The country that made land

Economics treats land as the fixed factor of production. It is the one input that cannot be manufactured, which is why its price behaves differently from the price of everything else and why, in the framework this series uses, the near-zero supply elasticity of well-located land is the first primitive from which the rest of the pathology follows.

The Netherlands is the standing exception. Something like a fifth of the country’s land area was pulled out of sea, lake and marsh, and around a quarter of it now sits below sea level, held there by a hydraulic bureaucracy older than the state. If any country could demonstrate that land scarcity is a policy rather than a geological fact, it is this one.

It has demonstrated it, though not in the direction one might expect. The Dutch made the land. What they have not managed to do is permit the homes. The country now scores 9 out of 10 on supply elasticity in the RBH Ratings, one point higher than Canada, on the strength of an OECD estimate that places its housing supply response second lowest in the developed world. The constraint was never the sea.

That is the first of three findings in this study. The second is that the Netherlands has built the most institutionalised version of the black hole yet examined: two enormous capital sinks, the housing stock and the pension system, stacked on the same household balance sheet, with one now lending to the other. The third is that the widely reported cooling of the Dutch market in 2025 and 2026 is real in the price data and misleading in its cause. It is not a supply response, It is a transfer of existing homes from one tenure to another, and the policy that produced it has already begun to be reversed.

Subscribe now

Share

The puzzle in the July data

In July 2026 the average existing home in the Netherlands sold for 500,988 euros. A year earlier the figure was 486,041. The national house price index rose 3.9 per cent over the twelve months, down from a peak of 11.9 per cent in November 2024, and stands 17.9 per cent above the previous peak of July 2022. Transactions ran 5 per cent above the prior year, with 137,142 homes changing hands in the first seven months. The long boom that preceded all of this took prices from their June 2013 trough to more than 99 per cent higher by the summer of 2022.

Every headline written about that release led with the cooling. The half-million euro average was, correctly, described as a record; the deceleration was, correctly, described as continuing. Both things are true. The interesting question is how a market this stretched, with the highest private-rental cost burden in the European Union and the second lowest measured supply elasticity in the OECD, produces price growth that halves within eighteen months of the peak. The answer is not that supply has arrived. It is that a particular kind of owner has left.

E: permission is not production

Cavalleri, Luu and Causa’s 2019 OECD estimates of housing supply responsiveness are the standard reference for this series. They give the Netherlands a long-run price elasticity of new supply of 0.186, against 0.395 for the United Kingdom, 0.705 for New Zealand, 1.187 for Canada and 2.014 for the United States. Only Switzerland, at 0.146, scores lower. The same paper reports that a building permit in the Netherlands takes in the region of 85 days to obtain, and plots the country in the bottom right corner of a scatter in which permit time and supply responsiveness correlate at minus 0.56.

The second column of the same table deserves more attention than it gets. Alongside the long-run elasticity, the authors estimate a speed of adjustment, the coefficient on the error correction term in the short-run investment equation. The Netherlands scores minus 0.775, the most negative in the sample, which is to say the fastest. Dutch housing supply is not slow to respond to price. It responds quickly, toward a long-run target that barely moves. The system is efficient. It is efficient at delivering almost nothing.

Those estimates were produced on data that predate the event which now dominates Dutch construction. It is worth telling that story properly, because it is the least intuitive part of the case and the clearest illustration of the framework’s claim that supply inelasticity is often institutional rather than physical.

Under the EU Habitats Directive, the Netherlands maintains some 160 protected Natura 2000 areas. Nitrogen compounds, ammonia from livestock and nitrogen oxides from traffic, industry and construction, settle on these areas and degrade them, and the law requires that any permit for an activity adding deposition near a protected area demonstrate that no harm will result. The Netherlands has the highest livestock density in Europe and correspondingly severe nitrogen overload. In 2015 the state adopted a programme, the PAS, which allowed permits to be issued immediately against reductions in deposition that were planned but had not yet occurred. It was, structurally, a nitrogen mortgage: consumption of environmental room now, secured on promised repayment later.

The European Court of Justice ruled the approach incompatible with the directive in 2018. In May 2019 the Raad van State, the country’s highest administrative court, struck the PAS down, and the legal basis under roughly 18,000 projects went with it. Since then, each project near a protected area has required its own deposition calculation, and in a country as small and as densely populated as this one, almost everywhere is near a protected area. The state cut the daytime motorway speed limit to 100 kilometres per hour in 2019 purely to free nitrogen room for construction. In 2021 it created a blanket exemption for the construction phase of building projects; in November 2022 the same court struck that down too, in the Porthos judgment, on the same reasoning. In January 2025 a district court ordered the state to meet its own statutory reduction targets for 2030. The farmer protests, the rise of a farmers’ party to national significance, and the collapse of more than one coalition arrangement trace to this single legal fact.

The OECD’s own language for the effect is the correct one: projects have faced delays and cancellations and case-by-case environmental assessment. The ruling did not halt permitting. It removed a shortcut, and the state has failed for seven years to build a lawful replacement. Construction itself accounts for only a small fraction of national nitrogen deposition; the overwhelming share is agricultural. But housing bears the permitting burden because each new project is the marginal permit into a budget that has already been spent. The binding constraint on Dutch housing supply is a court-enforced environmental account, and the overdraft belongs to someone else.

Add congestion on the electricity grid, which now imposes queues on connecting new developments in much of the country, and the construction numbers follow. The median time from permit to completion for homes finished in the first three quarters of 2025 was just under 23 months, against 16 months in 2015. In the first five months of 2026, building permits rose 27.6 per cent on the prior year. Completions fell 7.2 per cent. Permission is not production.

Supply elasticity: 9.

C: the full house

In most of Europe, a mortgage requires a deposit. In the Netherlands the statutory maximum loan-to-value ratio is 100 per cent. A buyer may finance the entire purchase price with debt, and the system relies instead on income-based limits set annually by the National Institute for Family Finance Information, Nibud, and on a state guarantee scheme, the NHG, which in 2026 covers loans up to 470,000 euros, or 498,200 where energy improvements are financed alongside. A home with the highest energy label carries an additional 40,000 euros of borrowing capacity in 2026 on top of the income norm.

Borrowers use what they are given. First-time buyers draw on average around 92 per cent of their maximum income-based capacity, and more than half take a loan-to-value ratio above 90 per cent. Modelled borrowing capacity for an average-income first-time buyer rose 239 per cent between 1995 and 2022. The De Nederlandsche Bank’s summary of the consequence is that house prices have risen faster since 2013 than maximum borrowing capacity, and faster than a broader measure of financing capacity that includes net household wealth. This is the collateral channel operating as the framework describes it: each easing of credit is capitalised into the price of the fixed factor, and the borrower is left where they started, further from the ground.

The stock inherits the history. Before 2013 the Dutch market ran extensively on interest-only mortgages, loans with no contractual repayment during the term, and although new lending of that kind was curtailed when the mortgage interest deduction was restricted to repayment loans, the legacy remains. Interest-only loans still account for almost 40 per cent of total mortgage debt, and the supervisors have formally warned about the repayment risk as the 2005 to 2008 vintages approach maturity in the 2030s. Household mortgage debt stands at 79.4 per cent of GDP on the broad CBS measure for 2025, down from the peak but still among the highest in the euro area, and roughly half of Dutch households carry a mortgage, an unusually high share by European standards.

What distinguishes the Dutch case is not the leverage but where it sits. The Netherlands runs one of the largest funded pension systems in the world, and the CBS’s wealth distribution work now allows the two great domestic capital sinks to be placed side by side. Including pension entitlements, total household wealth was 4.318 trillion euros at the start of 2024. Pension wealth accounted for 1,563.9 billion of that, 36.2 per cent. Net owner-occupied housing wealth accounted for 1,373.2 billion, 31.8 per cent. Pension wealth exceeds housing wealth. On the conventional measure that excludes pension claims, the home is 58 per cent of everything Dutch households own. Between these two positions there is remarkably little: households held 234.2 billion euros in securities directly in mid-2026, against 552.6 billion in savings accounts, and only around 2.2 million of 8.4 million households invest at all.

The two sinks are not independent. Of the more than 890 billion euros of household mortgage debt held by Dutch financial institutions at the end of 2025, banks hold 628 billion, 71 per cent. Pension funds, insurers and investment funds hold 174 billion, some 15 per cent of GDP, making them the second largest lender group, and most of the growth in mortgage debt since 2014 has come from them rather than from the banks. The Dutch household holds a leveraged claim on domestic housing, a compulsory claim on a pension fund, and the pension fund holds the mortgage. One sink is buying the other sink’s debt. The framework describes a system in which savings are channelled into the fixed factor rather than into productive capital; the Netherlands has built the institutional plumbing to do it at scale, with a fiduciary duty attached.

