A couple of months ago I wrote a post about how the government here in Australia is addicted to inflation since it is using something called “value capture” to finance infrastructure projects. That, of course, is just one example of the trickery that’s going on. We’ve been in a period of hidden inflation for several decades now, which finally spilled over into official inflation as a result of the covid debacle. The government’s response here has been to use public money to artificially reduce the official inflation statistics.
If I’m understanding the strategy correctly, we’re going into debt to reduce official inflation so that interest rates will go down so the interest on the increased debt will go down. This doesn’t sound like a winning strategy. In fact, it sounds like the strategy of the drug addict. It occurred to me that the analogy with drug addiction is actually more precise than I thought, and it’s worth sketching out the full cycle of addiction to know how we ended up where we are.
Now, obviously, different drugs have different effects. But the general principle that applies is that drugs increase dopamine in the body. Most people know dopamine is the feel-good neurotransmitter. It is a messenger molecule, and we can think of the exchange of dopamine as a transaction just like an economic transaction that involves the exchange of money.
Taking a drug causes a spike in the level of dopamine, which is why it feels good. In essence, though, you didn’t deserve that dopamine. The pleasant feelings didn’t come from activities that are beneficial, like finding and eating food, having sex, or achieving something. You just took a chemical. One of the problems with drugs is that they replace a positive sequence of events Do Something Good –> Feel Good with what is at best a neutral sequence Take Chemical –> Feel Good.
But the main problem with drugs is that they almost never remain neutral because the drug itself causes the entire system to change. The dopamine receptors in the brain are calibrated to the “natural” settings, meaning that they expect normal amounts of dopamine. The high from any drug comes from the extra amount of dopamine introduced into the system as a function of time. It’s the sudden spike that causes the problem.
Natural systems are incredibly adaptive, and the human body is a prime example. If the human body was not adaptive, you could just keep taking the drug and receiving the same high every time. You’d still get into trouble, however, because the cells of the body cannot handle the amounts of dopamine you’re throwing at them, and so they’ll just cease to function at some point. That’s why the system recalibrates to protect itself. It adapts to expect sudden spikes of dopamine.
This has two main effects. Firstly, the high that comes from the drug is reduced. Secondly, and more importantly, because the system has recalibrated itself to be less receptive to dopamine, everyday dopamine levels no longer do their job of mood regulation, meaning that the drug user’s general mood worsens. This combination can set off a positive feedback loop that leads to addiction if the user tries to make up for feeling bad by taking the drug to feel better. The system keeps recalibrating to desensitise itself, meaning you need more of the drug to get less of the high.
When we look at how money works in the economy, its function is incredibly similar to dopamine, and the same dynamic holds as with drug use. Let’s say you have an economy that’s in good shape and the money supply is 100 million. Out of nowhere, you pump in 10 million. Traditionally, this was done through discoveries of gold, such as the Spanish in South America. Nowadays, it’s done through a variety of measures that all amount to an increase in fiat currency. Part of the problem with that is that it happens invisibly like the junkie hiding away in the darkened room to get their fix.
The result of the extra 10 million is the same as the dopamine hit you get from a drug. It’s great the first time because the system is still calibrated to the natural state of the economy with its 100 million unit money supply. Whoever has possession of the extra 10 million can go out and buy lots of stuff, and they feel good. After they’ve spent the 10 million, however, the system recalibrates since there are now 110 million units of currency sloshing around but no extra supply of goods and services. Just like the dopamine receptors of the drug user’s body become less sensitive to the same amount of dopamine, the monetary receptors in the economy become less sensitive to the same amount of currency.
Once the initial high has worn off, the overall economic mood is depressed since the same amount of money now buys less. In response to that general depression, the leaders of society may be tempted to do what the drug user does and go back for a second hit of free money to solve the problem. If that becomes a habit, you get an economic downward spiral that’s almost identical to a drug addict.
And it’s that downward spiral that most western nations are nearing the end of right now. The actions of the Australian government are not really any different than most other countries. They are the final desperate scramblings of the drug addict who will do anything for one more fix. Which is why, to say it again, we are governed by junkies/zombies.
Hi Simon,
If government are the dealers and users, the public are the strawberries! 🙂
The debt story is crazy, but maybe the folks in charge don’t have any other tricks up their sleeves which don’t involve good ol’ fashioned hard work?
And Victoria is in the worst position nationally as a state debt wise, which perhaps reflects the cost for the extreme depths of the lockdowns. Those things weren’t cheap, and there’s a school of thought which says that given the future was being auctioned off, the public perhaps should have had a say as to the costs of the response.
