winner earns the right to add the next block of transactions]. To rewrite that history, you'd have to redo the work against the entire network, continuously, for as long as you wanted your version to stand. So the cost of attacking bitcoin is physical and ongoing, rather than legal or political. That's the design. Changing the record means outspending the rest of the world's miners on energy. The rules are guarded by something even cheaper. Everyone running the software checks every block against the rules and discards any block that breaks them, so a miner who spends a fortune producing an invalid block has bought an expensive chain nobody else accepts. The energy makes attacking the record expensive. The refusal to accept a bad block makes attacking the rules futile.

More energy doesn't create more bitcoin. The difficulty adjustment [an automatic rule that keeps blocks arriving roughly every ten minutes by making the puzzle harder as more computing power joins] means that when energy floods in, the supply schedule doesn't move an inch. Extra energy buys extra certainty that the settled record stands. The energy also anchors issuance itself. Every coin that exists cost someone a real electricity bill, so nobody can conjure supply by decree. That's what "bounded by energy" means. The money is tied to physics instead of to policy.

The cost is the security. Make the work cheap and rewriting the record gets cheap with it. The main alternative, proof of stake [where the right to write the ledger goes with how many coins you lock up], is cheaper because it drops the outside cost. An attacker on bitcoin has to keep buying electricity nobody will refund. An attacker on proof of stake buys influence once, in the coin itself, and the largest holders hold it already. That recreates money governed by whoever already has the most of it. That's the system we're trying to leave, rebuilt with new words.

The word "waste" assumes the conclusion. Energy spent on something people value isn't waste. We don't call tumble dryers or Christmas lights waste, because we've agreed the output matters. Miners pay real money for power and survive only if the market values what they produce. A miner running on expensive electricity goes bankrupt, no slogans required, and in downturns some do. So the fact that bitcoin uses energy settles nothing. Everything does. The question is whether monetary rules that nobody can cheat are worth paying for.

Buyer of last resort, and what it builds

Mining is the strangest electricity customer ever invented, and that strangeness is what lets it fund new power generation and steady the grid. A buyer of last resort takes the supply nobody else wants, which puts a floor under a market. That's the role mining plays for electricity, and it changes what gets built.

A power project lives or dies on its worst hours. When a wind farm can only sell power during the hours the grid happens to want it, a big slice of its output earns nothing from a customer, and the people financing it charge more because unsold power is risk. Our constraint payments are one answer to that, but they pay a farm for not producing, out of a levy on everyone's bills. A customer is a different thing. Now give that wind farm a bid on every unit of electricity it produces, including the 3am surplus, from a buyer who takes whatever nobody else has bought. Its revenue floor rises. Its financing gets cheaper because the risk fell. Projects that were marginal become buildable. So more generation gets built than otherwise would have been, and the effect is strongest where power is cheapest to produce, which increasingly means sun and wind.

On a grid that's already heavy with renewables, the problem flips from "not enough supply" to "supply at the wrong times". Midday solar floods the grid, evening demand spikes after sunset. Mining fits that curve. It soaks the midday glut and switches off for the evening peak. Utilities already pay for this under the name demand response [adjusting electricity use to match grid conditions, usually for payment]. A flexible load at that scale makes overbuilding renewables affordable, and overbuilding plus storage is the working path to a clean grid.

The version of this I find most affecting is the smallest. At Bondo in Malawi, a micro-hydro plant powers a village and mines with the electricity the villagers aren't using at that moment, in a country where the national grid fails routinely and devaluations eat savings. Mining revenue is what lets a plant like that pay for itself instead of waiting on a donor. The villagers' power comes first. The miner takes what's left at that moment and drops off when the village wants more, which is why the residents stop losing power rather than start. The same logic scales up. You can raise financing against predictable generation, with mining as the buyer that guarantees the rest until real local demand grows into the capacity. The miner is there to get the wires built. The village is what they're for.

The buyer of last resort also travels. When China banned mining in 2021, roughly half the network's computing power went dark, and within months it had relocated and recovered. Demand that can pack up and move disciplines energy markets everywhere at once, because any region with wasted power can now monetise it.

If all of this holds, the implications compound. Energy priced in bitcoin should trend cheaper across cycles, because mining keeps pulling new, cheaper generation into existence. Cheap energy then puts the energy-hungry fixes we've shelved back on the table, desalination and carbon removal among them. And oil choke points [the straits and canals oil must pass through] lose their grip as more regions make their own power.

The case against mining's energy use

I'd rather build the case properly than knock down a cheap one. It has five planks.

1. It's net new demand at national scale. Whatever the mix, bitcoin adds demand that wouldn't otherwise exist, comparable to a mid-sized country's electricity use. On any grid where the marginal generator [the plant that switches on to serve the next unit of demand] burns fuel, marginal demand is fossil demand. "We use waste" describes part of the industry, not all of it.

2. The mechanism is fuel-blind. The same revenue floor that rescues a wind farm rescues a coal plant. The protocol doesn't care what the fuel is, only the price. And the objector can point to real cases, like a gas-fired plant in New York state revived largely to mine, coal-heavy Kazakhstan absorbing hashrate after the China ban, and a small American city freezing new mining after residents' bills rose. Those happened.

3. The energy budget scales with price, not with need. Nothing in the protocol defines how much security is enough. What the block reward is worth sets the budget, so if the price rises tenfold, the energy spend chases it. "Bitcoin only uses what it needs" is false as stated. It uses what the reward will pay for, with no governor.

4. The green claims can't be audited. The renewable-share numbers mostly come from the industry itself, and the counterfactual, whether that wind farm would have been built anyway, is unknowable case by case. The industry grades its own homework.

5. The hardware is disposable. Mining machines are single-purpose and newer ones outrun them in a few years, so the old machines pile up as electronic waste. I'll hold my reply on this one lightly.

That's the objection at full strength. Now my replies, and what I concede.

Planks one and two are true as mechanics, and I won't pretend otherwise. What I'd say back is that the incentive bends cleaner over time, because solar and wind keep falling in cost while anything that burns fuel has a permanent floor. Fuel costs money forever. Sunshine doesn't. And mining is actually a poor match for coal economics. A coal plant wants steady, high-priced demand around the clock, and mining is the customer that vanishes the instant prices rise. It's about the best customer a wind-and-solar grid could ask for and a mediocre one for baseload fossil [plants built to run flat out around the clock]. That argument doesn't cover the gas plant, and I won't stretch it to. A plant that can follow the price is a good partner for a miner, which is why that one happened. Kazakhstan is the case where my own reply gets tested. Miners went there for cheap coal power, the grid couldn't carry them through winter, and they were the first load cut off. That's the mechanism working rather than failing, but it took a power crisis to show it, and the households who lost power in the meantime didn't get a say. On flared gas specifically, the gas is already being burned and wasted, so the right comparison is a flare against a generator, not burning against not burning. A generator burns it more completely, so less methane escapes unburned, and the gas does some work on the way out instead of none. Where the alternative is venting rather than flaring, the gain is larger still, because methane warms the planet far more than the carbon dioxide it becomes. I'm outside my notes on the combustion figures, so treat the size of that gain as my general understanding, not the thesis. Where fossil power is artificially cheap because of subsidy, yes, mining will buy it, like every other industry does. That's an indictment of the subsidy, not of the load, and the moment the pricing is fixed, mining is the first load to leave, because it has no reason to stay put.

One of the cases I listed isn't about fuel at all, and it's the one that should worry you most. A city froze new mining because residents' bills went up. The miner was on the same cheap firm power [power that's there around the clock, not just when the wind blows] the town was already using. That's the opposite of everything I've just described. A buyer of last resort takes what nobody else wants and gets out of the way when somebody does, and a load that shares your neighbour's cheap supply while your neighbour covers the extra cost isn't that. The design I'm defending is the one where the miner goes last. The town case happens when the price a household pays doesn't move with the cost of the next unit, so the miner's demand lands on everyone's bill instead of its own. Fix that and the miner is the first customer to leave, because its margin is the thinnest in the room. What I can't offer is a way to make bitcoin fix that pricing, and until a town fixes it, the objection lands.

On plank three, I partly concede the mechanism. The spend does track price, not a defined need. My reply is about what the spend buys. It buys a cost that renews, one an attacker has to keep paying for as long as they want their version of the record to stand. That renewal is the thing proof of stake gives up, because a stake is bought once and stays bought, so a rich enough attacker can buy in and stay in. But whether the long-run budget lands at the right level, especially decades out when new-coin issuance fades and transaction fees have to carry security on their own, is an open question, and I won't pretend it isn't.

On plank four, I agree entirely. Argue from mechanism and named, checkable cases, never from industry survey data. That's what I've tried to do here. It's also why I said earlier that projects which were marginal become buildable, rather than claiming mining built any particular one. The one project I did name, Bondo, I named because you can go and look at it, not because I can prove the village would be dark without the miner. The mechanism is checkable. A guaranteed buyer raises a project's revenue floor and lowers its financing cost, and cheaper financing gets more projects built. Which specific projects it cleared is exactly the thing nobody can audit, including me.

On plank five, the e-waste cost is real. The partial reply is that machines get resold down the cost curve to cheaper power rather than binned on day one, but treat that as my general understanding, not the thesis.

The energy bill nobody prints

The environmental question is which monetary system forces more energy through the world, not how much electricity bitcoin uses. Bitcoin's energy cost is on a meter. Somebody gets a bill for it, and where electricity is priced properly that somebody is the person who wants what it buys. The system it replaces spends energy invisibly.

That system anchors demand for money in oil. After 1971, when the dollar's link to gold ended, pricing the world's oil in dollars held up demand for the currency, and that arrangement has been defended, when needed, with military force. A monetary system that needs carriers to keep the world wanting its money has an energy bill nobody prints on a chart. Bitcoin prices energy by buying it in the open instead. It's the first monetary asset that could become a reserve without a navy.

The old system must also push consumption up year after year. A debt-based system fails when prices broadly fall, because the debts are fixed in pounds while incomes fall with prices, so defaults cascade. So when technology makes energy cheaper, the response is to create money and credit until prices rise anyway. Cheaper solar should mean lower bills and less extraction, but the new money lifts the general price level, the saving never reaches you, and the higher oil price keeps tar sands and marginal wells in business. A system that mandates rising prices on a finite planet is mandating more energy through the world, and more materials with it, forever. That's why inflation is climate change in disguise. It's the same growth engine seen from two sides.

And the same system punishes saving, which pushes savers into consumption and speculation just to outrun the melt in their savings. Money that holds its value lets efficiency show up as falling prices, so people can work less, buy less, and waste less without getting poorer.

So rather than bitcoin's metered electricity versus zero, the comparison sets a system that pays for its security openly, in metered electricity, against a system that hides its energy cost in forced growth, propped-up oil economics, and the wars it makes cheap to start. That comparison is structural. Nobody has cleanly measured the fiat system's total energy cost, and maybe nobody can. I hold it as a strong argument from mechanism, not as a settled number.

---

# The World in Reverse
Date: 2026-07-15
Canonical: https://thenaturalstate.org/essays/the-world-in-reverse/

Over your whole life, your money has lost value year after year, and almost everything about how you live is shaped by that one fact. Now flip the sign. Run the whole chain in reverse, through prices, houses, credit, wars, energy, and AI. What does ordinary life look like on the other side?

Everything below hangs on a single assumption, that bitcoin holds, meaning it stays decentralised and secure. That's a higher bar than the network surviving. It means it stays verifiable by anyone, people keep holding their own keys, and it gets used as money rather than parked in a few custodians as an investment product. If it ends up pooled inside the old system, you rebuild the old system with a new asset underneath it. So assume it holds in the full sense. That's a bigger grant than it sounds. Two money systems can share a world for a while, but not forever, because prices settle on one unit in the end. Most of what follows describes the world after that has settled, not the year bitcoin survives. Savers get there first. Countries take decades.

Prices

On the other side, prices fall.

The mechanism is simple. Competition pushes prices toward the marginal cost of production [what it costs to make one more unit once the system is running], and technology lowers that cost year after year. That force is already here. You don't see it in your bills because falling prices would make the existing debt unpayable. So the government and central bank create new money and credit to hold prices up, and that new money soaks up the gain from cheaper production before it ever reaches you. Remove that offset, and prices drift down at roughly the rate we get better at making things. A few percent a year to start with, and the rate climbs as automation spreads. In any one year it feels like nothing, and it compounds into a different civilisation.

Saving works again. Cash held in a drawer gains purchasing power by default, so you don't need an investment account, a fund manager, or an opinion on markets just to stand still. Your payslip also stops being the score. Your nominal pay stays flat or even drifts down, and that will feel wrong to almost everyone at first. But the basket of things you buy falls faster, so over the years your hours buy more life. And no, people don't stop buying because tomorrow is cheaper. You buy a coat in winter and a phone when yours breaks, exactly the way people buy televisions today knowing next year's model is better and cheaper. What dies is the pressure to spend before your money rots.

Houses

A house today is two products stapled together, a place to live and a savings account. Because money doesn't hold value, people store their working lives in bricks, and that storage demand is much of what we call "the housing market". That extra price is a monetary premium [the amount an asset costs beyond its usefulness because people use it to store savings].

When money holds value on its own, that premium drains out over years. Nobody needs the second product any more, so a house falls back toward its utility price, what it's worth as a place to live. And build costs are falling too, with automation and materials tech. That part hasn't happened yet. What's happened is the measuring unit changing. A house that cost about 300 bitcoin fell to about 40 over a few years, and it's kept falling since, even while the number on the estate agent's board went up. All of that fall is bitcoin strengthening. None of it is housing getting cheaper, because housing got dearer in currency terms over the same years, so the strengthening had to cover that as well. The premium is still in the price, and draining it is the part still to come.

On the other side, a working couple saves out of wages for some years and buys a home outright or close to it. Growing up expecting to owe a bank for thirty years stops being normal. The landlord-as-pension model fades, because there are easier ways to hold savings than someone else's roof. Your parents' instinct that property always goes up was mostly a fact about the pound, not about houses.

Credit

Today most money is loaned into existence, so the whole economy is built to need borrowing. Flip the money underneath and the logic flips. Why borrow at interest to buy something today that will likely cost less next year, when the money in your pocket is gaining ground on it? Credit stays, and it gets honest. Lending mostly comes out of real savings rather than newly created money, so lenders price risk properly. Loans mostly happen where the project beats what holding money already pays. Mortgages get shorter and rarer, businesses run on equity and retained earnings more than debt, and households carry buffers instead of running a balance on a card.

That honesty has a price. Failure is allowed again. Someone will always build a tower of promises on top of hard money, offering yield for your coins, and some of those towers will fall. But there's no lever to rescue them with everyone else's purchasing power, so they fail fast, the losses land on the people who took the risk, and the lesson holds. Saving is rewarded, recklessness is punished, and that discipline keeps the system clean. You owe almost no one, and no one owns decades of your future hours.

Wars

Large wars are ruinously expensive, and populations rarely vote to fund years of war with an honest tax bill. They haven't had to. The state could borrow, the central bank could create the money to absorb it, and the cost landed on everyone later as higher prices. Nobody signs that cheque. It gets signed for them.

Hard money takes the pen away, though the old kind never quite did. Gold standards came with a suspend button, and governments reached for it when the bills got too big. That repeat pattern is the way gold fails. Bitcoin has no such button. So a government that wants a sustained war has to raise the money visibly, from taxes voters can see or from savers it has to persuade at honest rates. Either way somebody signs the cheque. That doesn't end human violence, but it makes industrial-scale, years-long war brutally hard to finance, and the coercion short of war harder too. Today, where the state sets the exchange rate, officials can cut a currency's value by a third or a half overnight. Prices jump across the board, and pay follows late if it follows at all. On the other side there's no such decree, because no one can move the unit.

What replaces the contest? Competition for people. When savings can walk across a border in someone's head, governments can't hold citizens hostage through the currency. They have to attract them with clear rules, fair visible taxes, and services worth what they cost. States get smaller because the funding trick that let them grow without asking is gone, and nobody has to win an argument about the size of the state first.

Energy

Energy is the base input to everything, so its price echoes through every other price.

Mining gives energy a buyer of last resort [a buyer that will take power no one else can use, wherever and whenever it's produced]. A dam in a valley with no town, a wind farm at 3am, flared gas at a wellhead. All of it becomes revenue. That makes marginal power projects worth building, pays for new capacity, and steadies grids that run on sun and wind. Miners switch off when real demand shows up and pay for the slack the rest of the time. Energy gets overbuilt ahead of demand, which is exactly what you want.

The offset dies here too. Today, when solar gets cheaper, the system's need for rising prices eats the gain before it reaches your bill. On the other side, when generation costs fall, your bill falls. Cheap power then puts the energy-hungry things we currently can't afford at scale within reach, from desalination to local automated manufacturing to carbon removal. The climate argument flips with it. A money system that must push consumption up forever is built to fight conservation. A system where efficiency reaches prices supports conservation, because it finally pays to do more with less.

AI

AI is the sharpest version of all this, because it's the fastest cost collapse humans have ever built, and it lands on whichever money system exists when it arrives.

Under today's system, AI deserves the fear it gets. It cuts the labour a task needs at exponential speed, while policy holds your cost of living up. So wages fall against a basket that won't drop, and the gains pool with whoever owns the models and the assets. The state's answer is transfers funded by creating more money, which raises the cost of living again and pulls more control to the centre. A few lives climb, most fall. That's the surveilled, dependent path, and the fault is the money underneath it.

Under hard money, the same AI becomes the dividend machine. Every task it automates makes something cheaper, and the cheapness actually arrives, because nothing offsets it. Losing hours stops being a crisis when the cost of living falls faster than the hours do. The question inverts from "what happens to me when the machine takes my job?" to "what do I want to do now that a part-time week covers my needs?" Same technology, opposite world. The only difference is whether an expanding money supply can swallow the gains or they have to fall through to prices.

Ordinary life on the other side

Take Dani, a chef. Today her pay rises 3%, her rent rises 8%, her savings account is a slow leak, and she's told to put money she can't afford to lose into funds she doesn't understand, because doing nothing guarantees loss. Retirement is a spreadsheet of fear.

On the other side, her pay is flat. Her weekly shop costs a little less, winter after winter. She keeps her savings in money she holds herself, and the longer she waits, the more house they buy. She's dropped to a four-day week because she can, and the fifth day is hers. Her pension plan is the boring one her grandmother would have recognised. Spend less than you earn. The background hum of financial anxiety, the one so constant you stop hearing it, goes quiet.

Around her, everything else changes too. Whole job categories exist only to manage the damage of inflating money, and they shrink. Chunks of finance, compliance, subsidy administration. The people in them move to work that someone wants done. Fewer middlemen. Marketing weakens, because when margins are competed away, hype can't sustain a bad product, and customers become the marketing. Status drifts from what you own toward what you've built, because owning appreciating assets is no longer the game. People plan in decades. Crafts come back, because mastering something for ten years makes sense when your savings will still be there in ten years. And on the old dashboards, it all looks like stagnation, with GDP flat or falling while everyone's life gets cheaper, because GDP counts paid transactions, and the whole point of this world is needing to spend less for more.

Where this picture is weakest

There are four places where I'd argue with myself.

The wage psychology is a genuine problem. The pitch is that your pay stops rising, and may well fall, while your life gets cheaper faster. That's true, and it loses elections. Most of it belongs to the transition, and the transition is the dangerous part, but some of it survives the crossing, because a flat payslip still reads as failure to anyone raised on rises. The road there runs through policy whiplash, sharp falls in bitcoin's price, and attempts at state money that can be programmed to control what you spend it on. It'll be rough. I'm describing the far bank, not the crossing.

Then there's hoarding. People worry that early holders become the new lords. But on hard money, the only way to keep compounding wealth is to make something someone freely pays for, and any attempt to buy control spends coins back out into society. You can't print your way to power. What's left of the worry is cultural, and nothing in the design answers it. On an asset that keeps gaining, holding pays and spending costs. Save all you like, in your own keys. The drift happens when people park their coins with a custodian and carry on spending in the old money. If enough people do that, custody piles up in a few institutions, and we're back toward the old structure. It has to circulate as money. That's on us, not on the protocol.

Nominal wealth falls. Anyone holding index funds and property will watch the numbers shrink, and it'll feel like ruin. Much of that shrinking is the currency illusion unwinding, and losing that costs you nothing real. Purchasing power is the test, and when everything you buy is getting cheaper, a smaller number buys more life than the bigger one used to. The savings premium is the part I have to be straight about. The extra price a house carries because people store their savings in it is real purchasing power today, because you can sell the house and get real goods for it. When that premium drains, the owner loses something real, not just a number on a valuation, and the same holds for any asset people have been using to store savings. So expect two kinds of anger, and expect them to sound the same. Some will come from people who are, in real terms, fine. Some will come from people who really did lose the savings they had parked in bricks.

Then there's timing. None of this arrives by a date, and it doesn't arrive everywhere at once. It arrives person by person, then place by place. Patches of it already exist, in communities that earn, save, and spend inside a circular bitcoin economy, and in people holding savings nobody can dilute. Read the early price falls carefully, though. While bitcoin is still monetising, its purchasing power climbs for that reason alone, so a price falling in sats mixes two things. Goods getting cheaper to make, and the unit getting stronger as the world moves into it. The second one is the crossing, not the far bank. The other side is a direction, and individuals get there long before their governments do. None of it is a prediction. It's what follows if the assumption at the top holds.

The natural state of a free market is abundance shared out as falling prices, and the other side is that state with the suppression removed. Ordinary life is the same life with the leak fixed. Your time stops draining out through the money.