Collateral channel: 9.

T: the triple exemption

The Dutch income tax divides income into three boxes. The owner-occupied home lives in Box 1, alongside employment income, and enjoys three distinct advantages there.

The first is the hypotheekrenteaftrek, the mortgage interest deduction. Interest on the loan for one’s own home is deductible against income tax, at a rate capped at 37.56 per cent in 2026 after a decade of gradual reduction from the top marginal rate. Since 2013, new loans qualify only if they are repaid in full over thirty years on an annuity or linear schedule. A notional rental value, the eigenwoningforfait, is added to taxable income at 0.35 per cent of the assessed value for most homes, a figure small enough that for most mortgaged owners the deduction dominates it comfortably. The deduction has been curtailed by every government for fifteen years and abolished by none.

The second advantage is that there is no standalone capital gains tax on the sale of a primary residence. The bijleenregeling, which can reduce the interest deductible on a subsequent home by the amount of equity realised on the previous one, means the gain is not entirely without tax consequence, but there is no levy on it as such.

The third is that the primary residence is excluded entirely from Box 3, the wealth tax on savings and investments. Financial assets receive the opposite treatment. Box 3 taxes a deemed return, set for 2026 at 6.00 per cent on investments and other assets, 1.28 per cent on bank balances and 2.70 per cent on debts, at a rate of 36 per cent above an allowance of 59,357 euros per person. The deemed return applies whether or not the return was earned. After the Supreme Court’s Christmas judgment of 2021 found the previous version of this regime incompatible with the European Convention on Human Rights, and a further ruling in June 2024 found the statutory remedy insufficient, taxpayers may now substantiate a lower actual return, including unrealised losses, and be taxed on that instead.

The Netherlands is now attempting to replace this system, and the replacement is where the asymmetry becomes explicit. The Actual Return in Box 3 Act, which passed the Lower House on 12 February 2026 and awaits a Senate vote deferred pending corrective legislation, would from 2028 tax the annual increase in value of listed shares, bonds and similar assets, whether or not realised, at 36 per cent. Real estate held in Box 3 would instead face capital gains tax on realisation, with a valuation step-up at 1 January 2028 that permanently exempts all appreciation before that date. Parliament has already asked the government to bring forward a realised-gains alternative by Budget Day 2028. Nothing in the proposal touches the primary residence, which stays in Box 1 with all three exemptions intact. The direction of travel, as drafted, is toward annual taxation of paper gains on productive claims and lifetime exemption of paper gains on land.

The transfer tax completes the picture. Buyers aged 18 to 34 purchasing a first home under 555,000 euros pay nothing, once. Owner-occupiers pay 2 per cent. Investors in residential property paid 10.4 per cent in 2025; from 2026 the rate is 8 per cent, and the government’s stated objective in cutting it was to encourage investment in, and increase the supply of, private rental housing. That decision was taken within the same policy cycle as the rent regulation that drove the investors out, and it is the pivot on which the rest of this study turns.

Tax wedge: 8.

The cooling that is not a cooling

The Affordable Rent Act of 2024 extended rent regulation to the mid-market segment, at the same time as Box 3 changes raised the effective tax on rental income. Private landlords, whose returns were squeezed from both directions, responded in the only way available to them: they stopped re-letting when tenants left, and sold. Because the homes they owned were disproportionately cheaper flats, the sales landed in the segment of the owner-occupied market where first-time buyers compete, and the Kadaster’s estimate is that without investor sales the average purchase price in early 2026 would have been more than 3 per cent higher. Estate agents listed a record 56,700 existing homes in the second quarter of 2026, the most in a single quarter since records began in 1995.

This is the mechanism behind the headlines, but one minor note: it adds nothing to the housing stock. The European Commission’s 2026 country report puts the figure plainly. By 1 January 2026 the Netherlands had around 16,000 fewer private rental homes than two years earlier, reversing a period from 2020 to 2023 in which roughly 36,000 were being added each year. Investors still own more than 745,000 homes, close to 9 per cent of the stock, and the number is falling. The same homes exist. They have changed tenure. The purchase market has been eased by shrinking an already pressured rental market, which is why the private-rental cost burden and the owner-occupied price record can sit in the same month’s data without contradiction.

Higher mortgage rates and softer demand have contributed to the deceleration too; the sell-off is the distinctive component of the cooling, not the whole of it. But the distinctive component is the one that matters for the diagnosis, because it is temporary by construction. The Kadaster judged in May 2026 that the peak of the sell-off had passed: private investors sold some 3,400 rental homes to owner-occupiers in the first quarter, fewer than a year earlier for the first time in three years. Rabobank expects the wave to fade through 2026 and the market to tighten again as it does. The DNB’s assessment is the same. The Netherlands’ largest institutional landlord has faced redemption requests from its own investors. And the transfer tax on investment property has been cut by a quarter, with the explicit purpose of drawing the landlords back.

The sequence, then, is this. A regulation squeezed one class of rentier. The squeezed stock changed hands rather than growing. The state, having observed the shrinking of the rental sector, discounted the price of re-entry. The framework describes the black hole as an attractor: perturb the system and it returns. The Dutch data show the return happening in real time, with a lag of about two years.

Who pays

Rents in the regulated and unregulated sectors rose 5.4 per cent in the year to July 2024, the steepest increase in more than thirty years, 4.9 per cent in 2025, and a provisional 4.4 per cent in 2026, with the final figure due from the CBS later this month. The average newly let free-sector home commanded 1,830 euros a month in mid-2025, and under the three-times-rent income norm that most landlords apply, qualifying for it requires a gross monthly income of around 5,490 euros. Employed owner-occupiers with a mortgage spend, on regional median figures, between 20 and 28 per cent of income on housing; private-sector renters spend between 28 and 38 per cent.

The comparative number is starker. Among Dutch tenants renting at market rates, 43.9 per cent spend more than 40 per cent of their disposable income on housing. That is the highest housing cost overburden rate in the European Union, against an EU figure of 19.2 per cent for the same group, and the European Commission cites it in its own assessment of the country. A market that has produced the highest private-renter burden in the Union alongside a half-million euro average price is not one that has mispriced anything. It has priced the fixed factor correctly, given the elasticity, the credit and the tax, and distributed the cost to the people who arrived last.

The other side of that distribution is visible in the wealth data. Median household wealth in 2024 was 135,500 euros, more than double the 2019 figure, and the CBS attributes the increase mainly to house prices. On the conventional measure, 58 per cent of gross household assets is the home. A society in which the median household’s wealth doubles in five years without anyone producing anything additional has not become richer. It has revalued a claim on the ground, and the revaluation is paid by whoever must now buy or rent that ground from the incumbents.

The macro signature

The framework predicts that an economy which channels its savings into the fixed factor will show a characteristic set of aggregates: weak domestic investment relative to saving, a declining share of tradable production, stagnant productivity, and a wedge between what labour produces and what it is paid. The Dutch aggregates show all four.

The current account surplus was 9.4 per cent of GDP in 2023 and 9.1 per cent in 2024, against a European Commission imbalance threshold of 6 per cent that the Netherlands has exceeded for well over a decade. The OECD’s 2025 survey reads the surplus as the mirror image of a savings-investment gap, with saving concentrated in the corporate sector and domestic investment held down by labour shortages, electricity grid congestion and the nitrogen constraint. That is the framework’s description almost verbatim: the surplus is not a sign of competitiveness but of a domestic economy that cannot absorb its own saving into productive capital, because the permitted uses of capital have narrowed.

Manufacturing accounted for 24.6 per cent of total value added in 1969 and 12.0 per cent in 2023, on the CBS long series, with services at 77 per cent by the latter date. On the internationally comparable measure of manufacturing as a share of GDP, the decline runs from 14.6 per cent in 1995 to 10.1 per cent in 2024. The sector has turned up cyclically in 2026, with output 4.6 per cent higher in June than a year earlier after eighteen consecutive months without growth to the end of 2024, and the argument here is not that Dutch industry is contracting. It is that its share of the economy has halved over two generations while the share of the economy devoted to holding, financing and taxing the fixed factor has grown.

