It’s one of those synchronicities that happens to me quite regularly that just after I had finished writing my blog post from about a month ago explaining why we are in the middle of a period of mass inflation that is not counted by the official statistics, I stumbled across a news story which suddenly made clear exactly why the government is lying about inflation. The lies are not just the usual propaganda that greases the wheels of politics. There’s something much more fundamental going on: our governments are addicted to inflation.
Long-term readers would know that I live in Melbourne, Australia, which is kind of a hotspot for all the various pathologies brought on by neoliberalism. The state government here has debt that is currently about $170 billion and the official plan is to grow that debt in the years ahead. Every other Australian state is in the same position and for the same basic reason: we need to go into debt to fund massive infrastructure projects.
No surprise then that the news story I stumbled across was related to infrastructure and, more specifically, how this infrastructure is getting funded. The Victorian government is planning to build an enormously expensive rail loop in the suburbs of Melbourne. The project makes no sense. To put it another way, it makes about as much sense as lockdowns, mRNA vaccines, puberty blockers etc. We are given to presume that there is some genius plan to it all that us mere mortals are simply incapable of understanding. Shut up and trust the experts, pleb.
What caught my attention, however, is how the government is going to fund it. Apparently that hasn’t been worked out yet, which is a bit weird since the contracts have already been signed. Nevertheless, the news story informed us that about one third of the money is expected to come from something called “value capture”. My ears pricked up on hearing that since it’s a classic-sounding political weasel word. Weasel words are fine to bullshit your way through a press conference, but they are certainly not fine as a way to fund a multi-billion dollar project. So, I decided to find out what “value capture” really means.
It turns out that it means the government will fund the project through debt and then use increased revenues that result from the project to pay back the debt. That raises a follow-on question: how is this project going to raise revenue for the government? After all, public transport is not supposed to be highly profitable since, as the name suggests, it is a public service.
Apparently, “value capture” is all about revenue that comes from increased taxation. So, the Victorian government is planning to fund one third of its infrastructure project by increased revenue from taxation. Next question: what sort of taxation are we talking about? It took only a few minutes to figure it out.
I went and looked up the Victorian government revenues statistics from the last few decades. They tell a very interesting story.
The backbone of the government’s revenue has traditionally been payroll tax. But payroll tax has been falling as a proportion of total tax. In 1996, it made up almost 30% of receipts. Last year, it made up just 23%. Since payroll tax is a good proxy measure of productive economic activity, the fact that it has reduced as a proportion of the tax take seems like a bad development.
There was one other tax category that had also fallen in the last 30 years. Gambling taxes made up about 25% of receipts in 1996 but only 5% last year. Since gambling expenditure has only decreased very slightly over that period, I assume this has more to do with changes that were made to the taxation regime for gambling. In any case, this was a notable proportional fall in revenue.
So, if payroll and gambling tax receipts have declined proportionally, what has made up the difference?
Well, it should be no surprise to anybody familiar with the insanity of the Australian property market to find that stamp duty and land taxes have grown enormously. Stamp duty now makes up 33% of tax receipts in Victoria, while land tax has gone from less than 5% of receipts in 1996 to more than 10% last year. Almost half of the tax revenue of the Victorian government now comes from real estate.
And herein lies the dirty little secret that sits at the heart of modern Australian politics. When the government says it’s going to pay for infrastructure projects through “value capture”, that can mean only one thing: increased taxation revenue from a higher price of real estate. In order to pay for these giant infrastructure boondoggles, our government needs the percentage growth in property prices to be higher than the interest rate on the debt. Since property price growth is just another way to say inflation, our governments are addicted to real estate inflation.
This is, of course, the real reason why we are seeing such massive immigration numbers into Australia. Beneath all of the nonsense around being a welcoming, equitable, inclusive blah blah blah society lies the simple fact that we are in debt up to our eyeballs and we have only one way to pay that debt off and that’s by importing more people to drive up the price of real estate. That’s why, in the midst of a housing crisis, the choice is between the government and the opposition who promise to reduce immigration by a measly 25%. It’s a choice between driving off a cliff at 200 kph or 150 kph.
Since the finances of government have become dependent on real estate inflation, the government will do whatever it can do ensure prices continue to rise. That’s what “value capture” really means. But the system is already in debt and can only be propped up by more debt. Hence, we need every larger infrastructure boondoggles to pay off the last round of debt. The whole thing is a series of diminishing returns exactly equivalent to the heroin junkie who keeps upping the dosage but never gets the same high.
Just like the heroin junkie, eventually we are going to overdose and I’d say we have arrived at that point now. In Sydney, real estate is so insane that average workers can no longer even afford to pay rent, let alone mortgage repayments. The government’s “solution” is to build housing specifically for essential workers. Setting aside all of the other problems with that, it’s a mathematical fact that this extra expenditure can also only be paid off by increased tax revenues from real estate. Every “solution” just makes the problem worse.