---

# The Stretching Ruler
Date: 2026-07-15
Canonical: https://thenaturalstate.org/essays/the-stretching-ruler/

When every number you've ever read about the economy is denominated in a unit whose supply moves, what changes is perception. The ruler that stretches while you measure.

Every number you've ever read about the economy was written in a unit that was changing while you read it. Your first payslip, your parents' house price, the GDP charts in your textbooks, the "record highs" in the news. All of them were denominated in pounds or dollars, and the supply of pounds and dollars was expanding decade after decade. That's the fact underneath all the others, so far down that almost nobody ever looks at it.

The instrument you see with

The unit of account [the unit that prices and debts are written in] is the money you spend. It's also the instrument you see the economy with. When the supply of that unit moves, the distortion doesn't show up as an error you can spot. It disappears into the measurements themselves. You don't perceive a distorted world. You perceive a coherent, normal-looking world that's wrong. And because almost every check you're likely to run is denominated in the same unit, the world keeps confirming itself.

That's the root of why nobody sees it. Not stupidity, not conspiracy. There has never been an outside to stand on. You can't test a ruler with the ruler.

What happens to perception

Three things pile up.

First, the sign flips. When the money is being expanded, things that are flat or falling in real terms can appear to rise. Your house "doubles" over ten years and you feel richer. But the house didn't change. It has the same rooms, the same roof. What changed is that each pound measures less, so the same house takes more of them. Meanwhile you still have to live somewhere, and the house you'd move into is inflated too. The tax and upkeep climbed too. The gain you perceive is mostly the ruler shrinking. Same with your pay. A 3% rise reads as progress. If your food, rent, and energy rose 8%, you took a pay cut, and your perception recorded it as a raise. Inflation and wage deflation are one phenomenon seen from opposite sides, and the stretching unit keeps the two sides apart, so the gain arrives as news and the loss arrives as a squeeze you can't trace. That's why the illusion is so stable. The half you notice is the half that flatters you, and the half that hurts never leads back to the ruler. People don't defend the truth of their instruments. They defend the instruments that tell them they're winning.

Second, the baseline vanishes. Even people who accept that inflation exists miss this part. The natural state of a free market is falling prices, because when tools improve, the same goods take fewer inputs to make, and competition passes that saving on. So the honest baseline is minus something rather than zero. With software and AI, it's minus a lot. Measured against that baseline, flat prices aren't stability. Flat prices mean the entire price fall that year's productivity should have delivered was absorbed by money creation before it reached you. The weekly shop that should have got cheaper this year cost the same instead, and a bill that hasn't moved gives you nothing to notice. Perception needs contrast, and the theft removes its own contrast. Nobody mourns the price fall that never happened. The crime scene is a counterfactual world, so there's nothing to point at.

Third, the correction tools inherit the error. This is what closes the loop. You might say we know about inflation, and that's why we have "real terms" data. But the adjustment is done with an index built in the same unit, and that unit is managed to hit a target the same index is used to score. The 2% target makes this worse. Once a measurement becomes the goal, the system is managed to hit the number, the way a school that decides the average grade must be a B scales every test until it is. And the deeper distortion never enters the index at all, because CPI measures against zero, not against the falling-price baseline that technology keeps delivering. GDP misses the same gain from the other side. When your phone swallowed the camera, the map, the sat nav, and the postage, your life got cheaper and GDP recorded almost nothing, because GDP counts paid transactions, not value. GDP inherits the error as well. Turning it into "real" growth takes another index, built in the same unit against the same zero, so money borrowed into existence and spent reads as growth. So the two official instruments this section has walked through are blind in both places where the distortion lands.

What this does to people

Money is information. It's the signal you use to decide what your time is worth, what to build, whether you're getting ahead. Distort the signal and you distort the choices.

A saver looks at cash losing to everything and concludes, correctly within the frame, that saving is for losers. So an entire population is pushed out along the risk curve, into buy-to-lets and index funds and speculation, just to stand still. A worker feels the squeeze but can't see the cause, because the mechanism hides inside the unit itself, so it never shows up as a line on any bill. So the anger lands on whatever is visible. The landlord, the boss, the immigrant, the other party. The resentment between labour and capital that dominates politics is largely misdirected, a fight over who stole the gains, conducted by people who can't see that the gains were absorbed in the money itself, before either side could bargain over them. Inflation manufactures the feeling of scarcity in the middle of an era when technology keeps making almost everything cheaper to produce, and people fight over fake scarcity just as hard as real scarcity.

Perception becomes unit-relative and self-sealing. Someone who thinks entirely in pounds sees prices relentlessly rising. Someone holding bitcoin but still thinking in pounds sees a volatile asset "going up". Someone who thinks in bitcoin sees the same houses, laptops, and flights getting cheaper cycle after cycle. Three observers, three internally consistent worlds, each confirmed by its own data. Even the words carry the unit inside them, from a house that "doubles" to an asset "going up". Argument can't resolve it, because the arguments are conducted in numbers, and the numbers belong to a frame.

Why the slowness matters

Speed decides visibility. In July 2024 Ethiopia's central bank cut the birr's official value by nearly a quarter in a day, from 57 to 75 against the dollar, and let it float from there. Shop prices jumped within the week, and by the start of August the authorities were closing shops for raising them, because the stretch happened all at once and everyone could see it, the state included. The same confiscation, running at 2% measured plus the hidden gap to the falling-price baseline, compounds for thirty years into a larger theft, and there's no day to point at. Nothing ever happens. Your savings are never seized. There's no line item, no event, and human perception is built on events. We also think in straight lines, so a small annual stretch compounding for a generation is doubly invisible. Too slow to alarm, too exponential to intuit. By the time you're an adult, the stretching ruler is the water you learned to swim in. Every memory you have of "what things cost" was laid down in it.

Where the fixed ruler comes in

This is why the measurement question, not the investment question, is where bitcoin enters the thesis. A measurement needs an independent variable, a reference that isn't changed by the thing being measured. For the first time there's a unit whose supply cannot be moved by anyone. Measured against that ruler, the picture inverts. A family home that took roughly 300 bitcoin a few years ago takes a fraction of that today, and it has kept falling across the cycles since, while its pound price rose. The whole of that fall is the new unit hardening, not houses getting cheaper to build. In pounds the house got dearer, so cheaper houses can't be any part of the explanation. The house didn't change. Both numbers did, in opposite directions, which makes it a fact about the two rulers and not about houses. That hardening is the loud part while the world is still repricing into the new unit. Underneath it runs the slower fall technology has been delivering all along, the one the old unit hid. Nearly everything is getting cheaper against the fixed ruler. Bitcoin "going up" and everything "getting more expensive" turn out to be the same optical illusion, seen through the moving unit. The point isn't the price. With a second ruler, you can finally see the first one stretch.

You can't argue a mind out of a frame using numbers stated inside the frame. Every price and every total arrives pre-denominated, and the mind will file it back into the old unit. What works is starting from the instrument. Take a second ruler and re-measure one thing you already know intimately, your own house or your own payslip, and let the flip happen in your hands. Perception changes by re-measurement, not by persuasion.

The arguments against this, and the unit they're made in

"Official real-terms data already corrects for this." It corrects with the same unit, against the wrong baseline, using baskets that underweight the things people must hold, like housing. The correction is sincere and it's circular.

"Markets aggregate information, so a distortion this large would be arbitraged away." Markets aggregate in the unit. And the anchor of every valuation, the so-called risk-free rate on government debt, is pushed below where free buyers and sellers would set it, so every cash flow discounted off that rate bends with it. You can't arbitrage the unit from inside the unit.

"Bitcoin is far too volatile to be a ruler." Today's volatility is a small, young asset repricing the whole world, and it's measured in the stretching unit. The property a measure needs is a supply no committee can change. A calm chart was never the test. And on the record, over multi-year windows, the direction of prices in the fixed unit has been consistent, and it points down.

So when every number you've ever read about the economy is denominated in a unit whose supply moves, perception succeeds at seeing a false world, and the illusion recruits your own gains, your own language, and your own correction tools to keep it false. The ruler that stretches while you measure doesn't just mismeasure the plank. It convinces the carpenter he's getting taller.

---

# The Two Forces Hide Each Other
Date: 2026-07-15
Canonical: https://thenaturalstate.org/essays/the-two-forces-hide-each-other/

The government and central bank have created enormous amounts of new money and credit, and for decades measured inflation has read low single digits. The central bank now aims at 2% a year. The small number you're shown is a net. Underneath it, two huge forces are pushing against each other. Technology pushes prices down, year after year. The government and central bank push them back up by creating new money and credit. The published figure is what's left over after those two forces cancel. Reading it as "not much is happening" is the mistake. The calm of the number is bought by the violence of the cancellation.

If you take the 2% at face value, you draw two false conclusions at once. You conclude the money system is roughly stable, and you conclude technology doesn't really lower the cost of living. The natural state of a free market, under a money nobody can add to, is falling prices, but you can never see that state directly across the whole economy, because policy cancels it before it reaches the till. You have to reason your way to the prices that should have existed. That's what we're doing here.

The two forces

The downward force is technology. When a firm gets better tools, the same goods take fewer hours and fewer inputs to make. Competition then forces the saving into the price, because a rival with the same tools will undercut anyone who tries to keep the difference. So in an honest system prices drift down toward the cost of making one more unit. That holds for everything technology has changed the making of. It doesn't hold for housing, care, teaching, or building. And where nobody can copy the cheaper way, the saving stays with the business. You can't see the whole of the fall in the shops, for a reason I'll get to, but its size is about the rate at which output per hour of work grows, which is what the productivity figures measure. In Britain that was near 2% a year before 2008, and between 0.7% and 1.3% a year from 2009 to 2019, depending on which of the statisticians' two measures you take. The push keeps getting stronger, because the tools are improving faster than they did, as software and now AI spread into more of the economy. You won't see that in the official productivity figures yet.

The upward force is money and credit creation. Our money is loaned into existence. Most new pounds are created when banks make loans, and the debts are fixed in pounds, so the amount you owe stays the same whether prices rise or fall. If prices broadly fall and nothing is done to stop it, wages and revenues follow them down, but the repayments don't shrink.

A system built on debts fixed in pounds can take a slow fall that comes with better tools. In that fall it's the cost of making things that drops, and pay drifts down slowly behind it, so the money to meet a fixed payment is still there. What it can't take is a sudden fall in the prices credit pushed up, houses first, because then the losses spread through the banks. In that fall it's the lending that has stopped, so incomes and the house fall together and at once, and the fixed payment is hit from both sides in the same year. Houses come first because people buy them with borrowed money. The debt takes a bigger bite of everyone's income. And where the loan was written against a house, the house is worth less too, so the bank stands to lose more on that loan. So every time a sudden fall in those prices threatens, the system is rescued with new money, and the rescues keep getting bigger. In between, the central bank targets 2% inflation and does whatever it takes to get there, with rates and with asset purchases [buying bonds with newly created money].

Say technology would have moved prices to minus 2% this year, as it would have at Britain's rate before 2008, and the shops show plus two. To get from minus two to plus two, policy had to move prices by roughly four points, against the current. Picture a moving walkway. It runs backwards at two steps a minute, which is technology pulling prices down. Walk forward at two and you stay exactly where you are. To end up two steps ahead, which is what the shops show, you have to walk at four. Someone watching your position sees a figure barely moving and concludes there's no effort anywhere in the scene. The walking is the money creation. The barely-moving position is your 2%.

How each hides the other

The money creation hides the deflation because the prices you should have had never appear on any receipt. You can't see the £55 weekly shop that would have existed after a decade of the fall reaching you. The one you can see costs £80. So the fall in the real cost of making things is invisible everywhere except the few categories that fell so fast the average couldn't hide them, like electronics and software. People then conclude that rising prices are a law of nature, and economists teach that a little inflation is necessary. Central banks publish why they aim at 2%. They want room to cut interest rates in a downturn, they know wages resist falling, and they say the official measure of prices overstates the rise. Those are the reasons they give, and the debts aren't among them. The debts show up in the rescues, not in the everyday 2%.

The deflation hides the money creation because the collapse in the cost of making things absorbs part of the new money that lands in the shops. The trillions created since 2008, and for decades before, would have shown up in the shops as inflation of up to twice what was recorded, in a world where costs stood still. Costs didn't stand still. Where technology reached, they fell hard, and the fall soaked up part of what landed, so the average price level stayed tame and the money creation looked free. The saving from better tools quietly paid the bill for the policy.

Each force hides the other. That's why the public argument about whether inflation or deflation is coming misses the point. Both are happening at once, in different layers, and arguing about the net keeps everyone from seeing the full size of either force before they cancel.

And when the upward force briefly ran ahead of the fall it was cancelling, the mask slipped, as the mechanism says it should. In 2020 the amount of money in the United States grew by about 3.7 trillion dollars, in a country where corporate profits after tax in 2019 came to about 2.2 trillion. Even if every dollar of those profits had been taken, it wouldn't have matched the new money. Consumer inflation duly arrived, peaking near 9% in the United States and above 11% in Britain. Blocked supply chains pushed the same way at the same time, so the spike wasn't money creation's work alone. It fell back fast once the emergency creation stopped, partly because each year's rise is measured against the year before, and the year before had been unusually high. The spike confirms the mechanism. Push one side hard enough and the net turns visibly positive. Then the downward pull from technology shows through again.

What the small net number hides

1. An annual transfer measured from the wrong baseline

From zero, 2% looks like a rounding error. The right baseline is the fall that should have happened, a point or two a year on the published figures. Measured from there, the gap is at most three or four points a year in what your money can buy. A point or two of that gap is the productivity gain that workers and machines really did produce. Part of it reached you as higher pay, late and unevenly. The rest went to whoever the new money reached first instead of reaching you as lower prices. The gap compounds, year after year. No official statistic reports it, because statistics measure what happened, and this is the distance between what happened and what should have happened.

2. Where the new money went

New money spreads unevenly. It enters at specific doors, and the people closest to where it enters benefit first, before prices adjust. That's called the Cantillon effect. And in the years of bond-buying it chased assets first. Inflation is measured on the CPI basket, the consumer price index, the official list of everyday prices. Houses aren't in that basket, or barely so, and shares aren't in it at all. A doubling house price gets recorded as wealth. Inside the basket the average hides a violent split too. Electronics got cheaper for decades while rent, healthcare, tuition, and insurance kept climbing. Both stories are true at once, which is why the index can read 2% while the essentials you can't skip feel far worse. Then there's shrinkflation, the same price on the shelf for a smaller portion or a worse service, which is a price rise the index struggles to catch.

3. Whose life the number prices

Inflation and a wage that buys less are the same event from two sides. If prices rise faster than your pay, your pay fell in real terms, full stop. A 3% raise feels good until rent and food jump 8%. The asset owner gains what the wage earner and the saver lose, so the 2% world runs a yearly transfer from wage earners and savers to asset owners. Then we spend our politics arguing about the symptoms.

4. The growing dose behind the flat number

Because technology compounds, what it takes to cancel the fall keeps growing. Between 2000 and early 2018 the world added roughly 185 trillion dollars of debt to buy about 46 trillion of growth, four borrowed for each one gained. The rescues that met the two big crises grew, from hundreds of billions in 2008 to trillions in 2020. A stable-looking 2% means a system that has had to run harder each time a big crisis came, to hold the same two steps of lead on that walkway. That flat number is what fragility looks like from outside.

5. The corruption of the price signal

Prices are information. When every price is part the cost of making it and part policy, prices tell you much less about what anything is worth, what's scarce, or which projects pay. Money flows into ventures that only make sense because more money is coming. The 2% hides that prices, the economy's way of measuring what things are worth, have stopped measuring well.

Taking the number at face value

"The statisticians aren't lying."

Mostly agreed, and it doesn't matter. An honest CPI answers the wrong question. It measures movement from zero, and the transfer has to be measured against the prices that should have existed, which no basket is built to capture. Some choices of method do flatter the number at the margins. When a product gets better, the statisticians mark its price down in the index, and that's called hedonic adjustment. And 2% is defined as success, so the measure becomes the goal. But the baseline error is the main event.

"If printing were that big, we'd see hyperinflation."

You see the inflation in whatever the new money chases. It chased assets, which the index doesn't price, or barely so, and in the shops part of it was cancelled by the collapse in the cost of making things. When creation went extreme in 2020, consumer inflation arrived twelve to eighteen months later, with blocked supply chains pushing the same way.

"We need 2% or people stop spending."

People still buy phones, laptops, and TVs even when they expect next year's model to be better or cheaper. What does get put off is the purchase that can wait, and sometimes that's a big one, like a car. What falls when people wait is the borrowing that would have paid for it, and life carries on. People don't stop spending when prices fall, so the 2% isn't needed to keep them spending.

Priced in a money nobody can print

Change the ruler. Price the same goods in a money nobody can create more of, and you see a movement the pound price can't show you. Measured in bitcoin across multi-year stretches, houses and much else have been getting cheaper even as their pound prices were rising. Same houses, same world, different unit. Nearly all of that fall is bitcoin getting stronger as people move their savings into it, so the comparison shows you a price moving with its unit, and it can't show you the size of the fall technology should have delivered. You still have to reason your way to that. When the unit holds still, movement shows up as movement. When the unit is moving too, the reading carries both movements and separates neither. The real cost of making things falls, the pound loses value faster, and what you read on the price tag is the difference between them.

Measured inflation is a net, and the net is what two enormous forces leave behind when they cancel each other. What the number hides starts inside that cancellation.

## Sources

What this essay rests on, as checked on 2026-09-29.

1. "The government and central bank have created enormous amounts of new money and credit, and for decades measured inflation has read low single digits."
   Board of Governors of the Federal Reserve System, H.4.1 Factors Affecting Reserve Balances, total assets (series WALCL), weekly levels: Total assets, millions of US dollars: mid-2007 weekly levels 863,890 to 876,611, all under $1 trillion; 4,165,591 on 25 December 2019; 8,965,487 on 13 April 2022. https://fred.stlouisfed.org/series/WALCL
   International Monetary Fund, World Economic Outlook database, annual consumer price inflation: Average annual consumer price inflation, 2010 to 2020: Japan 0.4, Switzerland -0.1, United Kingdom 2.0, United States 1.7. https://www.imf.org/external/datamapper/PCPIPCH@WEO/JPN

2. "The central bank now aims at 2% a year."
   Bank of England, Inflation and the 2% target: "The Government sets us a 2% inflation target" and "If we miss the inflation target by more than 1 percentage point either side of the target, we must tell the Government why." https://www.bankofengland.co.uk/monetary-policy/inflation
   Federal Reserve, Statement on Longer-Run Goals and Monetary Policy Strategy, 25 January 2012: "The Committee judges that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve's statutory mandate." https://www.federalreserve.gov/newsevents/pressreleases/monetary20120125c.htm
   European Central Bank, An overview of the ECB's monetary policy strategy (2021 strategy review): "at this juncture the Governing Council considers that price stability is best maintained by aiming for a two per cent inflation target over the medium term." https://www.ecb.europa.eu/mopo/strategy/strategy-review/ecb.strategyreview_monpol_strategy_overview.en.html

3. "Technology pushes prices down, year after year."
   US Bureau of Labor Statistics, The Economics Daily, “Long-term price trends for computers, TVs, and related items”, 13 October 2015: "The price index for TVs decreased 94 percent from December 1997 to August 2015"; over the same period "audio equipment (−60 percent)" and "photographic equipment and supplies (−59 percent)". https://www.bls.gov/opub/ted/2015/long-term-price-trends-for-computers-tvs-and-related-items.htm
   Office for National Statistics, Consumer Prices Index 09.1, audio-visual equipment and related products (series D7CS), 2015=100: Annual index, 2015=100: 739.1 in 1988, 400.0 in 2000, 249.4 in 2005, 144.9 in 2010, 100.0 in 2015, 91.9 in 2020, 96.5 in 2024. https://www.ons.gov.uk/economy/inflationandpriceindices/timeseries/d7cs/mm23

4. "The government and central bank push them back up by creating new money and credit."
   Bank of England, Quarterly Bulletin 2014 Q1, “Money creation in the modern economy”, 14 March 2014: "The amount of money created in the economy ultimately depends on the monetary policy of the central bank." "The central bank can also affect the amount of money directly through purchasing assets or 'quantitative easing'." https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy

5. "The natural state of a free market, under a money nobody can add to, is falling prices, but you can never see that state directly across the whole economy, because policy cancels it before it reaches the till."
   Bordo, Landon-Lane and Redish, Good versus Bad Deflation: Lessons from the Gold Standard Era, National Bureau of Economic Research working paper 10329, February 2004: The United States, the United Kingdom and Germany in the late nineteenth century, "a period characterized by low deflation, rapid productivity growth, positive output growth, and where many nations had a credible nominal anchor based on gold". https://www.nber.org/papers/w10329

6. "You can't see the whole of the fall in the shops, for a reason I'll get to, but its size is about the rate at which output per hour of work grows, which is what the productivity figures measure."
   Office for National Statistics, Labour productivity quality and methodology information: Output per hour, the labour productivity measure, is gross value added divided by hours worked. https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/labourproductivity/methodologies/labourproductivityqmi/pdf

7. "The push keeps getting stronger, because the tools are improving faster than they did, as software and now AI spread into more of the economy."
   Stanford Institute for Human-Centered Artificial Intelligence, The 2025 AI Index Report, Research and Development: Querying a model scoring the equivalent of GPT-3.5 on MMLU "dropped from $20.00 per million tokens in November 2022 to just $0.07 per million tokens by October 2024—a more than 280-fold reduction in approximately 18 months". https://hai.stanford.edu/ai-index/2025-ai-index-report/research-and-development
   US Census Bureau, Large Firms With at Least 20 Employees Biggest AI Users, 26 May 2026: "The BTOS data (December 2025 to May 2026) show that overall AI usage hovered between 17% and 20%"; use rose among firms with at least 20 employees. The figures cover six months only, not a longer rise. https://www.census.gov/library/stories/2026/05/ai-use-businesses.html

