Friday, August 19, 2011

Deflation and Debt Slavery

Consider the following. You live in a world that is growing every day. With that growth, economies of scale and improvements in technology conspire to bring forward real, practical, improvements in the reward you receive for your labor.

In this world, as in any other, you need to be a part of a society to benefit from the growth, and so you need a roof over your head in a location that allows you to work, to obtain the resources necessary for your survival, and, well, to live.

One option provided to you is to obtain a loan to purchase a house. The terms of the loan are, apparently, quite simple: you pay a fixed amount every month, for thirty years, and at the end of the loan you own the house. Should you stop paying, then you lose the house, and probably a lot of money at the same time, but you can always pay the loan off early, and you should be able to do so simply by selling the house.

Put these together, and you make your decision based upon the reality that your life exists within the growing economy. Unless you make some colossal errors, your income will rise, and based upon this fact, you can reasonably assume that the loan payments will become less burdensome over time. Should you make the colossal errors, you still have Plan B, in that you can sell the house, and use the proceeds to pay off the loan.

Following me so far? Good.

Now, what if I were to tell you that a sizable part of the political establishment right now believes that the value of the loan should be tied to the size of the economy, or worse, should actually grow in weight faster than the economy does. That the burden of debt repayments should always get worse, not better. And that escape routes, such as selling your home, should become more difficult, because the price of your home should never rise, and could even fall.

That's what deflation is. When people are proposing deflation, or claiming it is somehow better than inflation, they're proposing that the value of a dollar should increase. This means that things priced in dollars, such as homes, will reduce in dollar value. It means that someone can take your salary and say "Well, in real terms your salary has increased by 5% over the year, because the dollar now pays for 5% more "stuff", but we only saw a 3% increase in productivity, so we're going to cut your salary by the difference."

So even though you may be more valuable, that you may be working harder than ever before, a loan you took in good faith will become more and more of a burden, and your ability to spend money on other essentials will steadily erode. And realistically, you end up defaulting on your obligations, and the debts pile up, and become more and more burdensome, until you're unable to see a date where you'll pay them off in your own lifetime.

Now the counter argument made by some is "What of it? We need a new economy where people work, save, and then receive the items they need." With respect, this is sheer idiocy.

To begin with, that's not the world now, and to switch to that system without nullifying every loan ever made is unspeakably cruel and unfair.

But moreover, when do you expect people to have the money to buy the things they need? Is it reasonable for someone to be unable to buy a place to live until they're 50? What would be the consequences of a system where people have to wait decades before they can do such a thing, given that new homes are built, unquestionably improving the housing stock, providing good jobs to a sizable portion of the population in the process, because people buy homes when they can afford loan payments?

And this is one example. From someone buying a television on credit, to a business starting up with a business loan, the simple reality is that loans make it possible for commerce to happen that simply wouldn't happen otherwise. And that means growth. And that means we live in 2011, in a society that's pretty close to free from want, from hunger and a lack of shelter, and one in which the vast majority live in unparalleled luxury.

Is inflation, rather then deflation, fair? It's a fair question, but it's also worth noting that inflation hardly has the same effects as deflation. Inflation encourages lending and borrowing, as both sides see it in the best interests to ensure money is "working", that it's in the hands of people who can turn it into more money. Yet, for some reason, ordinary, non-extreme, inflation is seen by many politicians as a terrible thing. Not because of stagflation, or any practical reason like that, but because it's seen as immoral and wrong, a way to steal from those who hoard large piles of green pieces of paper.

I think this is wrong, and I just felt like writing a journal entry to explain why.

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