So, we have ended up with a system that is going to destroy itself in the way any machine does when it gets into a positive feedback loop. How does a democracy get into such a state? Cowardice, lies, deceit, graft, corruption, greed, all the usual suspects. The more important question is: how does a democracy get out of such a state?
Well, history tells us there’s only one answer: a populist demagogue. The democratic system has ground to a halt. What we need now is a leader, somebody who is willing and able to bash some heads together.
The early signs are good that Trump is ready to do what he should have done the first time around in his second term as president. As he throws the cat amongst the pigeons in the US, it should give other western politicians an excuse to actually become leaders again and do what is necessary to fix the system. They can just blame it on Trump.
Of course, there is the larger question of whether the system is salvageable at all. I’d say we are about to find out.
Hi Simon,
It’s an interesting problem isn’t it? And yes, we’re about to find out how things will roll.
Inflating away debt is one option in the economic and policy tool kit, and it’s favoured because, well, the blame falls elsewhere than where it should. The economist Milton Friedman way back in 1974 during the oil crisis suggested that: “Inflation Is Created by Government and by No One Else.” He’s correct of course, but also energy prices and the sheer amount of energy it takes nowadays to produce new supplies of energy these days plays a part as well. But basically, increased debt leads to inflation.
Over the past decade, there has been a shift in finger pointing for economic woes, and somehow the politicians have decided that it would be easier if someone else, say I dunno, the reserve bank, takes the blame. Weird isn’t it, when the politician folks decide just how much they’ll increase the money supply through spending beyond their means.
As a side note, I’m not seeing a great return on investment for all this increase in debt.
Basically, we live in a society with champagne tastes, and a beer budget, thus the debt. Have you ever had a discussion with someone where you suggest to them that perhaps they should consider living within their means? Hmm. Try it sometime, I recommend the challenge, and the results are instructive.
Across the Tasman Sea, I believe the recent incoming government sacked a whole bunch of public servants only a few months ago.
A very thoughtful essay, yeah.
There is a point reached eventually where none of this makes any sense, and all options lead to bad outcomes, for someone. The increased debt is a way of delaying that moment, and the longer the delay, the bigger the eventual fall.
Cheers
Chris
Chris – in some sense, managing a system is really easy. You have to ensure the rules of the system encourage good behaviour and discourage bad behaviour. Fiat currencies encourage bad behaviour on the part of government since they open up a short term solution to any political problem which is just to inflate the problem away. That’s the first heroin hit and it feels so good that you want to do it again and again.
Simon: “This is, of course, the real reason why we are seeing such massive immigration numbers into Australia. Beneath all of the nonsense around being a welcoming, equitable, inclusive blah blah blah society lies the simple fact that we are in debt up to our eyeballs and we have only one way to pay that debt off and that’s by importing more people to drive up the price of real estate.”
Y’know, that’s the explanation that I’ve been converging to myself. I’m thinking about Europe more than about Australia (cute kangaroos, but otherwise, I simply don’t know very much about Australia), but that really seems to be what’s going on. I mean, they say they need to import labor so that jobs could get done, except that (a) many of those jobs don’t really need to get done if you cannot find the labor for them (hello, hospitality “industry” – just close your hotel/restaurant if it’s not making a profit), and (b) even if they do need to get done, it’s often cheaper to just pay the locals more so that they would do the job than it is to pay a pittance to immigrants, and then subsidize their families via tax revenue so that the kids wouldn’t starve or sleep under a bridge. Now, that in and of itself is a sneaky way of appropriating tax revenue (“I pay my workers a pittance, and then you pay them extra so their kids don’t starve”), but probably the biggest part really is real estate. Some people are making out like bandits due to stratospheric property prices. Who that someone is varies from country to country, obviously (in some countries – hello, USA – it’s much of the retiree class), but clearly, those people have enough political clout to push unpopular policies through.
Irena – that sounds right. In Europe and the US there is an extra dimension since illegal immigration represents a direct cash payment to a whole lot of different interest groups, including those who traffic the people, those who own the accommodation that houses the people, and those who benefit from extra demand for food, clothing etc. The whole thing is corruption on a grand scale.
The Australian system is a more interesting because it’s not so obviously corrupt. Most immigration happens legally. Since the government controls that immigration, it could easily cut it. The reason it doesn’t is because government finances are predicated on more immigration. But nobody wants to admit that. Thus, we get politicians telling truly absurd lies like immigration has nothing to do with the increase in house price, because apparently the most basic law of economics doesn’t hold here. You really have to be a genius to understand. Trust the experts, pleb!