Labour productivity growth averaged 0.3 per cent a year over the past decade, against 0.7 per cent in the decade before and 1.7 per cent in the decade before that. The series fell 1.9 per cent in 2023 and 0.3 per cent in 2024, then rose 2.4 per cent in 2025, the strongest annual increase in twenty years. The snap-back is real and should be stated; the trend is what the framework predicts, and one good year does not reverse a two-decade slope.

The wedge is measured in the national accounts. Indexed to 2001, hourly labour productivity had reached roughly 122 by 2024, actual hourly compensation roughly 113, and the collectively agreed wage index barely 102, all deflated by Dutch CPI. Real earnings have fallen around 10 per cent behind productivity over the period, and the wage share of net national income, excluding self-employment income, dropped from 67 per cent in 2001 to 61 per cent in 2023 before recovering somewhat. Two cautions attach. The OECD’s work on wage-productivity decoupling notes that part of the measured decline in labour shares across countries reflects sectors, housing among them, where the labour share is driven by asset prices and imputation rather than by bargaining. And the George-crack discipline of this series applies: the framework claims the rent-driven component of the wedge, not the wedge entire.

One measurement point deserves a place here because it will matter for how the Dutch inflation record is read. The Dutch CPI includes an imputed rent for owner-occupiers, based on comparable market rents, with a 2026 weight of more than 12 per cent; actual rents carry a further weight above 6 per cent. Housing is therefore over 18.5 per cent of the Dutch consumer price basket. The harmonised European index excludes owner-occupied housing costs altogether. When Dutch rents accelerate, Dutch CPI runs above HICP, and the wage moderation described below is deflated by the higher of the two.

Wassenaar, and what nobody negotiated

The Netherlands has an interesting piece of its history that also notably contributes to the wedge also and is worth a mention.

In November 1982, at Wassenaar, the Dutch trade unions and employers’ federations agreed to moderate wage growth in exchange for measures to preserve and share employment. The bargain is the founding act of the polder model, and it worked. Dutch unemployment, which had been among the highest in Western Europe in the early 1980s and remained elevated into the early 1990s, has since the middle of that decade been consistently among the lowest in the European Union. The literature calls it the Dutch miracle, and the label is fair. Real collectively agreed wages have grown very little over the period, and a large share of the productivity gain has accrued elsewhere; but that was, in the first instance, the deal, and it was freely struck by the people it bound.

What the deal did not cover was the credit system. Wages were moderated. Borrowing was not. Over the same decades in which contract wages tracked inflation and little more, modelled borrowing capacity for a first-time buyer rose by a multiple, the loan-to-value ceiling stayed at the full purchase price, and the interest on the loan remained deductible. The gap between what work paid and what a home cost was bridged with debt, and the debt was capitalised into the price of the home. Nobody negotiated that part. There was no table at which it could have been negotiated, because it was not a bargain. It was an equilibrium.

No one designed the outcome. The unions won a real victory; the employers received real restraint; the state received low unemployment and a competitive export sector; the households received borrowing capacity in place of wage growth and were, on the whole, grateful for it. Each party got what it bargained for. The residual, the difference between the productivity and the pay, found its way into the one asset whose supply could not respond, and became a price.

Diagnosis

The surface reading of the Dutch market in 2026 is that it is improving. Price growth has fallen from 11.9 per cent to 3.9. Supply on the market is at a record. Buyers have breathing room, and first-time buyers in particular have found the cheaper flats that landlords have shed.

The structural reading is that the improvement is borrowed. A material part of the increase in owner-occupied supply is not housing supply at all; it is tenure conversion, and the sector it converted from was the one under the most pressure. Construction remains constrained by a legal budget that agriculture has already spent and by a grid that cannot connect what is built. Completions are falling while permits rise. Every structural primitive is intact or strengthening: the elasticity is the second lowest in the OECD and was measured before the ruling that made it worse; the loan-to-value ceiling is untouched and borrowers sit at its limit; the pension system has become the mortgage lender of marginal growth; the mortgage interest deduction survives another budget; the primary residence keeps its triple exemption; the proposed reform of the wealth tax would exempt land’s paper gains for ever while taxing productive assets’ paper gains every year; and the investor transfer tax has been cut by a quarter to invite back the class of owner whose exit produced the cooling.

The Netherlands is not escaping the attractor. It is oscillating inside it. The regulation of 2024 was a genuine perturbation, it produced a genuine and measurable response, and the system is already returning to where it was, with the state holding the door.

What happens when the loan comes due is not a forecast; it is a calendar. The sell-off wave that produced the cooling is fading, the Kadaster believes its peak has passed, and the lenders expect the market to tighten as it does. The interest-only vintages of the mid-2000s mature in the 2030s. The wealth tax reform, if enacted, takes effect in 2028 with its step-up. The nitrogen budget has not been rebalanced. Each of these is a scheduled event in a system whose response to scheduled events is now well documented.

The scores are 9 for supply elasticity, 9 for the collateral channel and 8 for the tax wedge, for a composite of 8.7. That places the Netherlands above Canada at the top of the ratings table, by a different route. Canada decapitalised its firms. The Netherlands institutionalised its sink, gave it a fiduciary duty, and put the country’s retirement on the same side of the trade as the country’s housing.

This is the best-governed country in the series, Its statistics are clean, Its courts are independent enough to have struck down the government’s own shortcut twice. Its unions and employers have kept the peace for forty years. Its unemployment is among the lowest in the Union. Its pension system is the envy of every finance ministry in Europe. It manufactured a fifth of its own territory and holds a quarter of it below the sea by force of administration. There is more state capacity per square kilometre here than anywhere on earth. Yet, the Netherlands has produced the second least responsive housing supply in the OECD, the heaviest renter burden in the European Union, a home that costs half a million euros on average, a mortgage book carried on the pension fund, and a tax code that will, as drafted, tax a saver’s paper gain on a share every year for life and never once tax a paper gain on land.

The black hole is not what happens when a country fails. It is what happens when a country succeeds inside the wrong set of constraints. Every Dutch institution did its job. The court enforced the law. The unions honoured their bargain. The pension funds sought return. The banks lent to the limit the rules allowed. Households borrowed what they were offered and bought what was there. Nobody broke anything, That is the point. A system in which every part functions and the whole delivers this outcome is not malfunctioning. It is functioning, this is the function.

If the Netherlands cannot administer its way out, no one can. The constraint was never competence, and it was never the sea. It is three primitives, sitting where they have sat for decades, quietly converting the best-run economy in Europe into a claim on its own ground. The Dutch built the land. The land now owns the Dutch.

The word bodemloos means bottomless. It is used of pits, of debts, and of markets. In 1672 a crowd in The Hague killed the Grand Pensionary Johan de Witt and his brother and, by contemporary account, ate parts of them. The country has since become the model of consensus. The consumption did not stop. It became orderly, and it changed direction: an economy consuming itself through recursive speculation on its own soil, a quieter mirror of a more colourful history.

Someone has been waiting the whole way through this essay for a tulip. I am sorry to disappoint you. Tulipmania was a bubble, and bubbles pop. Markets clear. There is pain, and then there is relief, and then there is a price again. A rentier black hole does none of those things. It does not pop, because nothing in it is mispriced. It does not clear, because the thing being priced cannot be produced. There is no relief, only a lower floor.

A bubble has a bottom. A rentier black hole is simply bodemloos.

Subscribe now

Share

Sources and Notes

All figures in this essay were verified against the named primary source before publication, in line with the series’ production rule that nothing is published uncleared. Price, transaction and rent data are from the CBS and Kadaster monthly releases to August 2026, with the 2026 rent figure provisional until the CBS finalises it in September. Household wealth and the pension decomposition are from the CBS wealth statistics including pension entitlements, reference date 1 January 2024. Mortgage stock, lender composition and interest-only shares are from the De Nederlandsche Bank residential mortgage dashboard to end-2025 and the DNB and AFM statements of March 2026; the 79.4 per cent debt-to-GDP figure is the broader CBS household measure and should not be conflated with the DNB institutional-scope figure of around 75 per cent. Supply elasticities are from Cavalleri, Luu and Causa, “How Responsive are Housing Markets in the OECD?”, OECD Economics Department Working Paper 1589 (2019). Housing cost overburden is Eurostat EU-SILC as cited in the European Commission’s 2026 in-depth review of the Netherlands, which is also the source for the private rental stock figures. Productivity, wages and the wage share are CBS national accounts as compiled in the IZA World of Labor country profile, with wages deflated by Dutch CPI, the wage share taken over net national income excluding self-employment income, and the 2024 productivity value a CPB expectation. Tax parameters are from the Belastingdienst and the 2026 Tax Plan; the description of the 2028 Box 3 regime reflects the bill as passed by the Lower House and not yet enacted. The nitrogen chronology draws on the judgments of the Raad van State of May 2019 and November 2022 and the OECD Economic Survey of the Netherlands 2025. The reclaimed-land share is given approximately because it varies with the definition of reclamation adopted.