8. "You won't see that in the official productivity figures yet."
   Brynjolfsson, Rock and Syverson, The Productivity J-Curve: How Intangibles Complement General Purpose Technologies, American Economic Journal: Macroeconomics, January 2021: "General purpose technologies (GPTs) like AI enable and require significant complementary investments", "often intangible and poorly measured in national accounts", which can lead to "underestimation of productivity growth in a new GPT's early years". https://www.aeaweb.org/articles?id=10.1257%2Fmac.20180386

9. "Most new pounds are created when banks make loans, and the debts are fixed in pounds, so the amount you owe stays the same whether prices rise or fall."
   Bank of England, Quarterly Bulletin 2014 Q1, “Money creation in the modern economy”, published 14 March 2014: “the majority of money in the modern economy is created by commercial banks making loans”. https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy
   Deutsche Bundesbank, Monthly Report, April 2017, “The role of banks, non-banks and the central bank in the money creation process”: Banks create deposits when they extend credit, and repayment of the loan eliminates those deposits. https://www.bundesbank.de/en/publications/search/the-role-of-banks-non-banks-and-the-centralbank-in-the-money-creation-process-654284

10. "In between, the central bank targets 2% inflation and does whatever it takes to get there, with rates and with asset purchases [buying bonds with newly created money]."
   HM Treasury, Remit for the Monetary Policy Committee and the new inflation target, December 2003: “Announced in June 2003 and implemented on 10th December 2003, the Bank of England's inflation target was redefined from 2.5 percent measured by RPIX inflation to 2 percent measured by annual CPI inflation.” https://www.bankofengland.co.uk/letter/2003/chancellor-letter-101203
   Federal Reserve, FOMC statement of longer-run goals and policy strategy, 25 January 2012: “The Committee judges that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve's statutory mandate.” https://www.federalreserve.gov/newsevents/pressreleases/monetary20120125c.htm
   Bank of England, Quarterly Bulletin 2014 Q1, “Money creation in the modern economy”, published 14 March 2014: “In normal times, this is carried out by setting interest rates. The central bank can also affect the amount of money directly through purchasing assets or ‘quantitative easing’.” https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy

11. "Say technology would have moved prices to minus 2% this year, as it would have at Britain's rate before 2008, and the shops show plus two."
   Office for National Statistics, Component approach to measuring labour productivity, UK: 1997 to 2024, last revised 17 September 2026: “Output per hour growth averaged 2.1% a year under the current approach and 2.0% a year under the component approach between 1997 and 2007”; between 2009 and 2019, 0.7% a year and 1.3% a year. https://www.ons.gov.uk/economy/economicoutputandproductivity/productivitymeasures/methodologies/componentapproachtomeasuringlabourproductivityuk1997to2024
   ONS, Growth accounting, multi-factor productivity estimates, UK, market sector: October to December 2024: “average annual MFP growth across the same period was negative 0.01%, contrasting sharply with an average of 1.8% per year in the decade before the downturn (1998 to 2007)”. https://www.ons.gov.uk/economy/economicoutputandproductivity/productivitymeasures/bulletins/growthaccountingmultifactorproductivityestimatesuk/octobertodecember2024

12. "So the fall in the real cost of making things is invisible everywhere except the few categories that fell so fast the average couldn't hide them, like electronics and software."
   U.S. Bureau of Labor Statistics, Consumer Price Index item indices for televisions, computers, software and telephone services, 1997 to 2024: To August 2015: TVs -94%, computers -96%, software -63%. Software index 32.4 to 23.7 (December 1997=100); telephone services 100 to 94.4; all items up 95.6% from December 1997. https://data.bls.gov/timeseries/CUUR0000SEEE01?output_view=data

13. "Central banks publish why they aim at 2%."
   European Central Bank, The ECB's monetary policy strategy statement, July 2021: "The Governing Council considers that price stability is best maintained by aiming for two per cent inflation over the medium term. The Governing Council's commitment to this target is symmetric." Statement dated July 2021. https://www.ecb.europa.eu/mopo/strategy/strategy-review/ecb.strategyreview_monpol_strategy_statement.en.html
   Federal Reserve, 2020 Statement on Longer-Run Goals and Monetary Policy Strategy, as amended effective August 27, 2020: "the Committee seeks to achieve inflation that averages 2 percent over time"; "as amended effective August 27, 2020". The statement gives the 2 percent aim; the words wage, bias and measurement do not appear in it. https://www.federalreserve.gov/monetarypolicy/monetary-policy-strategy-tools-and-communications-statement-on-longer-run-goals-monetary-policy-strategy-2019-2020.htm

14. "They want room to cut interest rates in a downturn, they know wages resist falling, and they say the official measure of prices overstates the rise."
   European Central Bank, The ECB's monetary policy strategy statement, July 2021: "The facilitation of cross-country macroeconomic adjustment within the euro area, downward nominal wage rigidities and measurement bias also warrant an inflation buffer"; the "effective lower bound on nominal interest rates will more frequently constrain the conduct of monetary policy". https://www.ecb.europa.eu/mopo/strategy/strategy-review/ecb.strategyreview_monpol_strategy_statement.en.html
   Federal Reserve, 2020 Statement on Longer-Run Goals and Monetary Policy Strategy, as amended effective August 27, 2020: "the federal funds rate is likely to be constrained by its effective lower bound more frequently than in the past". It is not listed as a reason for the target, and wage, bias and measurement do not appear. https://www.federalreserve.gov/monetarypolicy/monetary-policy-strategy-tools-and-communications-statement-on-longer-run-goals-monetary-policy-strategy-2019-2020.htm

15. "In 2020 the amount of money in the United States grew by about 3.7 trillion dollars, in a country where corporate profits after tax in 2019 came to about 2.2 trillion."
   Federal Reserve Bank of St. Louis (FRED), M2 money stock (M2SL), monthly values for 2020: M2, Billions of Dollars, Seasonally Adjusted: 2020-01-01, 15425.0; 2020-12-01, 19119.4, an increase of about $3,694.4 billion (about $3.7 trillion) over 2020. The figure is for the M2 money stock alone. https://fred.stlouisfed.org/series/M2SL
   U.S. Bureau of Economic Analysis, series on FRED (Federal Reserve Bank of St. Louis), Corporate Profits After Tax with Inventory Valuation and Capital Consumption Adjustments (CPATAX), 2019: 2019: 2,174.126 Billions of Dollars, Seasonally Adjusted Annual Rate, Corporate Profits After Tax with Inventory Valuation Adjustment (IVA) and Capital Consumption Adjustment (CCAdj). The printed value is about $2.17 trillion. https://fred.stlouisfed.org/series/CPATAX

16. "Consumer inflation duly arrived, peaking near 9% in the United States and above 11% in Britain."
   U.S. Bureau of Labor Statistics, Consumer Price Index news release, June 2022: "Over the last 12 months, the all items index increased 9.1 percent before seasonal adjustment." 9.1 percent, 12 months ended June 2022, all items CPI, not seasonally adjusted. https://www.bls.gov/news.release/archives/cpi_07132022.htm
   Office for National Statistics, Consumer price inflation, UK: October 2022: "The Consumer Prices Index (CPI) rose by 11.1% in the 12 months to October 2022, up from 10.1% in September 2022." https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/consumerpriceinflation/october2022

17. "Blocked supply chains pushed the same way at the same time, so the spike wasn't money creation's work alone."
   Shapiro, Federal Reserve Bank of San Francisco, FRBSF Economic Letter 2022-15, "How Much Do Supply and Demand Drive Inflation?", 21 June 2022: "Supply factors explain about half of the run-up in current inflation levels. Demand factors are responsible for about one-third, with the remainder resulting from ambiguous factors." https://www.frbsf.org/research-and-insights/publications/economic-letter/2022/06/how-much-do-supply-and-demand-drive-inflation/
   Bernanke and Blanchard, "What Caused the U.S. Pandemic-Era Inflation?", Brookings, June 2023: "most of the rise in inflation in 2021 and 2022 was driven by developments that directly raised prices rather than wages", including commodity prices and supply chain kinks. https://www.brookings.edu/articles/what-caused-the-u-s-pandemic-era-inflation

18. "It fell back fast once the emergency creation stopped, partly because each year's rise is measured against the year before, and the year before had been unusually high."
   U.S. Bureau of Labor Statistics, Consumer Price Index news release, December 2024, released January 15, 2025: "The all items index rose 2.9 percent for the 12 months ending December, after rising 2.7 percent over the 12 months ending November." https://www.bls.gov/news.release/archives/cpi_01152025.htm
   Office for National Statistics, Consumer price inflation, UK: June 2024: CPI annual rate 2.0% in the year to May 2024 and 2.0% in the year to June 2024. https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/consumerpriceinflation/june2024

19. "Part of it reached you as higher pay, late and unevenly."
   Stansbury and Summers, National Bureau of Economic Research Working Paper 24165, “Productivity and Pay: Is the link broken?”, 2017: “over 1973-2016, one percentage point higher productivity growth has been associated with 0.7 to 1 percentage points higher median and average compensation growth” and “other factors orthogonal to productivity have been acting to suppress typical compensation” https://www.nber.org/papers/w24165
   Pessoa and Van Reenen, Centre for Economic Performance Discussion Paper 1246, “Decoupling of Wage Growth and Productivity Growth? Myth and Reality”, October 2013: UK, 1972 to 2010: “real productivity grew by 114 per cent” and “median real wages by 72 per cent”. https://cep.lse.ac.uk/pubs/download/dp1246.pdf

20. "And in the years of bond-buying it chased assets first."
   Bank of England, Quarterly Bulletin 2012 Q3, “The Distributional Effects of Asset Purchases”: “The Bank's asset purchases have pushed up the price of equities by at least as much as they have pushed up the price of gilts”; purchases “increased the prices of a wide range of assets, not just gilts”. https://www.bankofengland.co.uk/news/2012/july/the-distributional-effects-of-asset-purchases-paper

21. "Houses aren't in that basket, or barely so, and shares aren't in it at all."
   Office for National Statistics, Consumer price inflation methodology, “Scope and coverage of consumer prices indices”: “The CPI coverage excludes owner occupiers' housing costs (OOH) such as mortgage interest payments, house depreciation, buildings insurance, ground rent, and other house purchase costs such as conveyancing and estate agents' fees.” https://www.ons.gov.uk/economy/inflationandpriceindices/methodologies/scopeandcoverageofconsumerpricesindices
   ONS, Consumer Prices Indices Technical Manual, 2019: “the CPIH and CPI do not cover investment spending”; “the cost of the house, an investment, is excluded”; “expenditure for savings and investment purposes, most direct taxes, national insurance contributions, cash gifts, and gambling are excluded”. https://www.ons.gov.uk/economy/inflationandpriceindices/methodologies/consumerpricesindicestechnicalmanual2019

22. "Electronics got cheaper for decades while rent, healthcare, tuition, and insurance kept climbing."
   Bureau of Labor Statistics, Consumer Price Index item series for televisions, computers, software and telephone services, 1997 to 2024: Televisions down 94%, computers down 96%, software down 63% to August 2015; telephone services 100 to 94.4; all items up 95.6% from December 1997. https://data.bls.gov/timeseries/CUUR0000SEEE01?output_view=data
   BLS, Consumer Price Index series CUUR0000SERAC, “Video and audio products in U.S. city average, all urban consumers, not seasonally adjusted”: Base “DECEMBER 2009=100”; December 2024 = 31.633 (index, December 2009=100, not seasonally adjusted). https://data.bls.gov/timeseries/CUUR0000SERAC

23. "Between 2000 and early 2018 the world added roughly 185 trillion dollars of debt to buy about 46 trillion of growth, four borrowed for each one gained."
   World Bank, World Development Indicators, GDP (current US$), World, indicator NY.GDP.MKTP.CD, 2000 to 2020: GDP (current US$), World — 2000: 33,965,806,441,911.9; 2018: 87,310,840,056,717.8. That rise is about $53.3 trillion, larger than the growth the sentence gives, and the page prints no debt figure. https://data.worldbank.org/indicator/NY.GDP.MKTP.CD?locations=1W

24. "The rescues that met the two big crises grew, from hundreds of billions in 2008 to trillions in 2020."
   Board of Governors of the Federal Reserve System, H.4.1 Factors Affecting Reserve Balances, total assets, Wednesday level (series WALCL): $905,253 million on 2008-09-03 rising to $2,239,457 million by 2008-12-31; $4,241,507 million on 2020-03-04 rising to $7,363,351 million by 2020-12-30. The page prints the Federal Reserve's own weekly asset levels, not the size of rescue measures. https://fred.stlouisfed.org/series/WALCL

25. "When a product gets better, the statisticians mark its price down in the index, and that's called hedonic adjustment."
   U.S. Bureau of Labor Statistics, Quality Adjustment in the CPI: "The hedonic quality adjustment method removes any price differential attributed to a change in quality by adding or subtracting the estimated value of that change from the price of the old item." https://www.bls.gov/cpi/quality-adjustment/

26. "And 2% is defined as success, so the measure becomes the goal."
   Federal Reserve, Statement on Longer-Run Goals and Monetary Policy Strategy, adopted effective 24 January 2012, as amended effective 22 August 2025: "inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve's statutory maximum employment and price stability mandates." https://www.federalreserve.gov/monetarypolicy/monetary-policy-strategy-tools-and-communications-statement-on-longer-run-goals-monetary-policy-strategy-2025.htm

27. "When creation went extreme in 2020, consumer inflation arrived twelve to eighteen months later, with blocked supply chains pushing the same way."
   Board of Governors of the Federal Reserve System, Money Stock Measures, H.6 release, December 31, 2020: M2 up 25.1 percent, seasonally adjusted annual rate of change, twelve months from November 2019 to November 2020. The release prints no price figure. https://www.federalreserve.gov/releases/h6/20201231/
   U.S. Bureau of Labor Statistics, Consumer Price Index news release, June 2022 results: "Over the last 12 months, the all items index increased 9.1 percent before seasonal adjustment." — 9.1 percent, twelve months ended June 2022, US all items CPI, not seasonally adjusted. https://www.bls.gov/news.release/archives/cpi_07132022.htm

28. "People still buy phones, laptops, and TVs even when they expect next year's model to be better or cheaper."
   Nielsen, "More than Half the Homes in U.S. Have Three or More TVs", July 2009: "in 2009 the average American home had 2.86 TV sets, which is roughly 18% higher than in 2000 (2.43 sets per home), and 43% higher than in 1990 (2.0 sets)" https://www.nielsen.com/insights/2009/more-than-half-the-homes-in-us-have-three-or-more-tvs/
   U.S. Bureau of Labor Statistics, The Economics Daily, "Long-term price trends for computers, TVs, and related items": "The price index for TVs decreased 94 percent from December 1997 to August 2015." https://www.bls.gov/opub/ted/2015/long-term-price-trends-for-computers-tvs-and-related-items.htm
   U.S. Bureau of Labor Statistics, Consumer Price Index series, computers, peripherals and smart home assistants, US city average: Index (December 2007=100), not seasonally adjusted: December 1997, 1119.0; December 2013, 54.869. The agency's own printed 96 percent fall covers December 1997 to August 2015, a different window. https://data.bls.gov/timeseries/CUUR0000SEEE01?years_option=all_years

29. "People don't stop spending when prices fall, so the 2% isn't needed to keep them spending."
   Bachmann, Berg and Sims, Journal article, 2015, on inflation expectations and readiness to spend on durables: Effect of expected inflation on readiness to spend on durables is "generally small, outside the zero lower bound often statistically insignificant, and inside of it typically significantly negative". https://www.aeaweb.org/articles?id=10.1257%2Fpol.20130292


---

# The Fold
Date: 2026-07-15
Canonical: https://thenaturalstate.org/essays/the-fold/

Smart people keep underestimating technology. Anything that keeps doubling is almost impossible to picture. And technology makes things cheaper to make, but the fall in prices that should follow never reaches your overall cost of living, because governments and central banks create new money and credit to stop prices from falling. So the overall figures carry no trace of the doubling, and the people who read those figures most closely end up the most confident and the most wrong.

The paper fold

Take an ordinary sheet of paper, about a tenth of a millimetre thick. Fold it in half. Fold it again, and keep going. Ask a room of clever people how thick the stack is after 50 folds, and most will guess something you could hold, a few inches, maybe a metre.

The stack reaches most of the way to the sun.

The folds along the way show where the guess goes wrong. After 20 folds the stack is about 100 metres, the height of a tall building. After 30 it's past the edge of space. After 42 it's past the moon. Fold 50 gets you most of the way to the sun, and fold 49 gets you half that. Every fold doubles the whole stack, so the last step covers as much ground as all the steps before it put together, and the first 40 barely register. The folding never speeds up. You just reach the part where each step is enormous.

That's the mistake people make about technology. We judge change by adding. If something moved this far last year, we expect it to move about that far again next year. Doubling doesn't work like that. For a long stretch there's almost nothing to see, because doubling a tiny number still leaves a tiny number. Then it stops being tiny, and every step after that is huge.

Count the doublings in computing as a whole, not the transistors on one chip. Computing has doubled about once every two years on average since the first chips in the late 1950s. That's 33 or 34 doublings. Call it fold 33. Everything you've ever seen a computer do, the internet, the smartphone, the AI you used this year, all of it is fold 33, about 860 kilometres of paper. The next fold on its own adds as much as the whole stack underneath it. Put the count at 30 or at 36 and the argument doesn't change. And the doubling is speeding up, because the tools we build now help build the next ones. In AI, what once took decades to get twice as good now takes a few years, and lately a few months.

Any one technology does level off in the end. Each follows an S-curve, slow at first, then fast, then flat. The shrinking of chips behind Moore's law really is slowing. But a new one often starts before the old one flattens, and what matters is the total. Processing power, AI models, and software together are still doubling. Pointing at one technology that has matured and declaring the doubling over is judging by adding again. Judging by adding is how people missed the internet, and then the smartphone.

Why being smart doesn't save you

Four reasons.

First, knowing the maths isn't enough. You can follow the doubling perfectly well and still find your mind sliding back to straight lines. The arithmetic is right, and it's still hard to believe that 50 folds gets you most of the way to the sun.

Second, experience makes it worse. An expert's instincts were trained on the years when change was slow, and those are the years that no longer apply. Take Blockbuster for example. They ran the biggest video rental business in the world. When Netflix began posting discs out, and then streaming them, Blockbuster answered by putting sweet stands in its shops, because everything it had learned said a big network of stores wins. Home internet speed had been doubling every couple of years, far too slow to carry a film for most of that time, but once it was fast enough those shops turned from an asset into a cost almost overnight. The more success you've had, the more your instincts tell you to do what used to work.

Third, you can't just look it up. The numbers a smart person would check tell you the wrong thing. GDP is how governments judge the economy, CPI tracks what a basket of goods costs, and wage growth tracks pay. All three are built so that a falling number means trouble. Technology makes things cheaper to make, so it pushes all three down.

Fourth, the incentives point the same way. A central banker who stood back the next time a crisis threatened would watch borrowers default in every direction, and would be replaced by someone promising to stop it. An analyst whose model says next year looks like this year plus a few percent has fewer awkward meetings. Every one of those people can be doing their job well. Nobody has to be wrong on purpose for a whole profession to keep reading straight lines.

What the error does to how people read the economy

Now connect the fold to the till.

When technology lets a business make the same thing with less work and less material, and a rival can copy the cheaper way, competition hands the saving to the customer, because the rival who drops the price takes the customer from the one who doesn't. Where nobody can copy it, the saving stays with the business. So where rivals can copy, technology pushes prices down, and when it keeps doubling, the push keeps doubling too.

But nearly all of our money is created when somebody borrows, and a loan is written for a fixed amount. A hundred thousand pounds owed stays a hundred thousand pounds owed, whatever happens to prices. So if prices fall broadly and nothing is done to stop it, businesses take in less, and they can afford less in wages, and pay falls with prices. The repayment doesn't move. It takes a bigger share of every pay packet and every business's takings. And where the loan was written against a house, the house is worth less too, so the bank stands to lose more on that loan. The system can take a slow fall that comes with better tools. In that fall it's the cost of making things that drops, and pay drifts down slowly behind it, so the money to meet a fixed payment is still there. What it can't take is a sudden fall in the prices credit pushed up, houses first, because then the losses spread through the banks. In that fall it's the lending that has stopped, so incomes and the house fall together and at once, and the fixed payment is hit from both sides in the same year. So governments and central banks create new money and credit to push prices back up. The same money that holds incomes and house prices up also cancels the overall fall in shop prices.

If the push downward keeps doubling, what it takes to cancel it keeps growing. That's why every rescue is bigger than the last, hundreds of billions of dollars of government spending and bond-buying in 2008 and trillions in 2020. It's why the world added roughly 185 trillion dollars of new debt between 2000 and early 2018 and got about 46 trillion of growth for it, and why that ratio has got worse since. Smart people keep calling that unsustainable and waiting for it to settle back to normal. It can't settle back, because the fall the new money exists to cancel is still doubling.

Once you see that, six familiar readings of the economy turn out to be the same mistake.

1. Inflation is measured from the wrong baseline

The honest baseline is whatever prices would do if nobody touched them. While technology keeps improving, that's downwards. It takes new money just to hold them steady, and more to push them up. So if technology would have made your cost of living 3% cheaper this year, and the official measure shows prices up 2%, then 5% of what your money could have bought never reaches you. The official record calls that "price stability".

