Fire, Then Ice: Our Deflationary Future

Lest you weep for those whose phantom wealth will be drained away, recall that few win when a reserve currency dies. Labor can start earning the day after the reset, but the capital lost is gone for good.

Outside the “everything’s always fine” echo-chamber, the consensus is that easily created fiat currencies will all evaporate as the temptation to continue printing/borrowing money into existence is irresistible: the only way to keep the system from imploding is to devalue the soaring debt and interest payments with inflation, and the dial controlling inflation is money-printing / central banks buying debt and all the related tricks.

The problem is that once the dial is turned to 11, inflationary expectations start feeding back into real-world inflation and inflation then escapes the control of central bankers and government treasuries: creating more money to devalue the currency and service the debt ends up destroying the currency via hyper-inflation. People Money: The Prom... Rogers, John Best Price: $36.31 Buy New $22.00 (as of 12:13 UTC - Details)

History offers many examples of this temptation and dynamic. The pain of debts being written off, governments defaulting on bonds and assets crashing is too great, and so we have to print more money / borrow more money into existence to stave off the painful reckoning of debt dependence and central bank hubris.

To stave off the pain of debt saturation / over-indebtedness, monetary authorities collapse the currency and the economy it supported, unleashing maximum pain on everyone who used the currency or owned assets denominated in the currency.

A new dollar is then introduced at a ratio of 1 new unit to 100, or 1,000, or 100,000 of the old dollars. Everyone’s financial wealth is wiped out. Tools, skills, precious metals, buildings, mines, farms, etc., still retain their intrinsic / productive value, but the monetary reset means everyone whose phantom wealth was a form of debt is wiped out.

This dynamic makes perfect sense, and it’s a well-worn pathway for nation-states. Empires, however, might choose differently. The difference between a nation-state and an empire is generally under-appreciated. A nation-state can destroy its currency and bankrupt everyone holding its bonds / debt and start over, but an empire cannot be quite so cavalier, for the “reserve currency” of the empire is its foundation of power.

Yes, the hard power of military power projection is a core strength, along with trade, alliances, cultural and diplomatic soft power, but if the currency evaporates, so does the Imperial Project, and those tasked with maintaining the Imperial Project are forced to calibrate pain by a different standard than politicians and central bankers. Domestic Imperialism: ... Knight, Keith Buy New $14.00 (as of 09:30 UTC - Details)

Inflation and the evaporation of the currency is not a solution for the Imperial Project, it is the surrender of all that is great and good. The only viable solution for the Imperial Project is deflation, the forced liquidation of unpayable debts and thus the forced liquidation of all the phantom wealth generated by ever-expanding debt.

Just as inflation has many sources, so too does deflation. Technology can be a source of deflation, as a new technology can dramatically increase supply and durability while dramatically lowering costs. Substitution can be deflationary, as enterprises and consumers swap a cheaper, more abundant substitute for whatever was becoming scarce and costly.

If the sum of “money” circulating in the economy contracts as credit tightens, it becomes harder to borrow more money into existence. Every dollar of debt that’s written down to zero reduces the quantity of money floating around, i.e. the money supply.

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