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.¹ 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.² 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.³ 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.⁴ 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.⁵ 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.⁶ 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.⁷ 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.⁸ 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.⁹ Policy pushed prices up 2% instead.¹⁰ So the gap, in what your money buys, is three or four points. And 2% is the target, not a ceiling.¹¹ 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.¹² 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.¹³ It usually enters through bank loans and the central bank’s bond buying, so asset prices move first.¹⁴ Houses and shares rise ahead of wages, and the people who already own them benefit before prices adjust for everyone else.¹⁵ 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.¹⁶ 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.¹⁷ 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.¹⁸ Televisions get cheaper and better every year and people still buy them.¹⁹ 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.²⁰ Prices falling because we got better at making things, that raises living standards.²¹ 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.²² That’s an indictment of the debt design, and cheaper goods were never the danger.²³

“Wages rise with inflation, so it comes out even.”

They rise last.²⁴ 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.²⁵ 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.²⁶ 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.