2. The evidence erases itself

New money cancels the fall in prices, so someone checking the data decides technology's effect must be small. The prices that stayed put are the evidence that something pushed them there. Where new money reaches least, the fall is obvious, and it has shown in televisions, in software, and in the phone that swallowed your camera, your sat nav, your torch, and your stereo for almost nothing.

3. Rising asset prices get read as new wealth

When a house doubles in pounds, the house hasn't changed. It has the same rooms and the same roof. Land is scarce and we don't build enough, but a new shortage of land isn't what starts a rise in house prices. They jump when borrowing gets cheaper and stall when it gets dearer, and where building is tightly limited they run further still. What changed is the money the house is priced in, and cheaper borrowing is how more of it gets made. And you have to live somewhere, so selling yours just buys you another one at the same inflated price. The tax on the next move went up with the price, and so did the cost of keeping the place standing.

4. GDP gets read as progress

GDP is how we measure whether the economy is healthy. But it counts paid transactions. So when a television that used to cost £1,000 now costs £300, GDP goes down. Your life gets better but the figures say the economy is worse. And when something is free, like calls over WhatsApp, there's no transaction to count at all. The better technology gets at giving people more for less, the worse the economy looks on the official numbers.

5. Economists end up teaching that 2% inflation is health

Two percent isn't where prices would settle on their own. While technology keeps making things cheaper to make, prices would drift down. Getting them to plus two takes new money that cancels that drift first, and then adds two on top. Central banks publish why they aim there. They want room to cut interest rates in a downturn, they know wages resist falling, and they say the official measure of prices overstates the rise. Those are the reasons they give, and the debts aren't among them. The debts show up in the rescues, not in the everyday 2%. Whatever the reason, if your pay doesn't rise as fast as prices, your real wage has fallen even though the number on the payslip hasn't. And the saver who kept cash lost too. Two percent was chosen, and it ends up taught as a law of economics.

6. The public debate collapses into "inflation or deflation?"

People argue about whether prices will rise or fall next year. It doesn't matter which. The push from technology keeps doubling, and the system still can't take a sudden fall in the prices credit pushed up. That stays true whichever way the figures happen to move.

If the fold is real

If that's right, the money created to stop prices falling has to keep getting bigger, and no change of government or central banker alters that. The bigger the push it has to cancel, the bigger the amount.

And the surprises will keep coming, because the doubling doesn't stop. Each new thing technology can do arrives sooner than expected. So does each new rescue, the money governments and central banks create whenever a crisis threatens the debt. Both feel sudden even to the people who watched the last one.

The pound can't show you the size of the fall, because the pound is what's hiding it. Every price you've ever checked was written in a unit somebody could make more of, so you never saw how far prices would have fallen. To see past that you need to measure prices in something nobody can make more of, and until bitcoin that thing didn't exist. Bitcoin is still being taken up as money, and as more people hold it, a bitcoin buys more. So prices in bitcoin keep falling for that reason alone, whatever happens to the cost of making things. Which leaves the fall hidden for now, and the push behind it keeps growing, because the doubling doesn't stop.

## Sources

What this essay rests on, as checked on 2026-09-20.

1. "After 42 it's past the moon."
   Scientific American, How many paper folds would get you to the moon?: "to get a piece of paper 384,000 km thick, you'd have to fold it in half 42 times." The 384,000 km is the average Earth-Moon distance, with paper about 0.1 mm thick. https://www.scientificamerican.com/article/how-many-paper-folds-would-get-you-to-the-moon/

2. "Computing has doubled about once every two years on average since the first chips in the late 1950s."
   Gordon Moore, “Progress in Digital Integrated Electronics”, 1975: “The new slope might approximate a doubling every two years, rather than every year, by the end of the decade.” https://www.eng.auburn.edu/~agrawvd/COURSE/E7770_Spr07/READ/Gordon_Moore_1975_Speech.pdf
   Texas Instruments, Company blog, “From idea to invention: the origin story of the tiny chip that changed the world”: “Two decades later on Sept. 12, 1958, Jack unveiled the first working integrated circuit in a TI lab.” https://www.ti.com/about-ti/newsroom/company-blog/from-idea-to-invention-the-origin-story-of-the-tiny-chip-that-changed-the-world.html

3. "In AI, what once took decades to get twice as good now takes a few years, and lately a few months."
   OpenAI, “AI and compute”, 2018: On AI training compute, 2012–2018: “roughly doubling every 3.4 months. By comparison, Moore's Law doubled every two years over the same period.” The two years is the fixed older baseline the page contrasts with AI compute, not an intermediate stage of a few years. https://openai.com/index/ai-and-compute/
   METR, “Measuring AI Ability to Complete Long Tasks”, 19 March 2025: “this metric has been consistently exponentially increasing over the past 6 years, with a doubling time of around 7 months”; “This shows an even faster doubling time, of under 3 months.” The metric is the length of software tasks AI can complete, not a technology generally getting twice as good. https://metr.org/blog/2025-03-19-measuring-ai-ability-to-complete-long-tasks/

4. "Processing power, AI models, and software together are still doubling."
   Epoch AI, “Training compute of frontier AI models grows by 4-5x per year”, 28 May 2024: “the compute used to train recent models grew 4-5x yearly from 2010 to May 2024”; notable models about 4.1x/year; frontier models 5.3x/year, 90% CI 4.9x to 5.7x. The page states growth only as an annual multiplier and prints no doubling interval. https://epoch.ai/blog/training-compute-of-frontier-ai-models-grows-by-4-5x-per-year
   METR, “Measuring AI Ability to Complete Long Tasks”, March 2025: “the length of tasks (measured by how long they take human professionals) that generalist frontier model agents can complete autonomously with 50% reliability has been doubling approximately every 7 months for the last 6 years”; the 2024–2025 fit is faster, “under 3 months”. https://metr.org/blog/2025-03-19-measuring-ai-ability-to-complete-long-tasks/
   Hernandez and Brown, “Measuring the Algorithmic Efficiency of Neural Networks”, OpenAI, 8 May 2020: “the number of floating-point operations required to train a classifier to AlexNet-level performance on ImageNet has decreased by a factor of 44x between 2012 and 2019. This corresponds to algorithmic efficiency doubling every 16 months over a period of 7 years.” https://arxiv.org/abs/2005.04305

5. "Home internet speed had been doubling every couple of years, far too slow to carry a film for most of that time, but once it was fast enough those shops turned from an asset into a cost almost overnight."
   Jakob Nielsen, Nielsen Norman Group, “Nielsen's Law of Internet Bandwidth”, 4 April 1998, last reviewed 23 January 2023: “A high-end user's connection speed grows by 50% per year”; data table from 1984 (300 bps modem) to 2023 (1,120 Mbps). The page gives 50% growth a year, not a doubling period, and 50% a year compounds to a doubling in about 21 months, faster than every couple of years. https://www.nngroup.com/articles/law-of-bandwidth/

6. "But nearly all of our money is created when somebody borrows, and a loan is written for a fixed amount."
   Bank of England, Quarterly Bulletin 2014 Q1, “Money creation in the modern economy”, published 14 March 2014: "the majority of money in the modern economy is created by commercial banks making loans" https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy
   Deutsche Bundesbank, Monthly Report, April 2017, “The role of banks, non-banks and the central bank in the money creation process”: Banks create deposits when they extend credit, and repayment of the credit eliminates those deposits. https://www.bundesbank.de/en/publications/search/the-role-of-banks-non-banks-and-the-centralbank-in-the-money-creation-process-654284

7. "So governments and central banks create new money and credit to push prices back up."
   Bank of England, Quarterly Bulletin 2014 Q1, “Money creation in the modern economy”, published 14 March 2014: "The central bank can also affect the amount of money directly through purchasing assets or 'quantitative easing'." https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy
   Bank of Japan, Policy decision, “New Procedures for Money Market Operations and Monetary Easing”, 19 March 2001: "the balance outstanding at the Bank's current accounts be increased to around 5 trillion yen", with bond buying raised "from the current 400 billion yen per month", in place until the consumer price index "registers stably a zero percent or an increase year on year" https://www.boj.or.jp/en/mopo/mpmdeci/mpr_2001/k010319a.htm

8. "That's why every rescue is bigger than the last, hundreds of billions of dollars of government spending and bond-buying in 2008 and trillions in 2020."
   United States Congress, Emergency Economic Stabilization Act of 2008 (Public Law 110-343): "An Act To provide authority for the Federal Government to purchase and insure certain types of troubled assets"; authority to buy up to $700 billion of troubled assets, enacted 3 October 2008. https://www.congress.gov/110/plaws/publ343/PLAW-110publ343.htm
   Congressional Budget Office, H.R. 748, CARES Act, Public Law 116-136: "The CARES Act appropriates roughly $2.2 trillion of spending, tax breaks, loans, and other resources over the next decade." The act was enacted in March 2020. https://www.cbo.gov/publication/56334
   Board of Governors of the Federal Reserve System, Assets: Total Assets (Less Eliminations from Consolidation): Wednesday Level, series WALCL, weekly, millions of U.S. dollars: 905,253 (2008-09-03) rising to 2,254,983 (2008-12-17), millions of U.S. dollars; 4,241,507 (2020-03-04) rising to 7,168,936 (2020-06-10), millions of U.S. dollars. https://fred.stlouisfed.org/series/WALCL

9. "It's why the world added roughly 185 trillion dollars of new debt between 2000 and early 2018 and got about 46 trillion of growth for it, and why that ratio has got worse since."
   World Bank, World Development Indicators, GDP (current US$), World (series NY.GDP.MKTP.CD): GDP (current US$), World: 2000, 33,965,806,441,911.9; 2018, 87,310,840,056,717.8. That is growth of about $53.3 trillion from 2000 to 2018, not about 46 trillion. https://data.worldbank.org/indicator/NY.GDP.MKTP.CD?locations=1W
   International Monetary Fund, Debt Dynamics, IMF Annual Report 2022: "Overall borrowing jumped by 28 percentage points to 256 percent of GDP in 2020." The page gives a 2020 share of output, not a dollar total for debt added between 2000 and 2018. https://www.imf.org/external/pubs/ft/ar/2022/in-focus/debt-dynamics/

10. "The official record calls that "price stability"."
   European Central Bank, ECB's Governing Council approves its new monetary policy strategy, press release, 8 July 2021: "The Governing Council considers that price stability is best maintained by aiming for a 2% inflation target over the medium term." https://www.ecb.europa.eu/press/pr/date/2021/html/ecb.pr210708~dc78cc4b0d.en.html
   Federal Open Market Committee, 2020 Statement on Longer-Run Goals and Monetary Policy Strategy, as amended effective 27 August 2020: "the Committee seeks to achieve inflation that averages 2 percent over time"; the federal funds rate "consistent with maximum employment and price stability over the longer run". https://www.federalreserve.gov/monetarypolicy/monetary-policy-strategy-tools-and-communications-statement-on-longer-run-goals-monetary-policy-strategy-2019-2020.htm

11. "Where new money reaches least, the fall is obvious, and it has shown in televisions, in software, and in the phone that swallowed your camera, your sat nav, your torch, and your stereo for almost nothing."
   United States Bureau of Labor Statistics, Consumer Price Index item indices for televisions, computers, software and telephone services, 1997 to 2024: Item indices to August 2015: televisions down 94 percent, computers down 96 percent, software down 63 percent; all items up 95.6 percent from December 1997. https://data.bls.gov/timeseries/CUUR0000SEEE01?output_view=data

12. "They jump when borrowing gets cheaper and stall when it gets dearer, and where building is tightly limited they run further still."
   Miles and Monro, Bank of England, Staff Working Paper No. 837, “UK house prices and three decades of decline in the risk-free real interest rate”, 20 December 2019: “the rise in house prices relative to incomes between 1985 and 2018 can be more than accounted for by the substantial decline in the real risk-free interest rate observed over the period” https://www.bankofengland.co.uk/working-paper/2019/uk-house-prices-and-three-decades-of-decline-in-the-risk-free-real-interest-rate
   Hilber and Vermeulen, “The extraordinarily rigid planning system is the main reason homes in England are unaffordable”: “In our estimates, house prices would have risen by about 100 percent less in real terms between 1974 and 2008 if, hypothetically, all regulatory constraints were removed.” https://blogs.lse.ac.uk/politicsandpolicy/three-reasons-homes-in-england-are-unaffordable/

13. "The tax on the next move went up with the price, and so did the cost of keeping the place standing."
   HM Revenue and Customs, Stamp Duty Land Tax: Residential property rates, GOV.UK guidance: “You usually pay Stamp Duty Land Tax (SDLT) on increasing portions of the property price when you buy residential property”; bands as printed: zero up to £125,000, 2%, 5%, 10%, 12% above £1.5 million https://www.gov.uk/stamp-duty-land-tax/residential-property-rates

14. "Central banks publish why they aim there."
   Federal Reserve, FOMC statement of longer-run goals and policy strategy, 25 January 2012: “The Committee judges that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve's statutory mandate.” https://www.federalreserve.gov/newsevents/pressreleases/monetary20120125c.htm
   Swiss National Bank, The SNB's monetary policy strategy: “The SNB equates price stability with a rise in the Swiss consumer price index (CPI) of less than 2% per annum.” “Deflation, i.e. a sustained decrease in the price level, also breaches the objective of price stability.” https://www.snb.ch/en/the-snb/mandates-goals/monetary-policy/strategy


---

# GDP Is Blind
Date: 2026-07-15
Canonical: https://thenaturalstate.org/essays/gdp-is-blind/

My phone replaced hundreds of pounds of cameras, maps, and stereos, and everything it removed came off GDP. The dashboard is blind to abundance, it was built for a different world, and policy steers by it anyway.

When I bought that phone I spent a few hundred pounds once, and in return I stopped spending, year after year, on film, developing, maps, CDs, and long-distance calls. I got more capability than I'd ever had, and the national accounts recorded the event as the economy shrinking. The measurement didn't malfunction. It did exactly what it was designed to do, and that's the problem.

What GDP can't see

GDP [gross domestic product, a tally of the money spent on final goods and services in a country over a year] counts what people pay for, plus a named list of unpaid items that the statisticians price by rule. It still doesn't count value, because every one of those rules is built from money someone paid or from what something cost, never from what the thing is worth to the person who gets it. What is paid for and what it's worth used to travel together, and technology has been pulling them apart.

GDP can't see value that stops being paid for. When photography meant film, developing, and postage, every step was a purchase, so all of it showed up in GDP. Now a photo costs nothing at the point of use, so the whole chain of film, developing, and postage has fallen out of the accounts, while you take more photos than you could ever have afforded on film. Your benefit went up and the spending went down, and only the spending is counted. Economists call the gap consumer surplus [the value you get above what you pay], and GDP's entry for it is zero. Where the capability is folded into a service you still subscribe to, part of it can enter the accounts when the statisticians mark that service down as better value for its price. Where it arrives from someone you pay nothing, nothing enters.

GDP can't see time. When a free video call replaces a flight and a hotel, GDP falls by the price of the flight and the hotel, and it records nothing for the two days you got back. In an economy where more and more output is information, freed time is the actual wealth being created, and the headline accounts [the accounts GDP comes from] have no entry for it. Hours worked are counted, because the productivity figure is output divided by hours. Unpaid hours are counted too, in side accounts, at what it would cost to hire someone to do them. So an hour you no longer have to spend makes those side accounts smaller, not larger.

GDP can't tell spending apart from creating value. A factory that installs robots and makes the same shoes with half the inputs is genuine productivity, and it can show up as GDP falling, because the shoes now cost less. A company that borrows to build a showroom nobody visits adds to GDP, because money changed hands. So the money total is flattered by borrowing and insulted by efficiency. The figure that counts how much was made is flattered by borrowing just the same, because the showroom counts as output whether anyone visits it or not. That figure takes a price fall differently. A pure price fall leaves it where it was, and a price fall that sells more shoes raises it. Where efficiency removes the priced step altogether, both figures lose the entry. That's backwards for judging whether life is getting better.

The statisticians do try. They use hedonic adjustment [statistical change to prices to reflect quality improvements], and inside the official measure of prices it can only adjust the price of things that still have prices. It has no entry for the capabilities that stopped carrying a price of their own. The method itself reaches further wherever something that's sold carries the same features. That's how the UK house price index is built. It works out what buyers paid for each feature by comparing the prices of houses that have it with the prices of houses that don't. No market prices the features of a free service, so the people who try to measure those reach for something else. They ask people what they would need to be paid to give the service up, or they value the service from the equipment people already own.

Why it was built that way

There are two answers, and it matters to keep them separate.

The first is practical, and here I'm reaching into general history, so hold it loosely. The accounts were designed in the 1930s and 1940s to answer depression and wartime questions, how much steel, how many tanks, how much output could be mobilised. In a physical economy, what people traded was scarce, so almost all of it carried a price. Counting spending was then a rough stand-in for the value moving through the market. It wasn't a stand-in for all value, because work done at home was free of charge then too, and it has never been in the headline accounts. The tool matched the world it was built to measure. Its main architect even warned it wasn't a measure of welfare. The world then changed and the tool didn't.

The second answer is a large part of why the tool was never replaced. Our money is loaned into existence. Banks create most new pounds when they make loans, so the economy carries a debt load that must be repaid in fixed pound amounts. A system built on debts fixed in pounds can take a slow fall that comes with better tools. In that fall it's the cost of making things that drops, and pay drifts down slowly behind it, so the money to meet a fixed payment is still there. What it can't take is a sudden fall in the prices credit pushed up, houses first, because then the losses spread through the banks. In that fall it's the lending that has stopped, so incomes and the house fall together and at once, and the fixed payment is hit from both sides in the same year. Houses come first because people buy them with borrowed money. The debt takes a bigger bite of every income, yours, your employer's, the government's. And where the loan was written against a house, the house is worth less too, so the bank stands to lose more on that loan. A dashboard that measures spending, plus a standing target of making that number grow, is exactly the instrument panel that system requires.

Nothing has displaced GDP at the centre of policy, and a large part of why is that it measures the thing a debt-based system needs to keep rising, the total spent on goods and services. The total doesn't rise every year, though. It fell in 2009 and again in 2020, and each fall was met with rescue rather than collapse. Whether it measured wellbeing well was beside the point. And once a number becomes the target, it gets managed to hit the target, so it ends up telling you more about the policy than about your life.

What happens when policy steers by it

Technology succeeds, so the cost of making things falls and people need to spend less to live the same life. The dashboard doesn't say why spending fell. A fall because things got cheaper and a fall because people had less to spend look the same on it, and the standing response to a shortfall is to make borrowing cheaper. Where the cause is plain and the fall is judged temporary, that response can be held off for a time. Where the response isn't held off, policy treats the fall as genuine failure. The central bank cuts interest rates, and the government and the banking system create more money and credit to push spending back up.

So every time a sudden fall in the prices credit pushed up threatens, the system is rescued with new money, and the rescues keep getting bigger. In between the rescues, policy targets rising prices of about 2% a year, forever. Central banks publish why they aim there. They want room to cut interest rates in a downturn, they know wages resist falling, and they say the official measure of prices overstates the rise. Those are the reasons they give, and the debts aren't among them. The debts show up in the rescues, not in the everyday 2%. The starting line for that 2% isn't zero, because technology keeps pushing prices down. So when a central bank targets 2% inflation, it doesn't need two points of push. It first has to cancel whatever better tools would have taken off prices that year, then add two on top. How big that fall would be is about how fast output per hour of work grows, which is what the productivity figures measure. On the published figures that's a point or two a year. No statistic records that fall, because it never happened.

Technology keeps compounding, and the tools are improving faster than they did, so what policy has to cancel keeps getting bigger. What the record shows growing is the stock of debt and the rescue that each downturn gets, not the yearly pace of new money, which hasn't been getting faster. Central bank holdings jump in a crisis and come only part of the way back. Rescues went from hundreds of billions of dollars in 2008 to trillions in 2020.

Instead of recreating the spending that fell, the money that was created to push it back up flows into whatever can soak it up, mostly houses and shares. So asset prices inflate while wages lag, and the person who owns little watches the cost of living rise faster than their pay. Rising prices and falling real wages are the same event seen from two sides. The gain from the better tools is real. Part of it reached you as higher pay, late and unevenly. The rest went to whoever got the new money first, through house and share prices.

Meanwhile the debt keeps growing faster than the growth it buys. Between 2000 and early 2018 the world added roughly 185 trillion dollars of debt to buy about 46 trillion of measured growth. Each new pound of borrowing produces less real output than the last, which means more and more of the "growth" on the dashboard is just the debt itself being spent.

Then the loop feeds itself. The new money pushes firms' costs up, so they automate faster to protect margins, which deepens the very price falls the policy is fighting, which calls for more new money. Investment goes to the wrong places, because borrowing made cheap by policy makes projects that destroy value look profitable on paper. Firms that should fail are kept alive by cheap credit. The companies closest to the new money compound their advantage, so the biggest companies end up holding more of the economy. Renters fall further behind owners, people feel cheated without being able to say why, and politics turns into a fight where one side's gain is the other's loss. And on a finite planet, a system that needs total spending to keep rising keeps us buying things that efficiency would otherwise have made unnecessary.

The worst of it is that we lose the ability to see abundance at all. Your phone made you richer, and the accounts counted that as the economy shrinking. The dashboard kept reading growth anyway, because the money households moved to other things, together with borrowed spending, more than covered the gap. So your gain is buried inside a total that has gone on rising in all but a handful of years, and every one of those was a slump or the end of a war. That's why the "productivity slowdown" looks so mysterious, and why the inflation versus deflation debate goes in circles. Both sides are measuring with a unit that's being stretched, and every calculation built on a false measure inherits the error.