Under the accretion of the Rentier Black Hole, an inelastic, collateralised and tax-advantaged asset can sleepwalk an economy, through individually rational decisions, toward collective decline. Put simply, property eats the economy.

We have already discussed what happens to those left below the reference.

In The Accretion Disk, I argued that the ordinary reference life is increasingly written in the language of property ownership, the balance-sheet position a successful life is expected to reach, inferred from the generation ahead and from the society around it. As the structural rentier asset appreciates, that reference moves with it.

For someone below that reference, the rational allocation may cease to look like a steady plan and begin to look like a lottery distribution. A conventional portfolio can produce a perfectly respectable return in absolute terms and still amount to a near-certain loss relative to the asset one is trying to catch. The tiny probability gamble may be worse on average, but it contains something the prudent strategy no longer does, a state of the world in which the gap closes. Under those conditions, the gamble is not necessarily stupidity. It may simply be the only strategy on the menu that still contains escape.

In Degeneracy Is the Symptom, I argued that this does not stop with investments. The same distribution appears in careers and lived choices: the meme coin, the speculative venture, the creator economy, the job with a microscopic chance of extraordinary success. What looks like degeneracy from above the reference can look like rational skew-seeking from below it.

Those above the reference inhabit a different problem. They find themselves rational at these heights, prudent investors, risk averse in the main. From that position, the behaviour below looks incomprehensible, and what a society cannot explain structurally it tends to explain morally. “The gambler is degenerate. The renter is entitled. The young are irresponsible. The angry voter is stupid.”

This essay takes the mechanism to its political conclusion. There is no reason the gamble stops at the brokerage account.

If an increasing share of a population is pushed below a socially learned reference and becomes more willing to accept variance in exchange for a small probability of reset, why should that preference disappear at the ballot box? Does the segregation of a population by asset ownership remain a financial condition, or does it propagate into political choice? Does moral condemnation stop at the front page, or does it enter the polling booth?

When a generation is crushed beneath its reference, does the extreme become the expected?

Subscribe now

Share

Why You Might Vote for a Demagogue

In 1979 Daniel Kahneman and Amos Tversky published the paper that eventually won the Nobel prize, and its central finding is simple enough to state in a sentence.^[1] People do not evaluate outcomes in absolute terms. They evaluate them against a reference point, and they behave differently on either side of it. Above the reference, in the domain of gains, people are cautious: they will take a sure thing over a gamble of equal expected value. Below the reference, in the domain of losses, the pattern inverts. People become willing to gamble, accepting a worse average outcome for a chance of getting back to where they think they belong. Losses also weigh roughly twice as heavily as equivalent gains, which is why falling behind a reference hurts far more than an equal advance pleases.

Nine years later, George Quattrone and Tversky asked whether any of this survived the journey into politics, and ran the experiments to find out. It survived intact. Voters evaluating candidates and referenda showed the same caution over gains and the same appetite for risk over losses. Incumbents were favoured when conditions were perceived as good and challengers when conditions were perceived as bad. When the experimenters moved the reference point, preferences reversed, with the same options and the same odds. Nothing had changed except where the voter stood relative to the line.^[2]

Now put a person below the reference in front of two political offers.

The first says: we will improve things, credibly and incrementally, over twenty years. The second says: give me the power and I will break the machine.

The first almost certainly has the better expected outcome, and the voter can usually sense that it does. But look at the two offers through the reference rather than through the average within the experience of a normal life below the reference. Under the incremental programme, their expected trajectory improves and still never crosses back into the life they were taught to regard as normal, not within any horizon that includes their remaining youth. It is a better version of a certain loss. Under the machine-breaking programme, most outcomes are worse and some are much worse. But a small set of outcomes contains reset. The political gamble has begun to resemble the financial one, for the same person, for the same reason, at the same time.

Every voter carries a weight on how much the gap between their position and their reference matters to them, and that weight rises as the gap widens. For each pair of programmes there is a threshold on that weight above which the riskier programme is preferred despite its worse average. Below the threshold, the voter is prudent. Above it, they are not, and nothing about their intelligence has changed. What has changed is that the reference gap has grown large enough that a route back is worth an expected-utility penalty to obtain. The voter is not blind to averages. They simply price the right tail at what it would mean to them.^[3]

The gamble does not have to look better on average. It only has to contain a route back to the life the status quo has made impossible.

First, the mechanism does not only touch the excluded. Owners have a reference too, not the price they paid, but the appreciation they have learned to expect, formed over decades of watching the asset climb. An owner does not need prices to fall to enter the domain of loss. They need them only to stall below the rate they were taught to expect, and once they do, the most placid voting bloc in the country quietly acquires an appetite for variance it never had before. Second, the mechanism says nothing whatever about direction. It predicts a demand for programmes with a certain shape, discontinuous, tail-heavy, promising restoration. It does not say which flank will supply them, and the recent housing-and-politics literature, which finds tenure to have become an electoral cleavage across the advanced democracies, expected future ownership to shape how non-owners vote, and local housing decline to feed support for anti-system parties, is consistent with the same silence:^[4] the demand rises with the gap; the product that meets it is decided elsewhere.

Press enough of a population below its reference and the extreme becomes, in expectation, the rational purchase. Which raises the prior question. Where does the reference come from, and why is it moving away?

Separation

Every society teaches its citizens a trajectory. Not formally, and not as an entitlement. A reference.

You work, become competent, earn more, establish a home, raise children, accumulate some security, and leave something behind. It is an unwritten contract, but expected, that we might enjoy lives better than our parents, much as they enjoyed lives better than theirs. People infer it from the lives immediately ahead of them. The 22-year-old looks at the ordinary life of the 42-year-old in their profession and thinks, reasonably, that is approximately where I will be in twenty years.

The reference therefore moves with the society that produces it. Yesterday’s exceptional achievement becomes tomorrow’s ordinary expectation. A country that spends decades getting richer spends those same decades teaching its citizens what an ordinary successful life is supposed to contain.

The problem begins when the attainable trajectory separates from the reference.

The young professional can earn more than the generation before them, hold more qualifications, work in a more prestigious occupation, and still find themselves further from the balance-sheet position they had learned to regard as normal. The life has not disappeared. It has simply been repriced faster than ordinary competence can accumulate.

They are not necessarily becoming poorer in income terms.

They are becoming poorer relative to the life they expected to reach.

James Davies identified the political importance of precisely this distinction in 1962. Revolutions, he argued, are not best understood simply as products of poverty or inequality. Societies can tolerate extraordinary deprivation for very long periods. The more combustible condition is a widening gap between expected and realised conditions, particularly after a period in which improvement had taught people to expect continued progress.^[5]

That contains a darker result. The stable society is not necessarily the good society. A population can live horrendously and remain politically stable if reality roughly matches what it has been taught to expect. The humane equilibrium closes the gap by raising attainable reality toward the reference. The authoritarian equilibrium closes it by lowering the reference toward reality.

Once a society has demonstrated a better attainable life, however, it creates a reference it cannot easily erase. The generation that watched ordinary people buy homes, accumulate security and improve their position does not invent its expectations from nowhere. Society taught them what normal looked like.

The reference, moreover, does not fall when the attainment does. In England, 42 per cent of households headed by someone aged 16 to 34 own their home, against 79 per cent of those headed by someone over 65; yet 69 per cent of the younger group still expect to buy eventually, exactly the proportion that expected it ten years earlier, before the last decade of separation.^[6] The trajectory is being withheld. The expectation is not moving.

And when reality stops delivering it, the gap itself becomes politically important.

The Pulpits Multiply

Meet a particular person. She is 36. She went to the right university and holds the right profession. She is articulate, credentialed, analytically trained; she can diagnose an institution at fifty paces, because diagnosing institutions is roughly what she was educated to do.

She lives in a rented flat.

A man who bought an ordinary suburban semi in 1998, and who has never read a book she would respect, may hold several times her net wealth, accumulated largely while he slept. She has status without assets, training without position, a diploma sold as a claim on a particular life that has quietly failed to settle.