“You have to ensure the rules of the system encourage good behaviour and discourage bad behaviour.”
There was some time in the forgotten and misty past that people thought a financial system based on savings encourages doers and savers, whereas debt finance encourages talkers and spenders. Then living according to obvious ideas became associated with being a moron and Alice In Wonderland pipe dreaming became the “cutting edge of innovation”. Maybe mining Mars will save us all.
Jinasiri – curiously, mandatory superannuation was brought in at the same time that debt levels spiked. So, the government makes everybody save 10% of their salary but also doesn’t let them have access to those savings or any real control over what they are invested in. Then, the giant superannuation funds invest in the boondoggles and real estate that keep getting inflated which forces people to go into debt to buy a home to live in. The word “insanity” is overused these days but I can’t think of a better term to use in this case.
Another problem with debt-based financial systems (there are so many!) is they entrains people into seeing every item, vegetable, animal, mineral, cultural and spiritual in terms of their capacity to generate financial returns at a rate greater than the interest rate they’ve borrowed at, either through income growth or capital gain. But the best way to do that is to direct every possible resource towards the production of goods and services that are addicitve. There is nothing more “profitable” than a racket: the sale of dodgy goods and services which give some kind of short-term hit at the cost of long term satisfaction plus sexy marketing campaigns bewitching the gullible to believe long-term satisfaction can be had (and, of course, clearly there is something wrong with you if you’re not happy with the funk you’ve been supplied). If you wanna get rich quick sell something that will break sooner rather than latet. The production of useless s*** is an inherent characteristic of our beloved system. We get bullshit jobs because, well, we love in a bullshit economy.
Getting real about economics would mean asking what actually encourages good behaviours and what bad behaviours. And we need an answer to that question that goes beyond the idea that the Good is whatever people define it be, which is just vacuity dressed up as freedom.
It would also require to us to see that good economic outcomes cannot be created by nudging about figures in the economic domain alone. Cultural, social and spiritual factors need to be fed into the equations. Price discovery, even after artificial government and central banking mechanisms are removed, cannot be achieved unless market participants have enough soul and wisdom to recognise what’s in their personal and common long-term interest.
Jinasiri – at the moment, I’d settle for a reversal of the financial and administrative power handed to unelected technocrats through the neoliberal agenda. Once that’s gone, we’ll discover that there’s a good old fashioned crisis of capitalism sitting beneath the hysteria. And then….well, that’s when the real re-building has to start.
I reckon we gotta work on the foundations now or else the crisis of capitalism will lead to a dark age that will make post-Roman Europe look like a lodestar.
Anyway, work on values does all jobs as we need leaders with decent values as well people who will vote for them before, during and after descent/collapse.
Jinasiri – I agree. In fact, that’s kind of what I meant. We have to get rid of all the superfluous nonsense and find our way back to what actually makes sense again. Turn on, tune in and drop out.
Properly resolving the existential connundrums opened by Nietzsche is key to this, I think. Your upcoming book sounds like a winner.
I think Nietzsche would say we shouldn’t try to resolve them, but transcend them. Of course, then we’ll have a different set of conundrums to deal with. No rest for the wicked 😉
I think that’s one of the primary roots of his breakdown. Resolution and transcendence need to be integrated for either to succeed. And then, they who reach the end of the Path, at least in my faith, get to rest: the final Holyday. But it’s a constant spiral of heroic battle (Zarathustra) and patient convalesce (Gay Science) before that. 😉
Fair enough. Nietzsche was very clear on this, however. In his philosophy, seeking eternal rest is a sign of decadence and this was his criticism of all major world religions. That doesn’t mean he’s right, of course, but I don’t believe it’s related to his madness. Goethe expressed the same idea in Faust and, in a roundabout way, we see it enacted in the modern world in the likes of Biden and Trump who fight on to the end, well past the time when they could comfortably retire.
I meant his rejection of resolution (with tradition) was a primary a cause for his madness: He was too forward and upward looking, like a birch that, proud of its straightness, cuts off its own roots in order to make conspicuous gains in height.
If deeply and rightly motivated, tireless striving (which immediately implies periodic rest) tends towards resilience of mind. But striving without roots goes to downfall — not to mention while delighting in butchering the roots.
What’s your pet hypothesis for why Nietzsche went mad?
Neurological damage from medically-induced mercury poisoning.
Hmmmm 🤔 … reminds me of the mad genius of the S Town podcasts, John B. McLemore. How old was Nietzsche when hae got poisoned?
Well, we have to remember that however bad the medical industry is today, it was ten times worse in the 19th century. Mercury was used in a number of medicines and Nietzsche was regularly sick, which meant he was basically a walking lab rat. Anyway, he was diagnosed with syphilis at 23 years of age and it was common at that time to directly apply mercury as a treatment. In addition, he would have been vaccinated during the Franco-Prussian war and the vaccine contained mercury. Like most soldiers, he got diphtheria during the war and the treatment he received made him even more ill, and probably also contained mercury.