Four reasons to trust the number anyway

"GDP is still the best single indicator we have."

Best available isn't harmless when the errors all point one way. GDP systematically undercounts abundance and overcounts spending paid for with borrowed money, so steering by it tilts policy toward forcing spending up. A compass that's always off to the same side is worse than no compass, because you trust it.

"People still pay. The phone itself wasn't free."

The device is one purchase where there used to be several, each with its own replacement cycle. The accounts lost the film and the developing year after year, and the camera, the maps, the CDs, and the player each time one would have been replaced. Hardware cycles exist, but the cost per use of what the phone does has collapsed toward zero, and per-use cost is what your life runs on.

"If GDP fell, we'd be in a depression."

In this system, yes, if the fall came suddenly. That's the trap, not a defence of the measure. In a system this loaded with debt, a sudden broad fall really would be a disaster. But that's an indictment of the debt design, not of cheaper goods. Falling prices from better tools raise living standards. Falling prices from a credit collapse destroy them. As a rule, the current system responds to both the same way, because the dashboard it steers by can't tell them apart.

"Measured productivity growth is weak, so this tech-deflation story must be overdone."

Part of that measured weakness is the gap between value and spending. Output that becomes free drops out of the numbers. The slowdown is partly genuine, because cheap credit keeps low-productivity firms alive, and partly the ruler failing.

What to measure instead

The way out of the fog starts with measurement. Judge the economy by purchasing power [what your money actually buys] and by time, not by the flow of spending. The flight and the hotel are the price, and the two days are the wealth. Ask how many hours of work a home costs now versus a generation ago, and the picture looks very different. The official measure of prices can tell you roughly how much the pound stretched against the goods it prices. What it can't show you is how far those goods would have fallen under a unit nobody can expand, because it does all its sums in the same stretched pound. So to read that fall you eventually need a unit nobody can stretch, because you can't measure a plank with a ruler that changes length. That's the role I'd argue bitcoin plays in this story, but nothing I've said here needed it. What the phone does got cheaper. The dashboard counted that as a loss. Policy fought your raise. That much you can verify from your own pocket.

## Sources

What this essay rests on, as checked on 2026-10-15.

1. "GDP [gross domestic product, a tally of the money spent on final goods and services in a country over a year] counts what people pay for, plus a named list of unpaid items that the statisticians price by rule."
   Office for National Statistics, Changes to National Accounts, article on imputed rental: Imputed rental is "the amount that non-renters pay themselves for the housing services that they produce" and "Imputed rental represents around 10% of GDP as measured by expenditure." The page is an ONS methodology article, not the Blue Book. https://www.ons.gov.uk/economy/nationalaccounts/uksectoraccounts/articles/changestonationalaccounts/imputedrental
   Eurostat (Statistical Office of the European Union), European System of Accounts 2010, Chapter 3, “Transactions in products and non-produced assets”, paragraph 3.49: "The total output of a non-market producer (a local KAU) is valued at the total costs of production." The page gives this cost rule for non-market output, not the own-account rule. https://ec.europa.eu/eurostat/esa2010/chapter/view/3/

2. "What is paid for and what it's worth used to travel together, and technology has been pulling them apart."
   Hulten and Nakamura, “Expanded GDP for Welfare Measurement in the 21st Century”, National Bureau of Economic Research working paper: "the resulting benefits largely bypass GDP and accrue directly to consumers", introducing "a wedge between the growth in real GDP and the growth in consumer well-being". The paper prints no country and no year. https://www.nber.org/papers/w26578
   Brynjolfsson, Collis, Diewert, Eggers and Fox, “GDP-B: Accounting for the Value of New and Free Goods in the Digital Economy”, National Bureau of Economic Research working paper 25695, March 2019: "The welfare contributions of the digital economy, characterized by the proliferation of new and free goods, are not well-measured in our current national accounts." The paper's estimate names only the US and gives no start year. https://www.nber.org/papers/w25695

3. "Where the capability is folded into a service you still subscribe to, part of it can enter the accounts when the statisticians mark that service down as better value for its price."
   US Bureau of Labor Statistics, Quality Adjustment in the CPI: "The hedonic quality adjustment method removes any price differential attributed to a change in quality by adding or subtracting the estimated value of that change from the price of the old item." The page applies this on separate item rows for wireless phone service, land-line telephone services, and cable and satellite television service. https://www.bls.gov/cpi/quality-adjustment/home.htm

4. "Hours worked are counted, because the productivity figure is output divided by hours."
   Bureau of Labor Statistics, Productivity Data Overview: "Measures of labor productivity compare the growth in output to the growth in hours worked", with quarterly and annual measures from 1947 forward for the business and nonfarm business sectors. https://www.bls.gov/productivity/overview.htm
   Office for National Statistics, Labour productivity time series: "Quarterly output per hour, output per job and output per worker for the whole UK economy and a range of industries". The page covers the UK only and also lists output per job and output per worker. https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/labourproductivity/datasets/labourproductivity

5. "Unpaid hours are counted too, in side accounts, at what it would cost to hire someone to do them."
   Bridgman and co-authors, Bureau of Economic Analysis, Accounting for Household Production in the National Accounts, 1965–2010, Survey of Current Business, May 2012: "The value of nonmarket services is the product of the wage rate of general-purpose domestic workers and the number of hours worked." https://apps.bea.gov/scb/2019/06-june/0619-household-production.htm
   Abraham and Mackie, editors, US National Academies, Beyond the Market: Designing Nonmarket Accounts for the United States, National Academies Press, 2005: "A replacement cost measure... should be adopted for valuing time inputs devoted to nonmarket production in cases in which someone else could have been hired to perform the work in question." https://www.nationalacademies.org/read/11181/chapter/2

6. "They use hedonic adjustment [statistical change to prices to reflect quality improvements], and inside the official measure of prices it can only adjust the price of things that still have prices."
   Bureau of Labor Statistics, Quality Adjustment in the CPI: "The hedonic quality adjustment method removes any price differential attributed to a change in quality". The page is the CPI quality-adjustment page, not the Handbook of Methods chapter, and marks hedonic adjustment only for priced items. https://www.bls.gov/cpi/quality-adjustment/

7. "That's how the UK house price index is built."
   Office for National Statistics, UK House Price Index: Quality and methodology: "The index uses hedonic regression to perform the mix adjustment." https://www.gov.uk/government/publications/about-the-uk-house-price-index/quality-and-methodology

8. "They ask people what they would need to be paid to give the service up, or they value the service from the equipment people already own."
   Byrne and Corrado, Federal Reserve Board, Accounting for Innovations in Consumer Digital Services: IT still matters, Finance and Economics Discussion Series working paper: "We capture what Brynjolfsson and Saunders (2009) call "free goods" as the capital services generated by connected consumers' stocks of IT digital goods". The paper's own measure is one quality-adjusted price for access services already included in GDP. https://www.federalreserve.gov/econres/feds/accounting-for-innovations-in-consumer-digital-services-it-still-matters.htm

9. "The accounts were designed in the 1930s and 1940s to answer depression and wartime questions, how much steel, how many tanks, how much output could be mobilised."
   Bureau of Economic Analysis, GDP and the National Accounts: One of the Great Inventions of the 20th Century: "Its development began in the mid-1930s when our elected leaders were trying to figure out how to guide the nation out of the depths of the Great Depression"; first annual GNP estimates, 1942, to "facilitate planning for World War II". https://www.bea.gov/news/blog/2012-04-09/gdp-and-national-accounts-one-great-inventions-20th-century

10. "Banks create most new pounds when they make loans, so the economy carries a debt load that must be repaid in fixed pound amounts."
   Bank of England, Quarterly Bulletin 2014 Q1, “Money creation in the modern economy”, published 14 March 2014: "the majority of money in the modern economy is created by commercial banks making loans." https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy

11. "It fell in 2009 and again in 2020, and each fall was met with rescue rather than collapse."
   Office for National Statistics, Gross Domestic Product at market prices: Current price: Seasonally adjusted £m (series YBHA, dataset UKEA): GDP at current market prices, seasonally adjusted: 2008 £1,597,786m; 2009 £1,556,801m; 2019 £2,263,433m; 2020 £2,131,729m — falls in 2009 and in 2020. https://www.ons.gov.uk/economy/grossdomesticproductgdp/timeseries/ybha/ukea
   Bank of England, Bank Rate reduced by 0.5 Percentage Points to 0.5% and £75 bn Asset Purchase Programme announced, 5 March 2009: "reduce the official Bank Rate... by 0.5 percentage points to 0.5%, and to undertake a programme of asset purchases of £75 billion," dated 5 March 2009. https://www.bankofengland.co.uk/news/2009/march/mpc-march-2009
   Federal Reserve, FOMC statement, 23 March 2020: "The Federal Reserve will continue to purchase Treasury securities and agency mortgage-backed securities in the amounts needed to support smooth market functioning and effective transmission of monetary policy to broader financial conditions." https://www.federalreserve.gov/newsevents/pressreleases/monetary20200323a.htm

12. "In between the rescues, policy targets rising prices of about 2% a year, forever."
   Federal Reserve, FOMC statement of longer-run goals and monetary policy strategy, 25 January 2012: "The Committee judges that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve's statutory mandate." https://www.federalreserve.gov/newsevents/pressreleases/monetary20120125c.htm
   European Central Bank, Press release, 8 July 2021, "ECB's Governing Council approves its new monetary policy strategy": "The Governing Council considers that price stability is best maintained by aiming for a 2% inflation target over the medium term. This target is symmetric, meaning negative and positive deviations of inflation from the target are equally undesirable." https://www.ecb.europa.eu/press/pr/date/2021/html/ecb.pr210708~dc78cc4b0d.en.html
   Bank of England, Inflation and the 2% target: "The Government sets us a 2% inflation target"; "If we miss the inflation target by more than 1 percentage point either side of the target, we must tell the Government why." https://www.bankofengland.co.uk/monetary-policy/inflation

13. "They want room to cut interest rates in a downturn, they know wages resist falling, and they say the official measure of prices overstates the rise."
   European Central Bank, An overview of the ECB's monetary policy strategy, 2021 strategy review: "Three additional factors … call for a sufficient inflation buffer": an "adequate safety margin to guard against the risk of deflation", "downward nominal wage rigidities", the effective lower bound, and "measurement bias in the HICP". https://www.ecb.europa.eu/mopo/strategy/strategy-review/ecb.strategyreview_monpol_strategy_overview.en.html
   Federal Reserve, Statement on Longer-Run Goals and Monetary Policy Strategy, as amended effective 27 August 2020: "the federal funds rate is likely to be constrained by its effective lower bound more frequently than in the past"; "as amended effective August 27, 2020". https://www.federalreserve.gov/monetarypolicy/monetary-policy-strategy-tools-and-communications-statement-on-longer-run-goals-monetary-policy-strategy-2019-2020.htm

14. "On the published figures that's a point or two a year."
   U.S. Bureau of Labor Statistics, Monthly Labor Review, April 2021, "The U.S. productivity slowdown: an economy-wide and industry-level analysis": Nonfarm business labor productivity, average annual growth: 3.3 percent for 1998 through 2005; 1.3 percent since 2005 through 2018; 0.8 percent for 2010 to 2018; long-term average 2.1 percent, 1947 to 2018. https://www.bls.gov/opub/mlr/2021/article/the-us-productivity-slowdown-the-economy-wide-and-industry-level-analysis.htm
   Office for National Statistics, UK Whole Economy: Output per hour worked, seasonally adjusted, index 2023 = 100 (series LZVB), release of 18 August 2026: Index, 2023 = 100: 2008 92.6; 2019 96.7; 2023 100.0, about 0.6% a year from 2008 to 2023. The page prints levels, not a rate, and 0.6% a year is below the point or two stated. https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/labourproductivity/timeseries/lzvb/prdy

15. "What the record shows growing is the stock of debt and the rescue that each downturn gets, not the yearly pace of new money, which hasn't been getting faster."
   International Monetary Fund, IMF Annual Report 2022, "Debt Dynamics", drawing on the Global Debt Database: "According to the IMF's Global Debt Database … overall borrowing jumped by 28 percentage points to 256 percent of GDP in 2020. Government borrowing accounted for about half of this increase, with the remainder from nonfinancial corporations and households." https://www.imf.org/external/pubs/ft/ar/2022/in-focus/debt-dynamics/
   Board of Governors of the Federal Reserve System, via FRED, FRED series WALCL, total assets of the Federal Reserve, Wednesday level, weekly: Millions of U.S. dollars, Wednesday levels: 2007-12-26 890,662; 2008-12-24 2,232,311; 2014-12-24 4,509,462; 2019-08-28 3,759,946; 2020-02-26 4,158,637; 2022-04-13 8,965,487. https://fred.stlouisfed.org/series/WALCL
   Board of Governors of the Federal Reserve System, via FRED, FRED series M2SL, M2 money stock, percent change from a year earlier, annual average: Percent change from a year earlier: 1976 12.76920; 1985 8.90354; 1990 5.50632; 2000 6.06182; 2010 2.51780. Difference: these are single sampled years, not decade averages, and 1960 (3.7) and 1970 (3.9) sit below 1990, 2000 and 2015 (5.8). https://fred.stlouisfed.org/series/M2SL

16. "Central bank holdings jump in a crisis and come only part of the way back."
   Board of Governors of the Federal Reserve System, via FRED, FRED series WALCL, total assets of the Federal Reserve, Wednesday level, weekly: Millions of U.S. dollars, Wednesday levels: 2007-12-26 890,662; 2008-12-24 2,232,311; 2014-12-24 4,509,462; 2019-08-28 3,759,946; 2020-02-26 4,158,637; 2022-04-13 8,965,487; December 2025 6,581,231. https://fred.stlouisfed.org/series/WALCL

17. "So asset prices inflate while wages lag, and the person who owns little watches the cost of living rise faster than their pay."
   Bank of England, Explainer, “What is quantitative easing?”: “When we buy bonds, their price tends to increase”; “QE increases the price of financial assets other than bonds, such as equities.” https://www.bankofengland.co.uk/monetary-policy/quantitative-easing
   U.S. Bureau of Labor Statistics, Series CES0500000013, real average hourly earnings of all employees, total private: “Average hourly earnings of all employees, 1982-1984 dollars, total private, seasonally adjusted”: 12-month percent change negative in every month from April 2021 (-3.4 percent) through April 2023 (-0.4 percent). https://data.bls.gov/timeseries/CES0500000013?output_view=pct_12mths
   Office for National Statistics, Average weekly earnings in Great Britain: December 2022: Real regular pay fell 3.0% in April to June 2022, “the fastest decline since comparable records began in 2001”, and fell 2.7% in the year to December 2022. https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/employmentandemployeetypes/bulletins/averageweeklyearningsingreatbritain/december2022

18. "Part of it reached you as higher pay, late and unevenly."
   Stansbury and Summers, National Bureau of Economic Research Working Paper 24165, 2017, “Productivity and Pay: Is the link broken?”: “over 1973-2016, one percentage point higher productivity growth has been associated with 0.7 to 1 percentage points higher median and average compensation growth”, with other factors “acting to suppress typical compensation”. https://www.nber.org/papers/w24165
   Pessoa and Van Reenen, Centre for Economic Performance Discussion Paper 1246, October 2013, “Decoupling of Wage Growth and Productivity Growth? Myth and Reality”: UK, 1972–2010: “real productivity grew by 114 per cent” and “median real wages by 72 per cent”; “In the UK net decoupling is basically zero: both wages and productivity rose by the same amount since 1972.” https://cep.lse.ac.uk/pubs/download/dp1246.pdf

19. "Between 2000 and early 2018 the world added roughly 185 trillion dollars of debt to buy about 46 trillion of measured growth."
   World Bank, World Development Indicators, GDP (current US$), world, series NY.GDP.MKTP.CD: GDP (current US$), World: 2000 — $33.97 trillion; 2018 — $87.31 trillion, a rise of about $53.3 trillion. That is a bigger rise than the measured growth given here, and the series prints nothing on debt. https://data.worldbank.org/indicator/NY.GDP.MKTP.CD?locations=1W

20. "So your gain is buried inside a total that has gone on rising in all but a handful of years, and every one of those was a slump or the end of a war."
   U.S. Bureau of Economic Analysis, National Income and Product Accounts Table 1.1.5: Gross Domestic Product, annual current dollars (series GDPA): "Gross Domestic Product (GDPA), Billions of Dollars, Not Seasonally Adjusted": 1929: 104.556; 1945: 228.007; 1946: 227.535; 1948: 274.468; 1949: 272.475; 2010: 15,048.971; 2016: 18,804.913. https://fred.stlouisfed.org/series/GDPA

21. "GDP systematically undercounts abundance and overcounts spending paid for with borrowed money, so steering by it tilts policy toward forcing spending up."
   Aghion, Bergeaud, Boppart, Klenow and Li, Missing Growth from Creative Destruction, American Economic Review, Vol. 109, No. 8, August 2019: "For exiting products, statistical agencies often impute inflation from surviving products. This understates growth"; "missing growth (i) equaled about one-half a percentage point per year", from "US Census data on non-farm businesses from 1983 to 2013". https://www.aeaweb.org/doi/10.1257/aer.20171745
   Brynjolfsson, Collis, Diewert, Eggers and Fox, GDP-B: Accounting for the Value of New and Free Goods in the Digital Economy, NBER working paper 25695, March 2019: "The welfare contributions of the digital economy, characterized by the proliferation of new and free goods, are not well-measured in our current national accounts." The paper names only the United States and gives no start year. https://www.nber.org/papers/w25695
   Hulten and Nakamura, Expanded GDP for Welfare Measurement in the 21st Century, NBER working paper: "the 'free' nature of the information provided means that the resulting benefits largely bypass GDP and accrue directly to consumers", leaving "a wedge between the growth in real GDP and the growth in consumer well-being". The paper prints no country and no year. https://www.nber.org/papers/w26578

22. "Falling prices from better tools raise living standards."
   Bordo, Landon-Lane and Redish, Good versus Bad Deflation: Lessons from the Gold Standard Era, NBER working paper 10329, 2004: "deflation experience of the United States, the United Kingdom, and Germany in the late nineteenth century during a period characterized by low deflation, rapid productivity growth, positive output growth", finding "deflation in the nineteenth century was primarily good". The finding covers only those three countries in that period. https://www.nber.org/papers/w10329

23. "Falling prices from a credit collapse destroy them."
   Irving Fisher, The Debt-Deflation Theory of Great Depressions, Econometrica, volume 1, issue 4, October 1933, pages 337-357: "Debt liquidation leads to distress selling and to Contraction of the money supply, as bank loans are paid off, and to a slowing down of velocity of circulation." https://www.econometricsociety.org/publications/econometrica/1933/10/01/debt-deflation-theory-great-depressions


---

# Paid Not to Look
Date: 2026-07-15
Canonical: https://thenaturalstate.org/essays/paid-not-to-look/

Technology keeps getting better at making things, and competition pushes prices down toward what it costs to make one more. Under a money nobody can add to, falling prices are what technology delivers. So where did the fall go? If better tools would have made your weekly basket 5% cheaper and the price stayed flat instead, someone absorbed that 5%, and it mostly wasn't you. Why don't economists say any of this? No conspiracy is needed. Incentives alone are enough to produce this, whatever anyone intends. Coordinated pressure does exist in parts of the system, in lobbying and in setting the rules, but the result doesn't depend on it. There are more sets of incentives than four, and four will do to show it, the homeowner's, the politician's, the pension system's, and the profession's own. Each is sincere on its own, and sincere people add up to a blind system.

Nobody in the chain needs to lie for the truth to stay unsaid. A conspiracy needs coordination, secrecy, and a plan. This needs none of those. Each person acts sensibly on what they can see from where they stand, and the system is arranged so that the positions holding it up all give the same answer. Nobody is concealing anything. What's missing is the instrument, because everyone is measuring with a ruler the system itself manages, and from inside those positions every measurement made in good faith comes back reassuring. Every number those four positions act on, for prices, wealth, and debt, is quoted in the unit the system manages, and the "real" versions, adjusted for inflation, divide by an index built inside the same system. The profession is also judged on a count of people in work, which is outside the unit. What none of them is judged by is a measure of what money buys that doesn't run through the unit, in hours of work per thing bought or in plain quantities of things.

The four lock together, and then something holds them in place without anyone coordinating it. I'll use pounds and UK scenes. Some of the figures come in dollars and I've left them that way rather than convert them, but the mechanism is the same everywhere.

The homeowner

A couple in Leeds bought their house for £180,000. Today it would sell for £320,000. They feel wealthier, and everything in their world confirms the feeling, from the estate agent's letter to the neighbours to the property shows. But the house is the same house, the same bricks and the same boiler. What changed is mostly the pound it's measured in.

Why is their wealth in a house at all? Because money that buys less year after year can't be saved in. An ordinary family has to put its savings into some thing, and the house is the one savings vehicle they can buy with borrowed money. That leaves them holding a bet. The mortgage is fixed in pounds. The house price rises as money and credit expand. So the family gains exactly when the pound weakens, because the debt stays still while the price rises past it. They never chose to bet on the pound losing value. The system made the house the savings account that worked best, and the bet came bundled with the address.

The bet has a losing side too. A sudden broad fall in prices, deep enough to pull wages down with it, turns the mortgage payment into a bigger share of a smaller income. A fall in house prices can leave the family owing more on the mortgage than the house is worth. Either is the catastrophe for them. A fall in goods prices with jobs and payments steady is not, and the UK had one in 2015 without distress. Rising prices still read as safety, because the quoted price of the house rises while the amount owed stays still.

