Slaying Dragons #14 – Digital Deflation

John Watkinson considers deflation in the digital world.

Since the economic crash of 2008 it has become clear that it was not a temporary event, but a correction whose results would be near permanent. Corrections take place when the wrong road has been taken for too long. In this case the wrong road was excessive borrowing, by individuals and governments alike, for the sole purpose of having what could not be afforded by pushing the problem into the future.

Economists and politicians bang on about growth, but in a finite world, indefinite growth is not possible and is the direct antithesis of environmental protection. There is no fundamental requirement for growth in an economy that I can identify, other than it being proportional to the size of the population.

The need for growth must therefore be political. Traditionally, when there has been government borrowing, the interest would be paid back by the greater tax revenues in the future made possible by growth. It’s a classic pyramid scheme. If as an individual I created a scheme like that, I would most likely end up in jail, but somehow it’s all right for politicians to do it.

Let’s be clear what happened in 2008. Homeowners were offered mortgages whose repayments they could afford for houses they couldn’t afford. What they didn’t realise was that is only possible if the debt increases. Somehow it was all right for banks to do that. Inevitably one day the repayments go up. Many couldn’t afford it so it backfired on the bank when income from repayments dried up.

The larger pyramid scheme is coming unglued as a result of a number of factors whose effects combined. For understandable reasons, there was a peak in births just after WWII, which then returned to a slowing of population growth. I was part of it. We baby boomers are now retiring and instead of contributing taxes, we are drawing pensions and needing medical attention. To make matters worse… [contd]

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