Hi Simon,
The events which unravel these sorts of exercises in economic unreality, historically have always been quite innocuous and mostly unheralded. From memory, you’ve written about the historic and very English episode, The South Seas Bubble? A strange affair which only makes sense from hindsight.
As a metaphor, it’s hard to know for sure what will kick out the foundations of this rickety edifice.
Truly, I was astounded in 1997 that this path of all the other choices would be taken, and after 27 years, I’m completely baffled that things could go on this long without consequence. Dunno. It just makes no sense to undermine the value of a fiat currency – always has it ended badly.
Cheers
Chris
Chris – fiat currency, like stocks, go bust when the money can flow into some alternative. The Americans are able to prevent that by tying the currency to trade, especially the trade in oil, which gives the whole system a stability and transparency that is very hard for competitors to copy. The strength of that system means that Americans can then export inflation to the rest of the world, which becomes an invisible form of tribute paid to the imperial centre. It’s a pretty incredible system if you think about it.
“It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.”
– Henry Ford –
I see your Henry Ford quote and raise you a Napoleon: “War is when the government tells you who the enemy is. Revolution is when you figure it out for yourself.”
Then I’ll wager a Sheridan: “Valhalla, I am coming!”
Hah! Unfortunately, I cannot take credit for that one. I stole it from Led Zeppelin – https://www.youtube.com/watch?v=P3Y8OWkiUts
Hi Simon,
Agreed, it is an incredible system, and that’s the consequence. Yes, export inflation to the rest of the world.
The real risk with the arrangements is if an alternative currency replaces the US dollar as the reserve for international trading in oil. It takes a very effective military to enforce the present arrangements.
Sooner or later the present arrangements will unwind, but when, and what that will look like is anyone’s guess.
Cheers
Chris
The system is unwinding as we speak. Dark systems depended upon stability in views as to who the enemy is. Those lines are changing fast. Some will conclude the enemy is foreign and wage wars. Others will think it’s domestic and conduct civil wars. 2025 will be the year where the players will shut their mealy mouths, show their bloody hands and go for the kill.
Most appear to have already forgotten that the enemy is war of any kind whatsoever. A thousand simultaneous wrongs don’t make any rights. We have this habit of going into battles to behave worse than the enemies we say we oppose and upping the ante each time the opposition does the same.
Self-defence is another thing, of course. But we need to get clear about what that means as, misunderstood, the concept is used to wage more wars.
At the heart, the perennial enemies are greed, hatred, delusion and fear. But we need clarity as to what these are too! And how to oppose them.
What is the use of fighting, maiming and being maimed, killing and being killed, starving and being starved only to replace one dark system with another?
I’m not sure that’s true. In fact, for at least a couple of hundred years now there has been no agreement about who the enemy is. More specifically, somebody who was a friend one minute turns into an enemy the next. Maybe it’s always been that way and the only difference is that now it’s not possible to impose a coherent narrative.
“it’s not possible to impose a coherent narrative”.
True. But as the COVID schnozzle showed, narratives don’t need to be coherent to be imposed. You just need to get people shit-scared (or frothing-at-the-mouth furious or gold-fever greedy). There are an infinite variety of ways to do it. But these disturbed emotional states are the common historical threads.
Although which particular groups are identified as “the enemy” can turn on a dime, the underlying narrative needs to have some sort of meta-coherence for a system to stay in place. It need not be rational nor sophisticated. For example, it may be “the Devil”, “Capitalists”, “tyranny” or “privilege” and then you can fill in the blanks as per expedience as to who meets the bill. The overall purpose being to bolster one’s own position as the “good guys” who are against the Devil, etc who will save the day and accordingly deserve to lead.
Anyhow, to bring it all back on topic, governments go from addiction to fear and anger cycles (war) to greed and lust cycles (“peace”). In times of “peace and plenty”, the iniquity of inflation is a symptom not the cause. Those who don’t see the game get caught up in it.
Freedom consists of seeing the real enemy within.
When you put it that way, I suppose that’s also why times of peace and prosperity are more spiritually difficult since there is no external enemy to project onto and people are left to confront themselves.
Exactly. For life to be meaningful, the masculine needs a battle (we turn into Momma’s boys otherwise). We were given the chance to look within for that fight during the COVID lockdowns and failed. The price of the failure will be war. Despite Penny Wong’s cautionary words, I forecast eventually Australia will be dragged in too. Then the internal question arises again. Will we become the monsters we abhor?
Well, covid was the enemy. That’s even the way politicians talked about it. More generally, politics has become the projection screen for all internal issues.