If you combine state and federal debt, then multiply it by a factor of 15 (noting that there are 15 people in the US for every Australian), you’ll note that in round numbers, our debt is pretty similar looking. And we have about the same chance of actually paying it off.
The eventual bad joke about inflation, is that one day the debt might be paid off, with worthless notes.
It’s also worthwhile noting that much of Victoria’s debt was financed when money was cheap at around the 2% cost. When it matures, as it will over the next decade, the costs are going to go up. I’d not want the job of managing that sort of basket case financing. An unenviable position to be a treasurer these days…
Cheers
Chris
Chris – it’s not just the debt, though. The reason I call it the “education-immigration-real estate axis of evil” is because all three amount to money for nothing, which means inflation, which means drug addiction. Victoria’s been here before. Most of the then parliament were directly involved in the real estate crash of the 1890s.
Hey mate,
Good analysis.
Getting rid of the monkey on your back means short term pain against long term gain.
What makes things worse is that the pain is felt by a different class of people then the gain.
I would say that in a sense the system is not broken. It works as designed. Just not in the interest of peasants like us. And of course it is approaching it’s use by date. Although I have been saying that for well over a decade now, so I might underestimate the criminal energy and creativity of our elites.
At this time I would not be confident to predict when we run out of road to kick the can down on.
The question I have been asking myself is how will the end game look? I can’t see any internal forces to change direction. Looks a bit like things will have to get a fair bit worse before they can get better.
I think we’re nowhere near rock bottom yet, but what will it look like?
What are your thoughts there?
Cheers
Roland
Roland – it’s interesting to me that the economy has become predicated on addiction pretty much ever since the neoliberal reforms. Social media, porn, computer games, even normal websites are all deliberately designed to be addictive. Add in the betting websites, the legalisation of recreational drugs, even pharmaceutical drugs, and it really does seem to be a theme: addiction across the board.
As for what might happen next, I have no idea. Like you, my predictions have turned out wrong which means my mental model of the world is incorrect. Still, things might be about to get very interesting. I’m not sure what Trump’s trying to do, but I feel we’re in for some big changes.
Hi Simon,
True, it’s a common desire to want something for nothing. We used to fix up old run down and derelict houses in otherwise fancy inner urban suburbs for an economic advantage – and I’m talking major structural repair stuff, not some cosmetic makeover. We’d buy the biggest absolute dump of a house, and fix it up to sell at profit.
It would have been far less work to simply have bought an OK house to sell later at a profit. The truth is though, it’s not that the houses are worth more, no. It’s that money is not worth what it once was. You can see the same thing happening with gold prices. It just never occurred to us to speculate rather than work.
Did you notice that your part of the world is about to have a by-election?
Cheers
Chris
I’m guessing the end game is what it always has been, namely war. But what sort of war is hard to say, maybe we are already all combatants in a bizzare info techno conflict with our overlords. But the fact that Trump has kicked off the Tariffs signals to me that everyone’s had enough and it’s time to start throwing punches.
From a far different modelling perspective, the outer planets are lining up for war too. The last time Neptune into Aries was the day after the US civil war started. It and Saturn enter March this year, and perfectly conjunct there next year. Explosive to say the least.
Chris – I saw an MSM economics commentator not long ago actually arguing that the fact that house prices had gone up was evidence that Australians were getting richer. It apparently doesn’t occur to these geniuses that there’s a difference between a house price going up because the property was improved in some way and a house price going up because every other price is going up. If a mainstream economist doesn’t understand the difference, then what hope for the rest of the population. Will be interesting to see what happens in the by-election. It’s one of the safest Labor seats in the country.
Skip – well, trade wars are also an extension of war by other means these days, so that sounds accurate. The fact that the US is cutting back its “international aid” is also very telling. I daresay there’ll be a lot of conflict breaking out in lesser known parts of the world as challengers take the opportunity to remove former US cronies.
Hi Simon,
The results of the by-election are rolling in. Very interesting, and doesn’t look all that safe to me any more. It’s a known thing that loyalty is perversely not rewarded in our society – a baffling situation.
Cheers and hope the outcome works out for you and the area.
Chris
Chris – most of the electorate are not members of a political party, so there’s no need for loyalty. You just vote for whoever sucks the least 😛
Hi Simon. Great summary. It is amazing how the same problems perculate though so many countries – it’s almost like no-one has an original idea, or lacks the strength to resist the pressure. Anyway I think that housing has long absorbed this fiat currency in Australia and the come down will be ugly when we all get to rehab. Sandra
Sandra – reminds me of a song 😛