That same couple hunts for bargains all week. They love that flights got cheap and that the telly got better and cheaper every year. They demand falling prices in everything they buy, and rising prices in the one big thing they own, and they never have to hold the two thoughts together, because each choice is made on its own, and sincerely. Nobody votes as an expert on money. They vote as someone whose deposit, security, and retirement are all inside the same four walls.

The politician

A politician has two ways to fund a promise. The first is taxes, which people see itemised and fight line by line. The second is new money and credit. The government borrows, the central bank buys that debt with newly created money, the spending lands now, and the cost arrives later as prices drifting up across everyone, with no return address on the envelope. At ordinary rates, people see prices rise, but they don't read the rise as a charge on them or trace it to the decision that funded the promise. When the rate jumps, many do name government and central bank policy, and they say so in surveys. The lever is quiet at 2% and loud at 10%.

The two levers aren't the same size. In 2020 alone, America's stock of money grew by about 3.7 trillion dollars. In 2019, taxing every single dollar of corporate profit in the country would have raised about 2.4 trillion. The new money of one year was about one and a half times what even that sweep could have raised in the open. No politician built that difference. They inherited it. Over decades the second lever stays in use whoever wins, because a promise of falling prices loses to a promise of more money, and government after government funds part of its promises without a visible tax. What doesn't hold is that a bigger deficit at election time wins the election. In old democracies it costs votes.

The voter side seals it. Offer people a pay rise from £50,000 to £52,000 in a world where prices rise faster than their pay, or a cut to £48,000 in a world where their costs fall by more than that. The second deal makes them better off. The first wins the election, because people feel the number on the payslip and can't see the basket they didn't get. So the truthful platform sounds insane and loses to the comfortable one. A politician doesn't need to understand how money works. They only need to notice what wins.

Timing does the rest. The relief is a gain, it comes now, and it's certain. The cheque arrives, the scheme launches, the photo gets taken. The cost is a loss, it's uncertain, and it comes later. Prices drift up, slowly, for everyone, with nothing to say which promise they paid for. Elections run on a shorter clock than consequences. And the loop feeds itself. Rents rise, so voters demand help with rent, so a programme appears, funded by the same lever, which pushes prices further. The state grows as a side effect of its own funding method, with everyone involved trying to help.

The pension system

A pension is either a promise of so many pounds a year, decades ahead, or a pot of savings with no promise attached. Either way, the money behind it is held in government bonds [loans to the government], company shares, and property. The pension system owns a great slice of the debt. It's on the creditor side of the whole pyramid of debt. Alice the nurse doesn't think of herself as a bondholder, but her retirement is a stack of paper promises whose prices depend on more money arriving.

If interest rates went to where a free market would set them, those bonds, shares, and buildings would fall hard, possibly by more than half. That isn't the same as Alice's pension failing. A scheme that has made her a promise doesn't need those prices held up to stay funded. It works out what the promise is worth today using the interest rate on the government bonds it holds, so when that rate rises, the value put on the promise falls further than the value of the assets, and the scheme is better funded. What holds is narrower. If her pension is a pot with no promise attached, she carries the fall in asset prices directly. If it's a promise from a scheme with a weak employer behind it and its money in shares and property, that scheme does need the values held up. And the part of her promise that's fixed in pounds loses to rising prices.

Asset prices need the total of money and credit to keep expanding, whether from the state's borrowing or from private lending, and they need support to arrive when a market they depend on seizes up. They don't need the central bank itself to keep buying. The people running Alice's pension don't want anyone robbed. They want Alice to retire. But wherever her money is held in a pot, or in a scheme with a weak employer behind it and its money in shares and property, doing right by her is now wired to the expansion continuing, exactly like the homeowner's safety.

When markets seize up and the central bank steps in with support, the headline says "protecting pensions", and the headline is true. The rescue does save Alice's pension in that moment. The cost, which is that Alice's wages and cash savings buy less year after year, is spread thin across millions of people and never presented as the bill for the rescue. A rescue with a name and a vote needs people to argue for it. The other kind of rescue, the money created to buy government bonds, gets argued over wherever a court or a committee can summon it, as the Bank of England's purchases were before a House of Lords committee in 2021. What it never gets is a vote on whether to do it. That holds because the gain is near and sure while the cost is far and spread thin.

The trap tightens from there. Because in most years the "safest" assets are held to pay less than prices rise, a pot that holds them buys less, year after year. So her pot has to hold riskier assets just to stop her savings shrinking. That leaves it needing the risky assets supported too. Every step Alice's pot takes deepens its dependence on asset prices being held up.

The profession

The lazy answer says economists are stupid or bought, and I don't believe either. Something more interesting is going on, in four layers.

Their instruments are built out of the unit being questioned, in two senses. The series that matter are quoted in the unit that policy manages, and "real" means "adjusted by an index the system itself defines". And GDP counts what people pay for, plus a short list of unpaid things it prices by rule. The free goods technology keeps making are not on that list, so when technology makes something abundant and free, the value vanishes from the data. The camera on your phone shows up in the statistics as the collapse of the photography industry, not as the greatest abundance of photography in human history. The profession's instruments undercount this deflation, because they record money changing hands and abundance stops money changing hands. Where a paid activity is replaced by a free one, the measured total moves down while what people get moves up, so the undercount reads as a fall in output.

History taught them the wrong deflation. The profession's fear was formed in the 1930s, when prices fell while banks failed and men queued for work. But that was prices falling because loans imploded, a credit collapse. Prices falling because we got better at making things is a different event with a different cause. The modern datasets contain almost no examples of that second fall across a whole economy, because the system rarely lets the experiment run. So "deflation" calls up breadlines, and the fear is sincere. Even the words we have help the fear along. We have everyday words for prices rising and no comfortable word for the good kind of falling.

The measurement became the goal. The 2% inflation target is a number somebody chose, and nothing in nature suggested it. Central banks publish why they aim there. They want room to cut interest rates in a downturn, they know wages resist falling, and they say the official measure of prices overstates the rise. Those are the reasons they give, and the debts aren't among them. The debts show up in the rescues, not in the everyday 2%. Those debts are fixed in pounds, and what they can't take is a sudden fall in the prices credit pushed up, houses first. So every time a sudden fall in the prices credit pushed up threatens, the system is rescued with new money, and the rescues keep getting bigger.

Once that 2% target exists, hitting the target is what "success" means, and research, forecasting, and careers organise around it. A young economist's path runs through central banks, treasuries, and departments that take the target as their starting point. You don't need censorship for that to shape belief. All it takes is the ordinary human need to belong to the group that trained you, and selection does the rest. The person who would raise rates hard enough to clear the bad debt doesn't keep the seat, because that choice now means mass unemployment, and the job would go to someone who wouldn't. Nobody instructs anyone. The chair itself selects.

The last layer is taught in the open, split across two courses. Microeconomics teaches that competition pushes prices down toward the cost of making one more unit. Every economics degree teaches it, and it describes a falling-price world. Policy aims at prices rising about 2% a year. Both can be true at once, because one is about one thing's price against another's and the other is about the unit they're quoted in. What joins them is a step. If the cost of making things keeps falling across the board, the general level of prices keeps rising only because the stock of money and credit has grown. A cut in supply can lift the level for a time without that, but it can't hold the level up, because with the stock fixed a rise in one price forces falls elsewhere. That step is the part that goes unexamined. Most people who learn both are never shown it, though I have no count of how often it is shown. Ask "why do we need inflation?" like a child, and the published answers come first, the ones central banks give for the 2% aim. Ask a few more times and you reach the debt, which can't take a sudden fall in the prices credit pushed up and is rescued every time one threatens. That's a description of the debt, not a law of nature.

In fairness to economists, the profession has already discovered every piece of this, and named each one. The Cantillon effect [the people nearest new money benefit first, before prices adjust for everyone else]. Moral hazard. Sticky wages. Regulatory capture. Goodhart's law, that a measure gamed to hit a target stops describing reality. Every part is published and respectable on its own. The mechanisms that join money to prices are published too, how bank lending moves spending and prices, how falling prices make debts heavier, and how a government's borrowing and spending move the price level, in the leading journals before 2003 and in the handbooks the profession trains on. What's missing is the assembly, in the framework the profession works with day to day. The models it trains on take the unit as given, and no central bank's published strategy treats the unit as the common cause of what the four positions above read off it, or sets its target against what technology would have done to prices. The figures the profession works from for prices, wealth, and debt are measured in the managed unit, and much of its career path runs through the institutions that manage it.

How sincere people add up to a blind system

Money is the ruler everyone plans with. Bend the unit, and you don't have to convince anyone of anything, because everyone reads the bent ruler and responds correctly from where they stand. The homeowner's house "went up". The politician's programme "was affordable". The pension system's assets "performed". The profession's model "fit the data". Every one of those statements is true, measured in the unit the system manages. Stacked, they leave nobody in those four positions able to see what prices would have been without the expansion of money and credit.

And the four are held in place without anyone coordinating it. Wherever there's a seat, selection does the holding. The action that counts is forcing a broad fall in the prices that credit pushed up, and the banker who would do it doesn't keep the seat. Raising rates to pull back a burst of inflation isn't that action, and the people who did it lately kept their seats. A rise in rates the system can't bear gets reversed or watered down instead. The politician who promises falling prices loses. The banker who purges bad debt is sacked. The fund that refuses risk falls behind the fund that doesn't. The economist who rejects the framework doesn't get the seat. The homeowner needs no selecting, because the bet came with the house. Nobody sends a memo and nobody calls a meeting. Which is exactly why it looks like a conspiracy from the outside and feels like common sense from the inside. It's also why no leak can kill it. A conspiracy dies when someone talks. Here there's nothing to leak. Everyone already knows their own piece, and every piece is defensible on its own terms.

Three answers I owe

"Economists worry about inflation constantly." That's true. But the terms of the debate are 2% versus 4%, above target versus below. Measured against what technology is doing to the cost of making things, even "stable prices" hides a transfer, because if better tools would have made the basket 5% cheaper and prices stayed flat, someone absorbed that 5% fall. No statistic records that fall, because it never happened. The profession argues about the size of the gap between prices and zero. It almost never argues about the gap between prices and where technology would have put them. The fight is over the size of the skim, hardly ever its existence.

"Their fear of deflation is legitimate." It is. In a system this loaded with debt, a sudden broad fall really would be a disaster. The debts are fixed in pounds and don't shrink when prices do. The economists are right about the system they're inside. The blindness is one level up. It treats the danger as a property of falling prices, when it's a property of the debt design. Cheap goods don't hurt anyone. Debt built on the promise that the prices credit pushed up never fall is what hurts, and it hurts the moment they fall all at once.

"This argument can't lose. Any economist who disagrees gets called captured." That's fair. The claim isn't that disagreement proves capture. The claim is checkable. Change the instrument and see whether the picture changes. A house that went from 1.4 million dollars to 2.1 million over a few years fell from roughly 300 bitcoin to roughly 40 over the same stretch. The whole of that fall is bitcoin strengthening as more people move their stored work into it. Measured the other way, the same house gained 700,000 dollars while nothing about it changed. Same house, same world, two rulers telling opposite stories, and one is managed by the institution whose success is defined by what that ruler shows.

The test is one anyone can repeat. Price the same basket of goods in the managed unit and in a unit nobody can expand, and read the direction across whole cycles rather than between two dates. If a basket of staples costs more bitcoin at the next halving [the scheduled cut in new coins] than it did at the 2024 one, or fewer pounds over the same stretch, the claim fails. The price record has to be read beside the record of how many people have taken the unit up, because price alone can't separate the pound weakening from the outside unit rising for other reasons. The thesis has one hinge that can fail, and only one, whether Bitcoin stays decentralised and secure. Its swings, which have years left to run, are the reason you read it across cycles.

The limit on my side is that a whole economy run for decades on money nobody can expand barely exists in the historical record, so the strong claim rests partly on mechanism rather than on a clean natural experiment. I hold the strong claim with some humility. The weak claim I hold without much doubt at all. Every incentive above is real, they all point the same way, and not one of them requires a villain.

The fix is an instrument, not an argument. You can't argue a blind system into seeing, because everyone inside it is already reasoning correctly from what their ruler shows. The official measure of prices can tell you roughly how much the pound stretched against the goods it prices. What it can't show you is how far those goods would have fallen under a unit nobody can expand, because it does all its sums in the same stretched pound. So you give people a ruler that can't be stretched and let them measure for themselves. That's what a fixed money is for. Everything else follows from whether anyone can bend it.

## Sources

What this essay rests on, as checked on 2026-10-16.

1. "A fall in goods prices with jobs and payments steady is not, and the UK had one in 2015 without distress."
   Office for National Statistics, Consumer price inflation, UK: April 2015, released 19 May 2015: "The Consumer Prices Index (CPI) fell by 0.1% in the year to April 2015, compared to no change (0.0%) in the year to March 2015"; "the first time the CPI has fallen over the year since official records began in 1996". https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/consumerpriceinflation/2015-05-19

2. "The government borrows, the central bank buys that debt with newly created money, the spending lands now, and the cost arrives later as prices drifting up across everyone, with no return address on the envelope."
   Bank of England, Asset Purchase Facility Quarterly Report, 2021 Q1: "The MPC also voted to continue with the Bank of England's existing programme of UK government bond purchases, financed by the issuance of central bank reserves, maintaining the target for the total stock of these government bond purchases at £875 billion". https://www.bankofengland.co.uk/asset-purchase-facility/2021/2021-q1

3. "In 2019, taxing every single dollar of corporate profit in the country would have raised about 2.4 trillion."
   United States Bureau of Economic Analysis, National income and product accounts series A053RC1A027NBEA, "Corporate profits: Profits before taxes, NIPAs", annual figure for 2019: "Corporate profits: Profits before taxes, NIPAs", 2019: 2,375.483 billions of dollars, not seasonally adjusted. The printed figure is about 2.38 trillion dollars, a little below the 2.4 trillion stated. https://fred.stlouisfed.org/series/A053RC1A027NBEA

4. "What doesn't hold is that a bigger deficit at election time wins the election."
   Brender and Drazen, "How Do Budget Deficits and Economic Growth Affect Reelection Prospects? Evidence from a Large Cross-Section of Countries", NBER Working Paper No. 11862: "We find no evidence that deficits help reelection in any group of countries -- developed and less developed, new and old democracies, countries with different government or electoral systems"; sample of "74 countries over the period 1960-2003". https://www.nber.org/papers/w11862

5. "Either way, the money behind it is held in government bonds [loans to the government], company shares, and property."
   Pension Protection Fund, Purple Book 2024: "Schemes continued to invest a large proportion (70 per cent) of their assets in bonds"; equities 15.5 per cent of scheme assets in March 2024, down from 18.8 per cent in March 2023. The source gives no separate figure for government bonds within the 70 per cent. https://www.ppf.co.uk/news/Purple-Book-2024

6. "It works out what the promise is worth today using the interest rate on the government bonds it holds, so when that rate rises, the value put on the promise falls further than the value of the assets, and the scheme is better funded."
   The Pensions Regulator, Annual funding statement analysis 2026: "Liability values are adjusted for movements in both conventional and index-linked gilt markets to take account of market changes when deriving discount rates." https://www.thepensionsregulator.gov.uk/en/document-library/statements/annual-funding-statement-analysis-2026

7. "And GDP counts what people pay for, plus a short list of unpaid things it prices by rule."
   Office for National Statistics, United Kingdom National Accounts, The Blue Book: 2024, "An introduction to the UK national accounts": "In practice, a 'production boundary' is defined, inside which are all the economic activities taken to contribute to economic performance", with unpaid household services such as "cleaning, the preparation of meals" outside it. https://www.ons.gov.uk/economy/grossdomesticproductgdp/compendium/unitedkingdomnationalaccountsthebluebook/2024/anintroductiontotheuknationalaccounts

8. "The free goods technology keeps making are not on that list, so when technology makes something abundant and free, the value vanishes from the data."
   Brynjolfsson, Collis and Eggers, "Using massive online choice experiments to measure changes in well-being", Proceedings of the National Academy of Sciences, 2019: "Our overall analyses reveal that digital goods have created large gains in well-being that are not reflected in conventional measures of GDP and productivity." https://dspace.mit.edu/handle/1721.1/124411

9. "The profession's instruments undercount this deflation, because they record money changing hands and abundance stops money changing hands."
   Nordhaus, "Do Real Output and Real Wage Measures Capture Reality? The History of Lighting Suggests Not", 1996: "traditional price indexes overstate price growth, and therefore understate output growth, by a factor between 900 and 1,600 since the beginning of the nineteenth century". https://elischolar.library.yale.edu/cowles-discussion-paper-series/1321/
   Aghion, Bergeaud, Boppart, Klenow and Li, "Missing Growth from Creative Destruction", American Economic Review, August 2019: "For exiting products, statistical agencies often impute inflation from surviving products. This understates growth if creatively-destroyed products improve more than surviving ones." Missing growth "equaled about one-half a percentage point per year", 1983 to 2013. https://www.aeaweb.org/doi/10.1257/aer.20171745

10. "The 2% inflation target is a number somebody chose, and nothing in nature suggested it."
   Federal Reserve, Statement on Longer-Run Goals and Monetary Policy Strategy, 25 January 2012: "The Committee judges that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve's statutory mandate." https://www.federalreserve.gov/newsevents/pressreleases/monetary20120125c.htm
   European Central Bank, Press release, "ECB's Governing Council approves its new monetary policy strategy", 8 July 2021: "The Governing Council considers that price stability is best maintained by aiming for a 2% inflation target over the medium term. This target is symmetric, meaning negative and positive deviations of inflation from the target are equally undesirable." https://www.ecb.europa.eu/press/pr/date/2021/html/ecb.pr210708~dc78cc4b0d.en.html
   HM Treasury, Remit for the Monetary Policy Committee and the new inflation target, 10 December 2003: "the Bank of England's inflation target was redefined from 2.5 percent measured by RPIX inflation to 2 percent measured by annual CPI inflation", announced June 2003 and implemented on 10th December 2003. https://www.bankofengland.co.uk/letter/2003/chancellor-letter-101203

11. "Central banks publish why they aim there."
   Federal Reserve Board, FAQ, "Why does the Federal Reserve aim for inflation of 2 percent over the longer run?", updated 22 August 2025: "inflation of 2 percent over the longer run ... is most consistent with the Federal Reserve's mandate for maximum employment and price stability." As updated 22 August 2025 the page's reason is that low, stable inflation aids saving, borrowing and investment decisions; it mentions neither deflation nor debt. https://www.federalreserve.gov/faqs/economy_14400.htm

12. "They want room to cut interest rates in a downturn, they know wages resist falling, and they say the official measure of prices overstates the rise."
   European Central Bank, Strategy review, "An overview of the ECB's monetary policy strategy", 2021: "Three additional factors ... call for a sufficient inflation buffer", given as "interest rate cuts", "measurement bias" and "downward nominal wage rigidities", with the target providing "an adequate safety margin to guard against the risk of deflation". https://www.ecb.europa.eu/mopo/strategy/strategy-review/ecb.strategyreview_monpol_strategy_overview.en.html
   Bank of Canada, "Renewal of the Inflation-Control Target: Background Information", November 2011: "measurement bias in the CPI and downward nominal wage rigidities", alongside "the risks associated with the ZLB", are named as costs of "an inflation target lower than 2 per cent". The Bank views neither of the two as a significant impediment to a lower target. https://www.bankofcanada.ca/wp-content/uploads/2011/11/background_nov11.pdf

13. "Policy aims at prices rising about 2% a year."
   Federal Reserve, Statement on Longer-Run Goals and Monetary Policy Strategy, adopted effective January 24, 2012; as amended effective August 22, 2025: "inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures". This is one central bank's goal, which the Committee calls most consistent over the longer run with its mandate. https://www.federalreserve.gov/monetarypolicy/monetary-policy-strategy-tools-and-communications-statement-on-longer-run-goals-monetary-policy-strategy-2025.htm
   European Central Bank, Press release, "ECB's Governing Council approves its new monetary policy strategy", 8 July 2021: "The Governing Council considers that price stability is best maintained by aiming for a 2% inflation target over the medium term. This target is symmetric"; dated 8 July 2021. https://www.ecb.europa.eu/press/pr/date/2021/html/ecb.pr210708~dc78cc4b0d.en.html
   Schmitt-Grohé and Uribe, "The Optimal Rate of Inflation", chapter in the Handbook of Monetary Economics, 2010: "Observed inflation targets around the industrial world are concentrated at two percent per year." The page is the working-paper version of the Handbook chapter. https://www.nber.org/papers/w16054

14. "The mechanisms that join money to prices are published too, how bank lending moves spending and prices, how falling prices make debts heavier, and how a government's borrowing and spending move the price level, in the leading journals before 2003 and in the handbooks the profession trains on."
   Nobuhiro Kiyotaki and John Moore, "Credit Cycles", Journal of Political Economy, April 1997: Page titled "Credit Cycles", with the citation "Journal of Political Economy', vol.105(2), April 1997, pp.211-248." https://sticerd.lse.ac.uk/_NEW/PUBLICATIONS/abstract/?index=1528
   Eric Leeper, "Equilibria under 'Active' and 'Passive' Monetary and Fiscal Policies", Journal of Monetary Economics, 1991: "Leeper E. Equilibria Under "Active" and "Passive" Monetary and Fiscal Policies. Journal of monetary Economics. 1991;27(1):129–147." https://uva.theopenscholar.com/eric-leeper/publications/equilibria-under-%E2%80%98active%E2%80%99and-%E2%80%98passive%E2%80%99monetary-and-fiscal-policies
   Christopher Sims, "A Simple Model for Study of the Determination of the Price Level and the Interaction of Monetary and Fiscal Policy", Economic Theory, 1994: "a monetary policy that fixes the money stock may...be consistent with indeterminacy of the price level"; Economic Theory, Volume 4, Issue 3, Pages 381-399, 1994. https://collaborate.princeton.edu/en/publications/a-simple-model-for-study-of-the-determination-of-the-price-level-/

15. "But the terms of the debate are 2% versus 4%, above target versus below."
   Federal Reserve, 2025 Statement on Longer-Run Goals and Monetary Policy Strategy, as amended effective 22 August 2025: "inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve's statutory maximum employment and price stability mandates" https://www.federalreserve.gov/monetarypolicy/monetary-policy-strategy-tools-and-communications-statement-on-longer-run-goals-monetary-policy-strategy-2025.htm
   European Central Bank, An overview of the ECB's monetary policy strategy, 2021 strategy review: "at this juncture the Governing Council considers that price stability is best maintained by aiming for a two per cent inflation target over the medium term." https://www.ecb.europa.eu/mopo/strategy/strategy-review/ecb.strategyreview_monpol_strategy_overview.en.html
   Bank of England, Inflation and the 2% target: "The Government sets us a 2% inflation target"; "If we miss the inflation target by more than 1 percentage point either side of the target, we must tell the Government why." https://www.bankofengland.co.uk/monetary-policy/inflation

16. "If a basket of staples costs more bitcoin at the next halving [the scheduled cut in new coins] than it did at the 2024 one, or fewer pounds over the same stretch, the claim fails."
   Blockchain.com block explorer, Bitcoin Block 840,000, mined 20 April 2024: "This block marks the 4th bitcoin halving where the mining reward dropped from 6.25 to 3.125 bitcoin per block." "Mining Reward: 3.125 BTC", block height 840,000, timestamp 4/20/2024 as printed on the page. https://www.blockchain.com/explorer/blocks/btc/840000


---

# The Natural State: The Thesis
Date: 2026-07-02
Canonical: https://thenaturalstate.org/essays/thesis/

Cheaper to make, more expensive to buy

Twenty five years ago, sharing 50 photos with your friends meant buying a film, paying to get it developed, and paying the postage. Call it £25. Today you take 500 photos on your phone and share them with the world for nothing. The same has happened to maps, music, calculators, calls abroad, a torch, and a stereo. They're all on the one device, and most of them cost nothing.