Multiply her by a few hundred thousand.

Peter Turchin calls the larger phenomenon elite overproduction. A society can produce more aspirants to elite status than there are elite positions available to absorb them. The housing structure makes the mismatch especially strange, because it allows someone to become culturally elite while remaining economically excluded from the balance-sheet position that elite life was supposed to confer.

Some of these blocked aspirants become what Turchin calls counter-elites, articulate, ambitious people whose route to status now runs through challenging the order that failed to provide it.^[7]

Every counter-elite needs one thing. An audience.

And a counter-elite goes where the audience is. It does not need to change its mind first. Its ideological priors are the training it received on the way to being blocked; what it wants is the position, and the political content of the pulpit is the price of admission to the congregation that will pay for it.

Davies explains why the cathedral fills. Turchin explains why the pulpits multiply.

Millions of people know that the trajectory they were taught has broken. At the same time, an unusually large class of clever, frustrated, unplaced people has both the skill and the incentive to explain why.

The audience and the explainers arrive together.

What happens next is a market.

Paneloux

Markets are built to clear, and one of the best illustrations comes from Albert Camus’s The Plague, one of my favourite books. In the city of Oran a pestilence arrives, the rats crawl out of the sewers to die in the streets, a plague spreads, the bodies pile up, the gates close, and a frightened population asks the only question a frightened population ever asks. Why us?

Father Paneloux mounts the cathedral pulpit before a packed congregation and explains the plague. It is deserved. The city brought it on itself, the flail is just.

It is a magnificent sermon. It explains not one rat. But a plague with a face is easier to live with than a mechanism without one.

Two explanations of the separation are on offer. One says: land elasticity, collateral feedback, tax preference, reference trajectories, coalition dynamics, banking regulation, planning systems reform.

The other says: Them.

The second product has an enormous advantage. It is cheaper.

A face is cognitively cheap. A mechanism is cognitively expensive. The face can be pointed at; the mechanism must be studied. Better still, the face comes bundled with a solution: remove the face. The mechanism offers no such convenience. It asks for institutional reform, patience, trade-offs, and an explanation of why individually rational behaviour has produced a collectively irrational outcome.

As products, these are not close.

Scapegoating is not the only sermon available. Lets step back to the two ways a reference gap can be closed. Reality can rise toward expectation, or expectation can be pushed down toward reality. The second has its own pulpit.

You should never have expected to own a home.
You should have worked harder.
You should have stopped buying coffee.
You should get used to renting.

It explains no more than the first sermon. It merely teaches the congregation to stop asking why the reference moved.

The faces themselves are familiar: the migrant, the foreign buyer, the developer, the older homeowner, the young themselves. Some of the claims made about them contain real information. Migration adds some minor housing demand. Foreign capital adds quite a lot of demand. Developers respond strategically by withholding land for development. Incumbent owners can obstruct supply as rational asset-protecting NIMBYs blocking planning permissions.

That is not the argument. The structural question is what happens when those pressures arrive. Pour additional demand into a housing market that can respond with supply and much of it becomes construction. Pour it into a closed market and much of it becomes price, then wealth separation, then grievance, then a congregation. The amplifiers are weather. The structure is climate.

A politics that promises to deport the weather leaves the climate intact.

The reactionary movement is not simply an alien force invading an otherwise healthy political system. It is one possible product supplied into a market for explanation whose demand side already exists.

The structure does not manufacture a particular ideology. History, institutions, culture and contingency determine what eventually clears the market.

What the structure does manufacture is more basic. A population for whom the ordinary trajectory increasingly resembles a loss, a greater willingness to entertain political variance, and a large market demanding to know who or what caused the separation.

Turchin supplies the preachers. Davies supplies the congregation. Camus’ Paneloux shows what happens when the cheapest sermon wins. The preacher need not be cynical. He may believe every word.

But agnosticism about the mechanism is not agnosticism about the market. Once you count, the market has odds, and they are not even. On the demand side first, two products are on the shelf, and they sell restoration or acquisition. Restoration says: the life you had, or were on course for, will be given back. Acquisition says, the life you never had will be seized. Restoration sells to people who held the asset and are losing ground on it; acquisition sells to people who never held it and have had a reference installed from outside. In a country where roughly two households in three own their home, the loss-domain mass, once the owners have entered it with disappointing returns, is mass that wants restoration, and the excluded credentialed cohort is the smaller reservoir that wants acquisition. Then the supply side. The face is cheaper to produce than the mechanism, and cheaper still for the credentialed producer, who can build it with a fraction of their training and keep the rest in reserve. Revenue in an explanation market is per view, so return on production time is higher where the mass is and the product is cheap.

Put the two together and the counter-elite’s crossover, held from the last section, resolves itself. The credentialed supplier follows the audience to the restoration product, and produces it more cheaply than the market’s own natives can. None of this requires anyone to be sincere and none of it forbids sincerity; the calculation is the same for the preacher who believes and the preacher who does not, and the congregation cannot tell them apart.

The historical rhyme is worth one hedged sentence. The structural-demographic literature, Goldstone and Turchin, describes the combustible triad as mass immiseration, elite overproduction and state fiscal distress; the addition here is only which product the mass buys. Where the loss-domain population had held the thing, a fallen middle, savings destroyed, a trajectory broken, the market cleared to restoration, and history has a word for what that became. Where the mass had never held it and a counter-elite installed the reference before the programme, it cleared to acquisition. Davies himself would insist that even the acquisition cases were reference gaps first, improvement then reversal, with the war or the harvest as the acute break. The structure does not choose a direction, it sets the odds, In a propertied society in the loss domain, the odds favour restoration, and restoration is the reactionary product.

Camus’s first readers, in 1947, did not need the mechanism spelled out. They had just watched a version of it clear.

The Tail

Everything so far has described a public, a congregation, a market, an electorate. But a distribution has a tail, and the tail is where the same product reaches one person rather than a crowd. It is worth walking out to the end of the distribution deliberately because the criminology of the far tail turns out to be the most dangerous part of the distribution.

Ramón Spaaij, and later Mark Hamm and Spaaij together, spent years assembling the empirical record on the lone actor: the individual who commits political violence without an organisation behind him. Their findings, and those of the largest case study in the field, are not what the folk theory expects. There is no single profile; the researchers are emphatic about that. But certain things recur at rates far above the population’s. In the largest study of its kind, more than half of the actors were socially isolated, half had never married, four in ten were unemployed, and psychological difficulties appeared far more often than among group-based militants.^[8] The lone actor is not, in the main, a disciplined ideologue. Their grievance is characteristically hybrid, a private wound that fuses with, or borrows the vocabulary of, a political cause. They do not typically invent their frame; They adopt one, from an online milieu, from a text, from a figure whose account of the world they take as their own. They broadcast intent, usually well in advance, and usually to people not equipped to hear it. Then some triggering event, often trivial, often personal, converts intent into act.^[9]

The private wound and the political frame is Paneloux operating at the resolution of a single mind. The demand is the grievance, the supplied product is the story with a face, and the same compression that wins in the cathedral wins in a bedroom at three in the morning. The credentialed-but-unplaced case is Turchin’s tail, the blocked aspirant who did not become a counter-elite because they never found the audience, and was left alone with the frame. Then the socially detached, the unmarried, the man with no position. A society ordinarily holds its citizens inside its lines with sunk cost. The mortgage, the spouse, the children, the standing in a place, the career with something left to lose. Those are the stakes the ordinary trajectory installs, and they are precisely the stakes the reference gap has withheld.

A structure that prices a growing share of a generation out of the ordinary life is, whether it notices or not, manufacturing people for whom the ordinary restraints have nothing to attach to, not the majority, the tail.

This description, when laid over the statistics of the nation today, paint a stark image. The Financial Times put it plainly in a recent analysis under the headline that Covid isolation never ended for some people. The pandemic did not create the isolation of the young, but it accelerated a decline that was already under way and it did not reverse when the restrictions did. In-person socialising among young people has fallen for a decade, relationship and marriage rates have fallen with it, and a rising share of adults, young men in particular, now report going a full week without social contact with another person.^[10] The best analysis of the deaths-of-despair literature finds that what marks out those who succumb is not psychological distress or hardship as such but long-term joblessness and social isolation, the two conditions in which people have least left to lose.

