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.¹ When a bank writes a mortgage, new money comes into existence with a matching debt attached.² So the economy carries a mountain of debt, and most of that debt is fixed in pounds.³ 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.⁴

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.⁵ 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.⁶

In between the rescues, policy targets rising prices of about 2% a year, forever.⁷ 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.⁹ 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.¹⁰ If you rent and earn a wage, your costs rise before your pay does.¹¹ 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.¹² 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.¹³ 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.¹⁴

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.¹⁵ Housing collapsed in 2008 and was met with bank bailouts, near-zero rates, and central banks creating money to buy bonds.¹⁶ Then 2020 was met with trillions in months.¹⁷ 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.¹⁸ 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.¹⁹ What the record shows growing is the stock of debt and the size of the rescue that each downturn gets.²⁰ 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 2022.²¹ The earlier spells ended in a return to support when something broke, and the forecast is that this one ends the same way.²²

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.²³ 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.²⁴ 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.²⁵ 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.