Governments who have taxed their populace as heavily as they can, must borrow if they wish to keep spending.
And boy do they.
Once they have borrowed as irresponsibly as the free markets will allow, the cost of servicing and acquiring new debt becomes too heavy a burden and their spending must be cut.
Unfortunately, when you have spent decades making promises, cuts in spending are so unpopular with so many people, you can’t do it without them rioting. To quote Jean-Claude Druncker… “We know what we have to do, we just don’t know how to get elected afterwards!”
So you drive interest rates to zero and carry on borrowing if you can. Of course savers are very unhappy, but in a nation as indebted as ours, savers are a minority whose views can be safely ignored.
Old people don’t riot.
Before you know it, consumer debt is at record levels, businesses with terrible business models (that would not have survived if forced to borrow at 8%) can stagger on for years (misallocating resources and labour into pointless activities) but governments have a bit of a problem – who will lend them money at 1%?
Too few investors are willing to lend money at 1%, especially when the government asking for their money with one hand is using the other to whip the central bank into pursuing 2% inflation!
So the central bank has to start printing money, and the inflation begins (“Inflation is always and everywhere a monetary phenomenon” – Milton Friedman), first in the things bought by the rich (stocks, art, real estate etc), then eventually in those things bought by the rest of us – The Cantillon Effect.
But now the government has a whole bunch of new problems. Inflation of the money supply means we need more of it to buy stuff – prices of things start to rise.
But not everything – when the price of stuff that people NEED goes up, they have to stop buying the things that they merely WANT.
So electricity rises in price but people keep buying it, using the money they saved by not buying a new car.
Sales of energy stays solid. Sales of new cars drops off a cliff (so their prices actually then fall in an attempt to stimulate demand)
Inflation in our essential spending, and deflation in our discretionary spending.
And this is one neat way the government hides the inflation – they keep putting the discretionary stuff in the basket, even though no-one is buying that stuff any more!
Soon stores are closing and a retail apocalypse begins as discretionary spending craters – the government is forced to repeatedly adjust the way inflation is calculated in order to keep secret their accelerating debauchment of the currency.
Eventually a house of cards of deceptions has been built, with the desperate government printing money and resorting to extraordinary monetary and fiscal policies to keep it standing. Inflation data is fiddled, the price of physical metals suppressed, sales data cooked and stock markets supported to prevent a critical mass of awareness from developing. Any downward momentum in equities must be squashed, even if this means resorting to circuit breakers or even worse, just creating “technical problems” at exchanges.
Eventually the whole edifice is so rickety that a minor black swan would bring it crashing down and the blame would land on those who have spent so long abusing their privileges. They realise that a controlled demolition is preferable and they engineer their own “black swan” (that “no-one could possibly have seen coming”) which they can then blame on whomever they decide.
As the hapless orange patsy is buried under an avalanche of accusation and blame, the true architects of the disaster admit with great sorrow that their policies were working just fine until this disaster befell us, and express great regret and promise to ensure such a crisis can never happen again, if only we grant them lots of additional power and control.
And we will.