Read that against the profile at the top of this section, unmarried, unplaced, isolated, and against the mechanism of this essay, which withholds precisely the household formation, the partnership and the position that would ordinarily pull a young man back into contact with other people. Isolation has causes the structure does not own, the phone, the remote job, the pandemic’s scar, and this essay claims only the component it does own: a housing structure that delays partnership and household formation by a decade is a structure that keeps a growing share of a generation in the state the criminology of the tail describes as its precondition. A country that has arranged those inputs at population scale has not produced any particular actor. It has widened the tail, and it has done so while simultaneously stocking the explanation market with faces.

Then the trigger. Hamm and Spaaij are clear that the triggering event is usually contingent, a personal humiliation, a rejection, an anniversary, a piece of news. The system does not pull the trigger, Coincidence does.

The wrong answer on one side says the structure produced the act, and therefore the act indicts the structure and nothing else. That is the fever mistaken for the treatment, and it is a sermon. The wrong answer on the other side says the act was one deranged individual, full stop, and therefore contains no information. That is the incumbent’s sermon, and it is equally cheap. The disciplined answer is that the distribution is endogenous and the draw is not. A structure that presses a population below its reference, supplies a market of faces to explain the pressure, and withholds from a growing tail the sunk costs that would ordinarily hold them inside the lines, raises the expected count of such acts and shapes the frames they will carry. It does not select the person, the day, or the trigger.

Take the demand the structure manufactures, combine it with any underlying condition or private wound, isolate the person from the ordinary society that would hold him, hand him a face and a cause and nothing to lose, and what may follow at a sufficient trigger is potentially boundless. That is not a prediction about anyone. It is a statement about the support of a distribution, and it is why the structure cannot be let off the hook for the shape of the tail even as the individual is never let off the hook for the act.

Revolution

The people want the reset, suppose they get it by chance, suppose the political lottery pays out.

The most popular jackpot on offer, sincere and understandable, is housing as a right for this generation: distribute the asset, extend ownership downward, get the young onto the ladder at last. Versions of this are sold across the spectrum, and it sounds like the structural fix. A nineteenth-century anarchist explains why it is not.

Mikhail Bakunin spent the 1870s asking Karl Marx a question Marx never satisfactorily answered: if the proletariat becomes the ruling class, over whom does it rule? A class that rules is no longer the class it was; its members become, in his phrase, ex-workers, governing from the commanding heights they were supposed to abolish. Bakunin predicted the red bureaucracy a half-century before it arrived, and his point was never really about socialism. It was about structure. Seizing an asset does not abolish the asset’s logic. It enrols you in it.

Britain has run the experiment. From around 1980 the state sold the council houses to their tenants at deep discounts, more than two million homes by the latest count, the largest transfer of asset wealth to the working class in the country’s history, and owner-occupation expanded at enormous scale.^[11] What followed was not the disappearance of the homeowner coalition but its entrenchment.^[12] Changing the membership of an asset-owning class did not remove the political incentives attached to owning the asset.

The moment the asset is yours, its value becomes your reference, and losses against that reference hurt roughly twice what gains please. The tenant who marched for housing becomes available to vote as an owner votes, not through hypocrisy but through the ordinary arithmetic of loss aversion, and the next queue forms outside prices his coalition now has every incentive to defend.

The proletariat took the asset. The asset took the proletariat.

That is what the jackpot pays. Winning the lottery does not abolish the casino. It moves one gambler onto the house side of the table, resets his reference to the new chips, and hands the queue outside back one generation. Any programme whose endpoint is more people holding an appreciating claim on a fixed asset is a membership drive for the coalition it believes it is storming. This is not an argument against the young owning homes. It is an argument that owning the asset and profiting from its appreciation are separable things, and that every politics which distributes the second while promising the first is manufacturing next decade’s blockers, ensuring the continuation of the regime we are plagued by.

Removal

The other ‘jackpot’ on the shelf is sold from the opposite pulpit, the ‘restoration product’ and it deserves the same courtesy of being taken at its word. Suppose that programme pays out too. Suppose the face is removed, at scale, as promised.

Take the demand-side claim first. Migration adds some moderate housing demand, not anywhere near the order of the credit market, but some. Removing a large population removes demand, so far the sermon is arithmetic. What it does not say is what else leaves with the demand, and what the three dull facts do once it has gone.

What leaves is a large share of the labour that the economy’s output is currently made of, concentrated in three sectors a country cannot pause: health, care and construction. Roughly two in five licensed doctors in the UK qualified abroad; adult social care added around fifty thousand internationally recruited workers in a single year and still carries more than a hundred thousand vacancies; and the construction workforce has for years drawn on labour born elsewhere.^[13] The country that removes them does not get its doctors back, it gets its waiting lists back. Output shrinks with the population that produced it. There is also a quieter cost that arrives with the apparatus rather than with the outcome. A state that builds the capacity to identify, detain and remove people at scale, on the strength of a category rather than a conviction, has confirmed something about itself that does not stay confined to its original target. Once the machinery for removal on suspicion exists, the question of who it may be pointed at next is answered by whoever holds it, and the citizen who cheered its construction discovers that he lives inside its range.

Now the housing arithmetic, which is where the sermon’s own promise fails. Two things can happen to the price of the closed city when this marginal demand is removed, and neither is relief.

If the demand shock is large enough to unwind prices meaningfully, then the collateral channel that inflated the asset runs in reverse. Falling collateral values against fixed nominal debt is the mechanism of a Minsky-style deleveraging: lenders retreat, forced sales feed further falls, the balance sheets built on the appreciating asset are impaired at once. The terminal state of the rentier dynamic, the collapse the whole structure has been deferring, arrives sooner rather than being avoided. That is not the excluded getting their houses, that is everyone getting the crash.

If the shock is modest, and it is more likely to be modest, then prices reprice by some minor percentage and the three dull facts are untouched: the land is still fixed, the credit still flows preferentially against it, the tax still favours the gain. The asset remains what it was before the removal, the dominant risk-adjusted claim in the economy, the place where capital goes because it is still where capital does best. So it is bought again, by the same process, on the same collateral logic, and within a cycle the prices and the rents are back where they were. The mechanism has been fed a smaller country and has produced the same result.

Either the removal triggers the terminal state faster, or it reprices the asset by a rounding error and the black hole reabsorbs it. What it cannot do, on any setting, is address the reason the reference moved, because the reason was never the weather. You end where you began, the same rents, the same prices, produced by the same three facts, in a nation smaller and poorer than the one that voted for it, and no longer able to pay for what it built.

The reactionary jackpot sells restoration, which is why it sells to a country that once had the thing. There is also a second-round move that any incumbent facing that jackpot will discover without needing to be told, because the polls will teach it. Retire the face with a gesture, an announcement that costs nothing and touches no climate, and buy the owners back with appreciation: a stamp duty holiday, a mortgage guarantee, a loosened lending limit, whatever name it wears. Restore the asset’s climb above the rate the owning cohort learned to expect, and that cohort walks back into the domain of gains and its appetite for political variance switches off, It works, but It works once. A flood of cheap credit soothes the demand for political variance temporarily.

Expected appreciation is adaptive, so each restoration raises the rate against which the next disappointment is measured, and the boost required to hold the ballast next time is larger, the frontier is further from the excluded, the graduate reservoir is deeper in its own loss, and the cliff under the whole structure is taller because nothing was deleveraged and the collateral has been re-inflated. Nobody plans this, every poll-driven government arrives at it independently, which is the point of an emergent equilibrium. The bribe that staves off the restoration lottery is a dose of the disease that manufactures its buyers.

The revolutionary jackpot and the reactionary jackpot need not resemble one another morally or politically, and nothing here equates them. Both sell a discontinuous restoration of the reference life, a fat right tail purchased at the price of a fat left tail the brochure does not dwell on. Both, on payout, leave the three dull facts standing. The content differs, the distribution is the same shape, and it is the shape, not the content, that the customer below the reference is buying. A politics that fights only the rival sermon, while leaving the congregation’s reasons intact, is competing for the pulpit rather than emptying the cathedral.

The Rebellion

Camus spent The Rebel asking the question this essay has been walking toward: what does a person do who sees the mechanism, refuses the sermon, and declines the jackpot?

His answer was a distinction. Revolution begins in a legitimate refusal and then totalises it. It seizes the machinery of suffering and, in seizing it, risks inheriting its logic. The guillotine changes hands rather than disappearing. Rebellion is narrower, the rebel says no, but the no contains a limit.

This far, no further. The line binds the rebel too.