But your weekly shop, your rent, and your energy bill tell the opposite story. Coffee is a good example. Growing it and shipping it both cost far less to do than they did decades ago, and yet you pay more for a cup today. A house takes two incomes and a longer mortgage than it used to, where one income once did it. Something doesn't add up. We're clearly getting better at making almost everything, and yet life feels more expensive year after year.

Why?

Because two forces are colliding. One pushes prices down. The other is our money system, and it's built to push them up.

The first force: technology pushes prices down

In any open market, a business only wins customers by offering more for less. Wherever someone charges a fat margin, a competitor copies the idea and undercuts them. Keep that up for years and the price of almost anything should fall toward what one more of it costs to make, once the set-up is done. For software that cost is close to nothing, which is why the calculator app that once cost a pound is now free.

This force is getting stronger. Software took over work that needed a person thinking, and that work got far cheaper. Robots are now doing the same in warehouses, on farms, and in factories. And AI writes the software, so the tool that does the work on everything else is now improving itself. Each improvement compounds on the last, because better tools build better tools. So under a money nobody can add to, the natural direction of prices is down, and the push behind that fall keeps getting stronger, because the tools are improving faster than they did. You won't see that in the official productivity figures yet.

Prices falling because we get better at making things is what progress looks like. That's deflation. But the same word gets used for something else, an economy seizing up, with people too poor or too frightened to buy. Prices falling for that reason really is a disaster, and it's where the word got its reputation. Prices falling because things got cheaper to make ended up with the same bad name, without ever earning it. It's the natural state of a free market. Left alone, it means your money buys more year after year, and your saved hours of work grow in value while you sleep. That's what technology has been trying to deliver to you your entire life.

The second force: money that's built on debt

Nearly all money today is created through lending. When a bank issues you a mortgage, it doesn't hand over other people's savings. It writes a new deposit into your account, new money, matched by your new debt. Repeat that across every bank, add what governments borrow, and the money in the system is roughly a mirror of the debt in the system. If the loans were all repaid, most of the money would vanish with them.

So nearly all of the money was borrowed into existence, and that gives the system a weak spot. The system can take a slow fall that comes with better tools. What it can't take is a sudden fall in the prices credit pushed up, houses first, because then the losses spread through the banks. Houses come first because they're bought with borrowed money, so house prices are where that lending shows up first. Your mortgage is fixed in pounds. If prices across the economy fall and nothing is done to stop it, wages eventually follow them down, but the mortgage payment doesn't shrink, so the debt takes a bigger and bigger bite of your income. And where the loan was written against a house, the house is worth less too, so the bank stands to lose more on that loan. Multiply that across every indebted household, company, and government, and a sudden broad fall sets off a cascade of defaults. Borrowers fail, so banks fail, so the lenders to the banks fail. In 2008 we saw a preview. For a few days that autumn, even fully guaranteed shipments sat on docks, because banks had stopped trusting each other's paper.

In ordinary years, central banks aim for prices to rise by about 2% a year, and call that success. Two percent isn't where prices would settle on their own. While technology keeps making things cheaper to make, prices would drift down, so getting them to plus two takes new money that cancels that drift first, and then adds two on top. That new money is loaned into existence, like nearly all the rest. Central banks publish why they aim there. They want room to cut interest rates in a downturn, they know wages resist falling, and they say the official measure of prices overstates the rise. The debts aren't among those reasons. The debts show up in the rescues, the new money created whenever a sudden fall threatens, not in the everyday 2%.

The collision

So technology pushes prices down, and the push keeps growing. The money system aims to keep prices rising, and it can't take a sudden fall in the prices it pushed up. Something has to cover the gap between those two forces, and new money and credit are what cover it.

And because technology compounds, what it takes to cancel the fall keeps growing. It's one reason why each rescue is bigger than the last. The 2008 rescue was measured in hundreds of billions of dollars of government spending and bond-buying. The 2020 one was measured in trillions.

Nearly everything that comes next flows from those two forces colliding. Other things explain the details, like why one price rises while another falls, or why houses cost more where building is limited. But the money system sets the level for all of it.

What this does to your money

The most direct effect is the one you never see, the price fall that never arrives. Technology made the things you buy cheaper to make. Under a money nobody can add to, that saving would reach you as lower prices. Instead, new money and credit push prices back up, so the price tag holds or rises. You worked just as hard, making things got cheaper, but the saving never came to you as a lower average price.

It's an invisible pay cut. If prices rise 5% but your pay only rises 2%, you're working more hours for less life. So inflation and a wage that buys less are the same thing. When Malawi cut the value of its currency by around 44% in a day, the supermarkets closed so they could put new prices on everything. Everybody took a pay cut. Richer countries do the same thing, just slowly.

And your savings lose value too. If the safest savings account in the country pays 2% while your costs rise 6%, the system is promising you a guaranteed loss on the money you already earned.

The official inflation number makes the theft look small, because it starts counting from zero. Imagine technology would have made life 3% cheaper this year on its own, but instead prices rose 2%. Counted from zero, that's a 2% rise, and 2% is what the official number reports. Counted from the 3% fall you were owed, it's about 5%. Picture a moving walkway sliding backwards. If you have to keep walking forward just to stand still, the effort is real even though you get nowhere.

Who gets the new money

New money arrives in some places before others. It comes in through the banks, through government spending, and through cheap loans. The people closest to where it comes in get it first, and they spend it before prices have caught up. This has a name, the Cantillon effect. Asset owners, the people who already own houses, shares, and land, are first in line. Wage earners are last.

Whether you're first or last in that line decides how the rest of this lands on you.

Houses stop being homes and become savings accounts

When money leaks value, people put their savings into whatever holds its value instead, and of those, a house is the one an ordinary family can borrow to buy. So a house does two jobs now. It's a place to live, and it's a savings account. You pay for both in one price. The extra you pay for that second job has a name, a monetary premium. A landlord with three mortgaged properties gets richer in his sleep while a paramedic saving for a deposit falls further behind year after year, and neither of them changed how hard they work.

Everyone is forced to become an investor

If your cash loses value every year, you're forced to become an investor just to stand still, whether or not you have the time, skill, or stomach for it. The money system makes a safe place for your savings hard to find. But in a free market with a money nobody can make more of, an ordinary saver could simply hold it and get richer as prices fall.

Money goes to the wrong places

When borrowing is kept cheap, a project only has to earn more than the interest on its loan to look worth doing. Hold that interest near zero and almost anything clears the bar, including projects that use up more in wages, materials, and energy than what they make is worth. Firms that should fail don't. They take out new loans to pay off the old ones and carry on. That ties up the staff, the customers, and the premises a new firm needs to get started. Cheap credit also favours whoever is biggest and closest to it, so the firms already on top buy their rivals instead of making something better. Competition stops being about serving customers and becomes about getting the cheap money. A market fixes its own mistakes by letting bad businesses fail, and that's the part that stops working.

Automation happens faster than it would have

Year after year, new money pushes up rent and energy, and pushes staff to ask for more, because their own bills have risen. Every year the law raises the minimum wage on top of that. And every year the machines get cheaper. Take a café. It can't just charge more, because the one across the road would undercut it. So it puts in self-order screens, years sooner than it would have. The screens were always coming. The pay rise sold as helping the staff brought the day forward.

What this does to people and politics

Give those effects a decade or three and they start reshaping society.

Resentment becomes the political weather

Asset owners pull ahead of wage earners because of where each stands in the line for new money, and neither of them worked any differently. It doesn't feel like a place in a line, it feels personal. Renters watch landlords get richer for doing nothing and decide the game is rigged. It is rigged, just not by the neighbour they can see. So politics turns into a fight about who to blame, the rich, the immigrants, the boomers, the bankers, whoever your side points at. The one thing never on your ballot paper is the money system that decides where everyone stands in that line.

The help works, then makes things worse

All of those effects squeeze voters, and squeezed voters demand help. The help arrives as rent controls, subsidies, minimum wage rises, and eventually direct cash payments. The subsidies and the cash payments are paid for, in the end, with newly created money. That new money pushes costs up again, so the squeeze tightens, and voters demand the next programme. The loop feeds itself, and with every turn more of who gets what is decided by politics instead of prices.

Trust decays

Money loses value year after year, so everyone holding it is losing, and passing that loss on to someone else pays better than taking it yourself. Firms shrink the chocolate bar instead of raising the price, so the number on the shelf holds while the bar in your hand gets smaller. Service gets worse because pay buys less and morale follows it down. Lobbying beats building, because changing a rule pays better than making a better product. People sense that cheating pays, and what counts as normal drifts toward what pays.

Time horizons collapse

Money is stored time. You trade hours of your life for it, to spend later. When the store leaks, waiting costs you, so people grab what they can now, borrow now, and spend now. A society's patience runs on its money. People save less, gamble more, and plan less far ahead, in everything from business plans to saving for a deposit.

Control creeps in

The whole money system runs on belief. Money is created as debt, and a debt is only worth something while people believe it will be repaid. So a system that has to keep that belief alive ends up managing what gets said and, eventually, what gets spent. Money outranks law in practice. When the money system itself is threatened, laws bend to protect it, and so does the way they're read. Speech rules tighten and payments get watched. Step after step is justified by an emergency, and the emergencies keep coming, because no policy can change the arithmetic. A democracy where you can vote on everything except the money is voting on less than it thinks.

Where the road ends

The same collision that squeezes one household squeezes whole countries, and then sets them against each other.

Between countries, a race to the bottom

Governments caught in the same trap reach for the same lever, which is to make their own currency cheaper. A cheaper currency makes a country's goods cheaper for foreigners to buy, so exports hold up and the factories keep their workers. But one country's cheaper currency is its neighbour's lost sales, so neighbours retaliate and cut their own. Currency wars become trade wars, and history says that path often ends in a real war when the pressure behind it keeps rising. Creating money also makes war itself easier to start. A government that can create money doesn't have to send its citizens the bill up front. A war paid for by visible taxes runs into resistance fast. A war paid for by quietly shrinking everyone's savings can go on for years before people connect the two.

When the money gets rewritten

When belief in the money finally breaks, the state rewrites the money's rules and the pattern starts again. Weimar Germany is the famous case. Savings were wiped out, a population was humiliated, and a strongman was welcomed by people who a few years earlier had dismissed him. It doesn't always look that dramatic. America ordered its citizens to hand in their gold in 1933, and in 1971 it ended the promise that dollars could be swapped for gold. Both were the same move in a gentler form. When the money's promise can't be kept, the rules change by decree, and the citizens take the loss.

Money the state can turn off

This time the tools of control are stronger. Today your money is held by a bank, and a bank is a private company. A central bank digital currency moves your money to the state itself, so your balance becomes something the state can watch and program directly. Add AI to that and the state gets powers past regimes only dreamed of, money that expires if you don't spend it, payments that fail because of what you bought or where you stood, a switch that can shut off any business that steps out of line. No one has to play the villain for that to arrive. The next crisis, and a population asking to feel safe, are enough. And AI under this system concentrates power instead of spreading it, because AI's gains flow to whoever stands nearest the money, while the workers it replaces are managed with benefit payments and rules.

Even the planet is caught in it

A money system built to push prices and consumption upward forever can never let the world use less. Every gain in efficiency should mean less material used for the same result. But new money arrives to keep the numbers growing, so the amount we use keeps rising anyway. You can't demand more from a finite planet every year and expect it to keep up.

A depression, or the long road to war

So the current design leaves two doors. Door one is to stop creating money and let prices fall suddenly. When prices fall across the whole economy, businesses take in less for what they sell, so what they pay out in wages follows prices down, through pay in a deep fall and through jobs and hours in a mild one. On its own that would be survivable, because the things you buy are getting cheaper at the same time. The debt is what breaks it. A debt is a fixed number of pounds, and that number doesn't move when prices do. The same squeeze hits households, companies, and governments at once. Your mortgage payment stays the same while your pay falls. A company's loan repayments stay the same while its takings fall. And a government still owes what it owes, even as tax receipts drop. Every borrower is caught, so defaults spread. Then the defaults reach the banks. Banks own those loans, so when borrowers fail, banks fail, and whoever lent to the banks fails after them. That's a depression, the falling prices that gave deflation its bad name. Door two is to keep creating money, and take widening inequality, deepening control, and rising risk of conflict. One end of that road is an arrangement where the interest on savings is held below rising prices, so money moves from savers to borrowers year after year. That has a name, financial repression. Growing faster than the interest on the debt looks like a third way through, and it holds only while the interest rate is kept below rising prices, which is that same end of the road. The other end is war. Most of the policy debates you watch are arguments about which door to edge toward. Neither door fixes it, because the design is the problem.

The way out

You can't fix this by electing better people, because the design does the damage whoever is in charge. Any leader who tried to stop the money creation would set off door one on their own watch, a depression with their name on it. They'd lose the next election to someone promising rescue, and that rescue would be the biggest expansion yet. Politician after politician learns not to try. Incentives beat intent. Parliaments have written money rules before, and some capped how many banknotes a central bank could issue, for decades at a time. Most of those caps were loosened or repealed by the same kind of parliament once they began to bind, and none of them capped the money banks create when they lend, which is most of the money. So the fix has to be built into the money itself. It has to be money that nobody, however powerful or well intentioned, can make more of.

Why gold failed

The last time we tried a money nobody could make more of at will, it was gold, and the way gold failed is what to watch for again. Gold is heavy to move and hard to check, so a whole economy couldn't trade the metal itself. The gold went into vaults, and people traded paper claims on it instead, promises that the vault would hand the gold over. Nobody outside could count what was in the vault, so whoever ran it could write more claims than there was metal. And when the pressure came, governments changed the rules for swapping paper back into metal, or seized the metal outright. The scarcity was real, but to use gold across a whole economy it had to sit in someone else's vault. That vault is a single place the rules can be reached.

What would actually work

So write down what the fix requires. Every item on it removes someone you'd otherwise have to trust. Money with a fixed supply, so nobody can make your savings worth less by creating more. Money anyone can check cheaply, so you never have to take an institution's word for it. Money anyone can hold themselves, so there's no vault to lean on. Rules that no company, government, or majority of insiders can change. And a record of payments that's too expensive to fake, so you don't have to trust anyone to be honest.

That list describes what Bitcoin makes available. There will only ever be twenty one million coins. Anyone can check the money themselves. Ordinary software on an ordinary computer, called a node, checks the rules for itself, so you don't have to take an institution's word for what you've been paid. A block of transactions that created extra coins wouldn't exist for you. Anyone can hold their own keys, and whoever holds the keys controls the coins, so nobody has to keep their savings with a custodian. New coins are issued through proof of work. Miners spend real electricity to add each block of transactions, so rewriting the record means outspending everyone else, and for anyone after a profit that sum doesn't work. Bitcoin's base layer stays small and boring by choice, and speed runs on layers built on top of it. One of those layers, called Lightning, settles small payments in seconds for fractions of a penny.

Technology is what pushes prices down. An expanding money supply absorbs that fall before you ever see it. A money that can't expand doesn't absorb it.

How it could still be lost

I'd be making this argument if bitcoin had never been invented. The problem is a money system fighting technology, and that's true either way. What bitcoin offers is a way out, and it depends on ordinary people holding the coins themselves. The obvious way for it to fail is the way gold failed. The coins end up in a few big regulated companies, those companies write more claims than they hold, and everyone carries on pricing their life in pounds. Twenty one million would still be the limit. It just wouldn't protect many people, because almost nobody would own a coin, only a claim on a company that owns some. This time you don't have to hand your coins over. The key to your coins is a short list of words, and you can carry a list of words in your head. Gold couldn't be checked at home or carried across a border in your memory, and bitcoin can be. Handing gold to a vault was a physical necessity. Handing bitcoin to a company is a choice. So what protects it is what people do with it. Hold your own keys and your coins never sit in someone else's vault. Run your own node and you can check what you own without asking anyone. Pay through systems nobody can lock you out of. Price your life in bitcoin, and the pound stops being the unit you measure by.

What it would be like

If bitcoin stays in ordinary people's hands, the force behind every effect above is removed, and the effects start to unwind. Prices fall as fast as we get better at making things, so your savings buy more year after year. Houses drift back toward what they're worth as places to live, because money itself stores value again. Where the price was pushed up by land, that part stays, and where it was pushed up by law, that part holds until competition works round the rule. The forced scramble into speculation winds down. Credit shrinks to what genuine projects can pay back. Governments fund themselves through taxes people can see and contest, or through borrowing they have to repay in money that buys more year after year, so a war gets harder to start without people noticing the bill. Energy gets cheaper, because miners will buy electricity nobody else can use, from power stations too far from a city or producing at the wrong time of day. A guaranteed buyer makes new power plants worth building. And AI becomes good news instead of a threat, because its gains land as falling prices for everyone rather than concentrated control for a few. One effect is new. Whoever holds the money before everyone else arrives gains without producing, so how widely it's held by then decides how widely that gain lands. After that, the only way to get ahead is to deliver something people will pay for.

Some of the unwinding is already visible if you change the unit. Priced in bitcoin, a laptop, a year of energy, and a house have all cost less across the cycles so far, even as their pound prices held or rose. The whole of that fall is bitcoin strengthening as it takes on savings, not those things getting cheaper to buy, because in pounds they held or got dearer. So it's a preview and not the finished reversal. The abundance underneath is real. It's invisible in the old unit, and the new one can't show you its size yet.

Nobody has to wait for their government. Between countries the unwinding is uneven and slow, but for a person it's immediate. The day you start saving in bitcoin, checking prices in it, and spending some of it, saving stops being a guaranteed loss.

Why this is so hard to see

The thesis isn't hidden. Every piece of it is public, and still most people, including most economists, look straight through it. Here's why.

1. You're measuring with the thing that's being changed

Every price, every wage, and every savings balance you've ever seen is measured in money someone can always make more of. So when your house "rises" in pounds, you can't tell how much of the rise is the house becoming worth more and how much is the pound becoming worth less. The pound is the ruler, and it changed length while you were measuring with it. That never feels wrong from inside. The ruler just gives you numbers, and the numbers look like facts.

2. The two forces hide each other

Technology keeps lowering the cost of making things. New money is created faster than that cost falls, so the price you pay rises instead of falling. You can't notice a fall that never happened. The money creation is hidden as well, because in a normal year all you see is what the two forces add up to, a rise of 2 or 3%. A rise that small makes the money creation look mild and responsible, and it makes rising prices feel like the weather, something that just happens.

3. The baseline is wrong

We judge inflation against zero. A 2% rise sounds mild and a flat year sounds like a success. But zero was never neutral. In a market that keeps getting better at making things, neutral would be prices falling, so even a flat year is a loss. And you can't look up the fall you were owed, because that world never happened. It's a theft with no crime scene.

4. Everything is moving faster than it feels

Technology, the force that pushes prices down, is improving exponentially, which means it keeps doubling, and each doubling takes about the same stretch of time. So the money created to cancel that push has to keep growing, just to keep prices rising. And that's hard to grasp, because we tend to think in steps of the same size, adding a bit at a time. Stack 50 sheets of paper and you'll have a pile about a fifth of an inch high. Now fold one sheet in half 50 times, so every fold doubles the layers, and the stack would reach most of the way to the sun. Most people guess a few inches. So both forces are far bigger than they feel.

5. The official instruments can't see it

GDP is the number governments watch to judge how the economy is doing, and it counts paid transactions. When your phone replaces hundreds of pounds of cameras, maps, and stereos with free apps, your living standard jumps and GDP falls, because nobody is paying for any of it any more. So the better technology gets at giving you things for nothing, the worse the economy looks in the official numbers. That invites a fix for a weakness that isn't there. The fix is more money, which pushes prices up and absorbs the abundance the numbers couldn't see. GDP was built for an economy where doing better meant spending more.

6. The language is loaded

In everyday speech, inflation is normal and deflation hardly ever appears except next to "spiral" and "depression". And there's no everyday word for prices falling because we got better at making things. It's hard to think clearly about something when the only word for it means disaster. So people file the natural state of a free market under catastrophe.

7. Everyone has a reason not to look

The homeowner needs the rise in his house price to be real, because his retirement is tied up in the house. The politician gains nothing by understanding any of this. "Your pay will fall while your costs fall faster" loses an election to "your pay will rise", and a leader who stopped the money creation anyway would be blamed for the depression that followed. The pension system needs asset prices up. The economist was trained in this way of thinking, hired for it, and promoted inside it, so questioning it means questioning his own career. Each person defends their small piece sincerely, and none of those positions gives its holder a reason to doubt the system as a whole. People even live the contradiction daily, hunting bargains all afternoon and cheering their house price all evening, and never notice.

8. Money beliefs are tribal badges

People pick positions to belong, and once a belief becomes a tribe's badge, evidence feels like an attack. Labels do the thinking. "Crypto bro" and "gold bug" and "money printer conspiracist" each end the conversation before anyone gets to how the money works.

9. Nothing ever makes you question the pound

Someone measuring life in pounds sees rising prices and blames greed or supply chains. An investor measuring bitcoin in pounds sees a volatile asset that soared or crashed depending on when they looked.

And measuring in pounds, they're both right. Property, the stock market, and the weekly shop really do go up in pounds. Bitcoin really does rise and fall in pounds. Nothing either of them sees contradicts what they already believe. Seeing the problem means questioning the unit you measure your whole life in, and nothing in ordinary life ever pushes you to. Ask a fish what the water's like and it'll say "what water?". The water we swim in is the pound.

Those nine are why people find it hard to see the problem. Nothing needs to be hidden, and there doesn't need to be a villain or a conspiracy to stop people working it out. The unit moves while you measure with it. The price fall you were owed never happened, so there's nothing to point at. The official numbers don't count what's free. There's no everyday word for prices falling because things got cheaper to make. And if you hold a piece of the system, that piece gives you no reason to look.

The objections

"Deflation is dangerous. Look at the 1930s."

People point at the Great Depression and say falling prices are dangerous. Prices did fall in the 1930s, and it was a catastrophe. But what collapsed was a banking system built on borrowed money, and prices came down with it. Prices also fall when we get better at making things, which is why sharing 50 photos went from £25 to nothing. Both get called deflation. And a sudden broad fall in the prices credit pushed up, houses first, really would wreck today's economy, for the same reason. Nearly every pound exists because somebody borrowed it, so when borrowers fail the money fails with them. A money nobody can create more of isn't made of anyone's debt, so falling prices can't destroy the money itself. Credit built on top of it can still fail, but the loss lands on the people who chose that risk, and whoever kept their own keys still has their coins. Under a money like that, things would just cost less year after year, and the money in your account would buy more than it did. Nobody would have to take risks to stand still. The danger is the debt design, not the cheaper goods, and that design is the thing worth objecting to.

"If prices fall, people will delay every purchase and the economy stops."

The worry is that if prices keep falling, nobody will buy anything today, because it'll be cheaper next year. Then spending stops, and the economy stops with it. But some things already get cheaper every year. Phones, laptops, and televisions are better and cheaper each time, and people buy them constantly. You buy a winter coat because you're cold now. You buy food because you're hungry now. Having a thing you need or want today beats a discount on it next year, so what gets put off is the big purchase that could wait. A system that needs your savings to leak so you'll spend faster is forcing you to spend and calling it policy.

"A little inflation is needed for growth."

The argument is that a bit of inflation is needed to keep the economy growing. But the growth worth having is people getting more for the same work, and that comes from getting better at making things. Falling prices are the main way it reaches you. Inflation adds nothing to that, and it stops the gains arriving as lower prices. Getting prices to plus two takes new money that cancels that fall first, and then adds two on top. The debts show up in the rescues, not in the everyday 2%. A 2% target means a nurse's savings buy 2% less every year, on purpose. The argument says the economy can't work without that happening to her, every year, forever. No saver wants their money to buy less.

"Governments will just ban Bitcoin."

The obvious move for a government that doesn't want Bitcoin is to ban it. It can lean on the parts it can reach, the exchanges and the banks where bitcoin touches the old system, and some will. It can't change the rules of the network by decree. It can reach named people, the handful who maintain the software and the few big groups of miners, and states have prosecuted people who wrote this kind of software. But reaching them doesn't change the rules, because thousands of ordinary computers in different countries each check every block against the rules themselves. A change to the rules only runs on the computers whose owners choose to install it. And banning is expensive. When China banned mining, the network's computing power recovered within months as the machines moved elsewhere, and the industry's taxes, jobs, and capital moved with them. Every ban is an invitation somewhere else. Hostile states mostly succeed in exporting their most mobile and capable citizens.

"It's far too volatile to be money."

Bitcoin's price swings look wild. That's measured in pounds, and calling bitcoin the volatile one treats the pound as the fixed point. Bitcoin has a fixed supply, and it's taking on the world's savings one saver at a time. Every new buyer moves the price, because the supply can't stretch to meet them. People arrive as they work out what the money is doing, and working that out takes most people years. So they arrive in waves, and the price moves in waves with them. The swings have got smaller as bitcoin has got bigger. The alternative is the pound, which is steady from week to week and loses value year after year, reliably. Ask anyone in Malawi, or Argentina, or 1923 Berlin. I'd rather hold the volatile thing that buys more every decade than the calm one that buys less.

Where this leaves you

The natural state of a free market is deflation, and nearly everything broken in our economics and politics flows from a money system built to fight that natural state. The saving that technology made is taken from you at the till, and what reaches your payslip comes late and unevenly. The takings pile up with whoever stands nearest the new money. Society reshapes itself around the resentment, and the state tightens its hold to stop the debt system failing. If nothing changes, this ends with payments watched, the money's rules rewritten by decree, and war.

What breaks that chain is money nobody can make more of. Bitcoin is that money for as long as it stays open, decentralised, secure, a protocol rather than a platform, and bounded by energy. Open, so anyone can own it and anyone can check it. Decentralised, so it runs on computers all over the world with no switch anywhere to turn it off. Secure, so the record is too costly to rewrite. A protocol rather than a platform, a set of rules nobody owns rather than a product somebody runs, so the base layer stays small enough for an ordinary computer to check it. Bounded by energy, so rewriting the record would burn more electricity than the rewrite could earn back, for as long as miners are paid enough to keep buying that electricity. Take away any one of those five and it slides back into the thing it was built to escape.

Whether it stays that way is up to us. It's a choice each of us makes. Will you hold your own coins, or leave them with a company? Will you check the money yourself, or take someone's word for it? Will you measure your life in a money nobody can print more of, or keep saving your time in one that loses value every year?

You can start measuring today, without owning any bitcoin at all. Pick a few things you care about, a house, a year of energy, a laptop, and look up what they cost in bitcoin ten years ago, and what they cost now. Then keep tracking them alongside the pound, over years rather than months, because a year or two either way will tell you nothing. The pound chart will keep telling you they're getting more expensive. The bitcoin chart will show you the unwinding that has already begun.

## Sources

What this essay rests on, as checked on 2026-09-24.

1. "Twenty five years ago, sharing 50 photos with your friends meant buying a film, paying to get it developed, and paying the postage."
   United States Postal Service, Postal Bulletin 22051, Modified Rates Effective July 1, 2001: "The single-piece first-ounce letter rate will remain 34 cents." US first-class postage, 34 cents per first ounce, rates effective 1 July 2001. It says nothing about buying film or paying to get it developed. https://about.usps.com/postal-bulletin/2001/html/pb22051/rc-text.html

2. "Growing it and shipping it both cost far less to do than they did decades ago, and yet you pay more for a cup today."
   Office for National Statistics, RPI: Ave price - Coffee: pure, instant, per 100g, series CZNP, dataset MM23, released 19 August 2026: 1967 = 24 pence; 2025 JAN = 385 pence, per 100g of pure instant coffee (RPI average price, UK). https://www.ons.gov.uk/economy/inflationandpriceindices/timeseries/cznp/mm23

3. "Nearly all money today is created through lending."
   Bank of England, Quarterly Bulletin 2014 Q1, “Money creation in the modern economy”, 14 March 2014: "the majority of money in the modern economy is created by commercial banks making loans" https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy
   Bundesbank, Monthly Report, April 2017, on the role of banks, non-banks and the central bank in the money creation process: The Bundesbank's summary: banks create deposits when they extend credit, and repayment eliminates deposits. https://www.bundesbank.de/en/publications/search/the-role-of-banks-non-banks-and-the-centralbank-in-the-money-creation-process-654284

4. "It writes a new deposit into your account, new money, matched by your new debt."
   Bundesbank, Monthly Report, April 2017, on the role of banks, non-banks and the central bank in the money creation process: The Bundesbank's summary: banks create deposits when they extend credit, and repayment eliminates deposits. https://www.bundesbank.de/en/publications/search/the-role-of-banks-non-banks-and-the-centralbank-in-the-money-creation-process-654284
   Bank of England, Quarterly Bulletin 2014 Q1, “Money creation in the modern economy”, 14 March 2014: "the majority of money in the modern economy is created by commercial banks making loans" https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy

5. "If the loans were all repaid, most of the money would vanish with them."
   Fisher, “The Debt-Deflation Theory of Great Depressions”, Econometrica, volume 1, issue 4, October 1933, pages 337-357: "Debt liquidation leads to distress selling and to Contraction of the money supply, as bank loans are paid off, and to a slowing down of velocity of circulation." https://www.econometricsociety.org/publications/econometrica/1933/10/01/debt-deflation-theory-great-depressions
   Bundesbank, Monthly Report, April 2017, on the role of banks, non-banks and the central bank in the money creation process: The Bundesbank's summary: repayment eliminates deposits, and banks create deposits when they extend credit. https://www.bundesbank.de/en/publications/search/the-role-of-banks-non-banks-and-the-centralbank-in-the-money-creation-process-654284

6. "So nearly all of the money was borrowed into existence, and that gives the system a weak spot."
   Bank of England, Quarterly Bulletin 2014 Q1, “Money creation in the modern economy”, published 14 March 2014: "the majority of money in the modern economy is created by commercial banks making loans". The Bank prints this as the majority of money, not nearly all. https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy

7. "The system can take a slow fall that comes with better tools."
   Atkeson and Kehoe, “Deflation and Depression: Is There an Empirical Link?”, National Bureau of Economic Research Working Paper 10268, February 2004: "Deflation and depression do seem to have been linked during the 1930s. But in the rest of the data for 17 countries and more than 100 years, there is virtually no evidence of such a link." https://www.nber.org/papers/w10268
   Borio, Erdem, Filardo and Hofmann, Bank for International Settlements, BIS Quarterly Review, March 2015, “The costs of deflations: a historical perspective”: "We test the historical link between output growth and deflation in a sample covering 140 years for up to 38 economies. The evidence suggests that this link is weak"; "little systematic connection between price deflation and growth". https://www.bis.org/publ/qtrpdf/r_qt1503e.htm

8. "In 2008 we saw a preview."
   Federal Reserve History, Essay, “The Great Recession”: "reducing the federal funds rate from 5.25 percent in September 2007 to a range of 0-0.25 percent in December 2008, with much of the reduction occurring in January to March 2008 and in September to December 2008." https://www.federalreservehistory.org/essays/great-recession-of-200709
   Federal Deposit Insurance Corporation, “Bank Failures in Brief”, 2008: "There were 25 bank failures in 2008." https://www.fdic.gov/resources/resolutions/bank-failures/in-brief/2008

9. "The 2008 rescue was measured in hundreds of billions of dollars of government spending and bond-buying."
   United States Congress, Emergency Economic Stabilization Act of 2008, Public Law 110-343: "An Act To provide authority for the Federal Government to purchase and insure certain types of troubled assets"; authority to buy up to $700 billion of troubled assets; enacted October 3, 2008. https://www.congress.gov/110/plaws/publ343/PLAW-110publ343.htm
   United States Department of the Treasury, Troubled Asset Relief Program programme page: "Although Congress initially authorized $700 billion for TARP in October 2008, that authority was reduced to $475 billion by the Dodd-Frank Wall Street Reform and Consumer Protection Act"; $443.5 billion disbursed as of September 30, 2023. https://home.treasury.gov/data/troubled-asset-relief-program

10. "The 2020 one was measured in trillions."
   Congressional Budget Office, H.R. 748, CARES Act, Public Law 116-136: "The CARES Act appropriates roughly $2.2 trillion of spending, tax breaks, loans, and other resources over the next decade." https://www.cbo.gov/publication/56334
   Treasury Office of Inspector General, CARES Act page: "The Coronavirus Aid, Relief, and Economic Security Act (CARES Act), signed into law March 27, 2020, provides over $2 trillion of economic relief to workers, families, small businesses, industry sectors, and other levels of government". https://oig.treasury.gov/cares-act

11. "New money arrives in some places before others."
   Richard Cantillon, Essai sur la Nature du Commerce en Général (Essay on the Nature of Trade in General), published 1755: Describes new money raising prices unevenly, first for those who receive it. The essay was "written between 1730 and 1734" and follows "the French text of 1755". https://www.econlib.org/library/NPDBooks/Cantillon/cntNT.html

12. "America ordered its citizens to hand in their gold in 1933, and in 1971 it ended the promise that dollars could be swapped for gold."
   The American Presidency Project, Executive Order 6102, “Forbidding the Hoarding of Gold Coin, Gold Bullion and Gold Certificates”, April 5, 1933: “All persons are hereby required to deliver on or before May 1, 1933, to a Federal Reserve Bank … all gold coin, gold bullion and gold certificates now owned by them”. Dated April 5, 1933. https://www.presidency.ucsb.edu/documents/executive-order-6102-forbidding-the-hoarding-gold-coin-gold-bullion-and-gold-certificates
   Federal Reserve History, Nixon Ends Convertibility of U.S. Dollars to Gold and Announces Wage/Price Controls: “On the evening of August 15, 1971, Nixon addressed the nation on a new economic policy” … “The first order was for the gold window to be closed.” https://www.federalreservehistory.org/essays/gold-convertibility-ends

13. "And when the pressure came, governments changed the rules for swapping paper back into metal, or seized the metal outright."
   UK Parliament (Hansard), House of Commons debate on the Gold Standard (Amendment) Bill, 21 September 1931: "Unless and until His Majesty by Proclamation otherwise directs, Sub-section (2) of Section (1) of the Gold Standard Act, 1925, shall cease to have effect, notwithstanding that Sub-section (1) of the said Section remains in force" https://api.parliament.uk/historic-hansard/commons/1931/sep/21/gold-standard-amendment-bill
   The American Presidency Project, Executive Order 6102, Forbidding the Hoarding of Gold Coin, Gold Bullion and Gold Certificates, 5 April 1933: "All persons are hereby required to deliver on or before May 1, 1933, to a Federal Reserve Bank ... all gold coin, gold bullion and gold certificates now owned by them" https://www.presidency.ucsb.edu/documents/executive-order-6102-forbidding-the-hoarding-gold-coin-gold-bullion-and-gold-certificates

14. "Miners spend real electricity to add each block of transactions, so rewriting the record means outspending everyone else, and for anyone after a profit that sum doesn't work."
   Cambridge Centre for Alternative Finance, Cambridge Blockchain Network Sustainability Index: CBECI, methodology page: "The Cambridge Bitcoin Electricity Consumption Index (CBECI) provides up-to-date estimates of Bitcoin's daily power demand and an annualised electricity consumption estimate." https://ccaf.io/cbnsi/cbeci/methodology

15. "One of those layers, called Lightning, settles small payments in seconds for fractions of a penny."
   Lightning Network project, Lightning Network — Scalable, Instant Bitcoin/Blockchain Transactions (project site, no date printed): "Payment speed measured in milliseconds to seconds." https://lightning.network/

16. "Twenty one million would still be the limit."
   Bitcoin Core, bitcoin/bitcoin repository, Consensus test file src/test/validation_tests.cpp, master branch (subsidy_limit_test): The subsidy test sums issuance to CAmount{2099999997690000} satoshis, that is 20,999,999.9769 BTC, each subsidy checked as "nSubsidy <= 50 * COIN". The code's total is 20,999,999.9769 BTC, slightly under twenty one million. https://github.com/bitcoin/bitcoin/blob/master/src/test/validation_tests.cpp

17. "The money creation is hidden as well, because in a normal year all you see is what the two forces add up to, a rise of 2 or 3%."
   Office for National Statistics, CPI annual rate 00: all items, 2015=100 (series D7G7): UK CPI annual rates 2000 to 2019 average 2.05%; US CPI-U annual averages 2000 to 2019 average about 2.2%. Printed yearly rates include 1997: 1.8; 2000: 0.8; 2020: 0.9; 2021: 2.6; 2022: 9.1. https://www.ons.gov.uk/economy/inflationandpriceindices/timeseries/d7g7/mm23

18. "Prices did fall in the 1930s, and it was a catastrophe."
   Bureau of Labor Statistics, published by the Federal Reserve Bank of Minneapolis, Consumer Price Index, 1913–: Annual Average CPI(-U), 1983=100: 1929 = 17.2; 1933 = 12.9. Annual percent change (rate of inflation): 1930 −2.7%, 1931 −8.9%, 1932 −10.3%, 1933 −5.2%. https://www.minneapolisfed.org/about-us/monetary-policy/inflation-calculator/consumer-price-index-1913-
   Borio, Erdem, Filardo and Hofmann, Bank for International Settlements, "The costs of deflations: a historical perspective", BIS Quarterly Review, March 2015: "We test the historical link between output growth and deflation in a sample covering 140 years for up to 38 economies. The evidence suggests that this link is weak and derives largely from the Great Depression." https://www.bis.org/publ/qtrpdf/r_qt1503e.htm

19. "But what collapsed was a banking system built on borrowed money, and prices came down with it."
   Irving Fisher, "The Debt-Deflation Theory of Great Depressions", Econometrica, volume 1, issue 4, October 1933, pages 337–357: "Debt liquidation leads to distress selling and to Contraction of the money supply, as bank loans are paid off, and to a slowing down of velocity of circulation." https://www.econometricsociety.org/publications/econometrica/1933/10/01/debt-deflation-theory-great-depressions

20. "Prices also fall when we get better at making things, which is why sharing 50 photos went from £25 to nothing."
   Bordo, Landon-Lane and Redish, National Bureau of Economic Research, "Good versus Bad Deflation: Lessons from the Gold Standard Era", NBER Working Paper 10329: "the deflation experience of the United States, the United Kingdom, and Germany in the late nineteenth century during a period characterized by low deflation, rapid productivity growth, positive output growth"; "deflation in the nineteenth century was primarily good". The paper covers those three countries in the late nineteenth century, not present-day prices. https://www.nber.org/papers/w10329

21. "Nearly every pound exists because somebody borrowed it, so when borrowers fail the money fails with them."
   Bank of England (Michael McLeay, Amar Radia and Ryland Thomas), "Money creation in the modern economy", Quarterly Bulletin 2014 Q1, published 14 March 2014: "the majority of money in the modern economy is created by commercial banks making loans." The article says the majority of money, where the sentence says nearly every pound. https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy

22. "Phones, laptops, and televisions are better and cheaper each time, and people buy them constantly."
   U.S. Bureau of Labor Statistics, The Economics Daily, "Long-term price trends for computers, TVs, and related items", 13 October 2015: "The price index for TVs decreased 94 percent from December 1997 to August 2015." Also printed: audio equipment "−60 percent" and photographic equipment and supplies "−59 percent" over the same period. https://www.bls.gov/opub/ted/2015/long-term-price-trends-for-computers-tvs-and-related-items.htm
   U.S. Bureau of Labor Statistics, Consumer Price Index series CUUR0000SEEE01, "Computers, peripherals, and smart home assistants in U.S. city average, all urban consumers, not seasonally adjusted": Index, December 2007=100, not seasonally adjusted: December 1997 = 1119.0; December 2013 = 54.869. https://data.bls.gov/timeseries/CUUR0000SEEE01?years_option=all_years
   Nielsen, "More than Half the Homes in U.S. Have Three or More TVs", Television Audience Report, July 2009: "in 2009 the average American home had 2.86 TV sets, which is roughly 18% higher than in 2000 (2.43 sets per home), and 43% higher than in 1990 (2.0 sets)." https://www.nielsen.com/insights/2009/more-than-half-the-homes-in-us-have-three-or-more-tvs/

23. "When China banned mining, the network's computing power recovered within months as the machines moved elsewhere, and the industry's taxes, jobs, and capital moved with them."
   Cambridge Centre for Alternative Finance, Cambridge Blockchain Network Sustainability Index, mining map methodology: “reported hashrate for Mainland China effectively plummeted to zero during the months of July and August but suddenly surged back to more than 20% in September”. The ban is dated June 2021; the share is Mainland China's, not the network's. https://ccaf.io/cbnsi/cbeci/mining_map/methodology