That is the crucial point. The no must be consequential enough to matter, but bounded enough that resistance does not become a new licence for domination. The first line restrains the structure. The second restrains the rebel.

Translated into the closed city described here, rebellion does not require personal purity. It does not require refusing to own a house, abandoning ordinary ambition, or accepting permanent loss with good manners, It asks for something harder.

I can own a house without requiring somebody else’s child to become poorer so that I become richer. I can acknowledge that migration adds demand without turning a migrant into the mechanism. I can want radical reform without requiring an apocalypse to deliver it. I can stand below my reference, understand exactly why, and still refuse every political lottery merely because it contains a right tail. That is an ethic, It is not yet a cure.

No quantity of personal virtue changes supply elasticity. Rieux’s decency cannot alter a collateral system. A society cannot moralise its way out of incentives that make destructive behaviour individually rational.

But that observation contains the escape from the determinism.

Everything in this essay has been endogenous to structure: The gambler, the blocker, the despair merchant, the preacher, the political lottery. If the structure manufactures the behaviour, then the behaviour is not fixed. Change the structure and the incentives change with it, the people were never the constraint because the people were never the cause.

What would a better structure do? Not a manifesto, a specification.

It would make productive activity more rewarding than ownership of scarcity.

It would allow supply to answer demand rather than capitalising every increment of demand into the price of a fixed claim.

It would provide security without requiring the exclusion of the next entrant as the source of the incumbent’s wealth.

And, above all, it would reconnect ordinary effort with an ordinary attainable life.

None of that requires a final theory of history, no purified population, no enemy class, no New Man, no revolutionary state, no return to an imagined past.

There are simply institutional arrangements that produce better incentives and arrangements that produce worse ones.

When the rules make destructive behaviour individually rational, change the rules. Camus supplies the limit, Economics supplies the design brief. Build institutions in which decency does not require heroism.

The plague does not require villains, the reaction does not require villains, the revolution does not guarantee a cure. None of that means the plague is inevitable.

Which leaves Rieux, not salvation, not ideology, work on the mechanism.

He treats patients, keeps the numbers honest, refuses the sermon and gets up the next morning to do it again. The novel’s word for that is not heroism, It is merely a job.

Bacillus

So we return, finally, to Oran, because the novel does.

On the night the gates reopen, while the crowds celebrate, Rieux stays sober, because he knows what the crowd has chosen to forget: the bacillus never dies. It waits, patiently, in the furniture and the linen and the cellars until the conditions return in which the rats can come upstairs again.

Britain has lived something like that paragraph without recognising itself in it.

There was a period, within living memory, when the ordinary trajectory and the attainable trajectory ran much closer together than they do now. Not a golden age; do not let anyone sell you one. Simply a period in which ordinary earnings could more plausibly purchase the ordinary reference life, But remission is not cure.

The underlying susceptibility remained: fixed land, a supply system increasingly unable to answer demand, and a financial architecture increasingly capable of capitalising additional demand into the price of existing land. It waited in the deeds, the covenants, the planning files and the balance sheets.

Then the host environment changed, the mechanism accelerated, the reference began separating from reality again. Now the rats are easy to recognise, because we have watched each one being manufactured.

The memecoin boom is a rat.

The betting boom is a rat.

The despair economy built to serve them is a rat.

The fury of the brilliant graduate in the rented flat is a rat.

The homeowner’s sudden political volatility when appreciation disappoints is a rat.

The proliferation of counter-elites auditioning explanations is a rat.

The sermon about them is a rat.

The jackpot programme promising the reset is a rat.

The jackpot programme promising the removal is a rat.

The credit boost sold as reform, to keep the owners calm for one more cycle, is a rat.

The credentialed young preacher who found his audience on the side he was not trained for is a rat.

The young man who has gone a week without speaking to anyone, in a flat he does not own, with a face on his screen and nothing to lose, is a rat.

The extreme refusal at the far end of the distribution, when every quieter no has become decorative, is a rat too.

The rats are not scattered evenly.

Look at where we stand now. Sixty-five per cent of English households own their home,^[14] and the owning cohort has been below the trajectory it learned to expect since 2022, prices rising below the long run average, falling in real terms, and mortgaged at a rate that makes holding the asset a losing carry at most loan-to-value ratios. The over-fifty-fives, the highest-turnout cohort in the country, now give a third or more of their intention to the ‘restoration product’; more than two-thirds of that product’s supporters are over fifty, and among those who came to it from the Conservatives, a majority own their homes outright.^[15] At the other end, one of the most credentialed young populations in the world, carrying its education as debt, watching real graduate earnings sit below where they stood in 2007 and young graduate employment fall, priced out of the reference life its degree was sold as a claim on, gives its intention to the acquisition product,^[16] and the parties of the low-variance centre are being emptied from both sides at once. The frustrated elite is enormous; the audience for restoration is larger.

So the market for faces against structures clears, on price and on quantity, to the right, and for the political opportunist there has rarely been a better moment in Britain to be a right-coded demagogue. That is not a moral observation. It is a market one.

The short-term incentive for whoever governs is equally legible, ratchet the asset back up, quiet the owners, retire the face with a gesture, and buy a cycle. The ratchet will run higher. The machine will not stop. It will only decide how the dominoes fall, and when.

These are not causes of a plague, they are what the plague produces when it presses a population below the life it was taught to expect.

Blaming them is simply one more sermon, and by now you know how sermons work. They explain not one rat. They only tell you where to look so that you never look at the structure.

The rats are the symptom.

The plague is the structure.

Subscribe now

Share

Sources and References

^[1] Daniel Kahneman and Amos Tversky, “Prospect Theory: An Analysis of Decision under Risk,” Econometrica 47(2), 1979.

^[2] George A. Quattrone and Amos Tversky, “Contrasting Rational and Psychological Analyses of Political Choice,” American Political Science Review 82(3), 1988. The experiments report risk aversion over gains, risk seeking over losses, incumbent advantage under favourable conditions and challenger advantage under unfavourable ones, and preference reversal when the reference point is moved.

^[3] The formal statement is in the author’s working paper on the political corollary to the structural rentier framework. For direct electoral evidence that disappointed expectations, rather than absolute position, predict electoral change, see Thomas Kurer and Briitta Van Staalduinen, “Disappointed Expectations: Downward Mobility and Electoral Change,” American Political Science Review 116(4), 2022.

^[4] On tenure as an electoral cleavage across advanced democracies: Goddard, “Housing and Electoral Behaviour: The Changing Face of Class Voting in Advanced Democracies,” Electoral Studies, 2025. On expected future ownership shaping how non-owners vote in Britain: James Breckwoldt, “The Prospect of Upward Housing Mobility: Future Homeownership Likelihood and Voter Behaviour in the United Kingdom,” working paper, 2025. On house prices and preferences: Ben Ansell, “The Political Economy of Ownership,” American Political Science Review 108(2), 2014; David Adler and Ben Ansell, “Housing and Populism,” West European Politics 43(2), 2020. None of these establishes that housing position determines ideological direction, and this essay does not claim it.

^[5] James C. Davies, “Toward a Theory of Revolution,” American Sociological Review 27(1), 1962. The older statement of the same observation is Tocqueville’s, in L’Ancien Régime et la Révolution (1856): revolution came where conditions had improved most, and the most dangerous moment for a bad government is when it begins to reform.

^[6] English Housing Survey 2024 to 2025, age cohorts release, Ministry of Housing, Communities and Local Government, May 2026. Of households with a reference person aged 16 to 34, 42 per cent were owner-occupiers and 43 per cent private renters; 79 per cent of those aged 65 and over were owner-occupiers. Sixty-nine per cent of the 16 to 34 group expected to buy eventually, against 69 per cent in 2014-15.

^[7] Peter Turchin, Ages of Discord: A Structural-Demographic Analysis of American History (Beresta Books, 2016); with Jack Goldstone, the structural-demographic model treats popular immiseration, intra-elite competition and state fiscal weakness as the joint conditions of instability. The literature establishes elite overproduction and counter-elite formation. The explanation-market extension in this essay is the author’s.

^[8] Paul Gill, John Horgan and Paige Deckert, “Bombing Alone: Tracing the Motivations and Antecedent Behaviors of Lone-Actor Terrorists,” Journal of Forensic Sciences 59(2), 2014, a study of 119 cases which found no uniform profile but reported the recurring characteristics given in the text. On the higher prevalence of psychological difficulties among lone actors than group-based terrorists, the finding is consistent across the subsequent literature.

^[9] Ramón Spaaij, Understanding Lone Wolf Terrorism (Springer, 2012); Mark S. Hamm and Ramón Spaaij, The Age of Lone Wolf Terrorism (Columbia University Press, 2017), for the radicalisation sequence of personal and political grievance, affinity, enabler, broadcast intent and triggering event.

^[10] “Covid isolation never ended for some people,” Financial Times, 2026. Figures in the text to be read against the article. On joblessness and social isolation as the marks of those who succumb to self-destructive behaviour, see John Burn-Murdoch’s analysis of the deaths-of-despair literature in the Financial Times, and his earlier “Young people are hanging out less,” Financial Times, 17 January 2025.

^[11] Ministry of Housing, Communities and Local Government, Right to Buy sales live tables: just over 2.03 million sales in England from 1980 to March 2025.

^[12] For the tenure cleavage in the British case, and owners’ opposition to construction where they expect prices to rise, see Ben Ansell, “Brexit and the Politics of Housing in Britain,” The Political Quarterly 90(S2), 2019. That the newly enrolled owners specifically became the blocking coalition is not established by that literature, and this essay does not claim it; the claim here is the narrower one stated in the text.

^[13] General Medical Council, The State of Medical Education and Practice in the UK: Workforce Report 2025, and House of Commons Library, “International recruitment in the NHS workforce,” 2026: around 138,400 licensed doctors qualified abroad, 42 per cent of the total. Skills for Care, The State of the Adult Social Care Sector and Workforce in England 2025: around 50,000 internationally recruited starters in 2024-25 against roughly 111,000 vacancies. Office for National Statistics, construction workforce by country of birth series.

^[14] English Housing Survey 2024 to 2025, headline report: owner-occupation 65 per cent of households (36 per cent outright, 29 per cent with a mortgage), private renting 19 per cent, social renting 16 per cent.

^[15] YouGov, voter study, July 2026: 68 per cent of Reform UK supporters aged over 50; among those who supported the Conservatives in 2024, 56 per cent own their homes outright. Age breakdowns of voting intention by pollster through 2026 place Reform at roughly a third or more among the over-55s and under a tenth among 18 to 24s, with the Greens leading among the youngest cohort.

^[16] Department for Education, Graduate Labour Market Statistics 2024: young graduate employment down 0.7 percentage points on the year, real median graduate earnings £3,500 below their 2007 level. On the Green coalition being disproportionately young, degree-educated and renting or living with family, see the same YouGov study as note 15.

In 2022, analysts at the Reserve Bank of New Zealand set out to answer a reasonable question, why do New Zealanders hold so much of their wealth in houses? They built a standard Markowitz portfolio model, fed it twenty years of returns data, and asked it what a rational New Zealander should hold.

The answer was houses, that’s about it. Once tax treatment was included, the optimal portfolio was one hundred percent housing. The model was then asked what the allocation should be if house prices grew at a rate the Bank itself considers sustainable. The answer was zero.

One hundred percent at observed returns. Zero at sustainable returns. Both numbers appear in the same document, Analytical Note AN2022/07, Housing as an Investment Asset in New Zealand. The note concludes with some gentle advice about diversification and the observation that New Zealanders hold one egg in their wealth basket. They then printed the report, stuck it on the shelf, and it would seem as if no one else has ever dared to pick it up again.

Using figures from the government and the national bank itself, even commentary from both, I am able to show you fully and extensively, that New Zealand has one of the most severe Rentier Black Holes I have encountered.

Share

Subscribe now

The three conditions

A rentier black hole requires three structural conditions. New Zealand satisfies all three more completely than any developed economy I have examined.

E, Elasticity

Roughly thirty percent of New Zealand’s land area is protected conservation estate. Most of the rest is mountain, and the population concentrates in a handful of cities pressed between ranges and coasts. Estimated housing supply elasticity sits around 0.7, among the lowest in the developed world already, but when considering the dense focus of 83% of the population into its urban cores, this elasticity trends to a short run 0, when prices rise, supply barely answers. There is one genuine exception, and it matters. Auckland’s upzoning from 2016 measurably lifted consents and slowed rent growth relative to the counterfactual. It is the one condition New Zealand has partially loosened, in one city, and the difference it made is visible.

C, Collateralization and Credit

Two thirds of New Zealand bank lending is to households, overwhelmingly secured on housing. The mortgage stock is floating or fixed for one to three years, so central bank rate changes reach household cash flow within months rather than decades. This is the fastest monetary transmission in the Anglosphere, and it runs in both directions. The retirement savings scheme, KiwiSaver, can be withdrawn for a first home deposit, so even the pension system feeds the collateral channel.

T, Taxation

New Zealand has no capital gains tax. Stamp duty was abolished in 1999, estate duty in 1992, gift duty in 2011. The land tax, of which more shortly, went in 1990. Treasury and Inland Revenue’s own calculations, produced for the 2018 Tax Working Group, put the marginal effective tax rate on a bank deposit at 55.7 percent, on foreign shares at 55.0 percent, on a pension fund at 47.2 percent, and on an owner-occupied house at 11.3 percent. The system does not merely spare the rentier asset. Through the foreign investment fund regime, which taxes overseas shares on a deemed return whether or not any gain is realised, it actively taxes the alternatives. A New Zealander choosing between a diversified portfolio and a second house faces a tax wedge of roughly forty percentage points, in the house’s favour.

Where the capital went

In 1987, plant and machinery took 31 percent of New Zealand’s gross fixed capital formation, and residential buildings took 17. Over the following four decades the two lines swapped places almost exactly: housing peaked at 33 percent of all capital formation in 2022, while machinery fell to 17. Housing investment grew at 7.4 percent a year on average; machinery at 4.1. The crossover first occurs in 2004, reverses briefly after the global financial crisis, and completes for good in 2013.

This is merely the present value of the new housing structures built, not the land under them, or the increasing funds and credit chasing merely the existing structures at higher prices, and that is a bigger element requiring its own section.

The crash that changed nothing

New Zealand is currently living through the largest house price correction in its recorded history. Prices sit roughly 15 percent below the November 2021 peak in nominal terms and 28 percent below in real terms, and have been flat for three years.

Despite this monumental collapse, by Reserve Bank’s own sustainability assessment still places prices above sustainable levels at 6x the average income nationally and 7x in Auckland.

With the RBNZ hiking rates out of the COVID pandemic, from 0.25% to 5.5% in June 2023, The same short-fixing mortgage structure that transmitted the boom transmitted the tightening within months, while the state turned every dial simultaneously, consumer credit rules, loan-to-value restrictions, investor tax changes. The correction was not an accident that happened to the structure. It was the structure, running in reverse.

A crash of this size should have produced a Minsky moment. Defaults, bank losses, credit contraction, fire sales, yet for now the banking system survives for a frankly perverse reason.

The Averted Crash

Eighty-four percent of New Zealand’s bank lending is held by four Australian-owned banks. Their New Zealand subsidiaries are locally incorporated and capitalised to requirements among the highest in the world, following the Reserve Bank’s 2019 capital review. Every borrower in the boom was stress-tested at servicing rates far above the rates they actually paid. Additionally New Zealand mortgages are full recourse, you cannot post the keys and walk away.

So when the correction came, almost nobody defaulted. Arrears barely moved through an 18 percent nominal fall. The loss absorption happened somewhere else. Households whose repayments doubled did not hand back the house, they stopped spending. All to ‘cling’ to the mortgage, creating the aptly phrased ‘mortgage prisoner'. The choices in negative equity with a large jump in the mortgage rate in a recourse market are fairly simple. You can default, lose your entire deposit, your largest asset, and then be burdened with the remaining negative equity as a personal liability that will most likely bankrupt you. Alternately, you cut back any discretionary spending, tighten the belt, keep paying the mortgage, and pray the property market comes back. Praying and suppressing consumption is what a large section of the economy chose, leading to a recession in Q2 2024- Q3 2024. The perverse effect of this even during such a colossal down turn, is a variance suppression in the property market from this ‘clinging’ behaviour, which seems odd to say given the size of the current crash. Yet in the case New Zealand was a non-recourse market, we would have seen a shorter much sharper washout in the property market, which on the surface sounds horrendous, but short sharp washes clear the board, what New Zealand has now is a lethargy of clinging behaviour, with thousands of would be defaulters dedicating themselves to the mortgage and praying on a recovery, and very little else.

However, when markets cannot efficiently clear on price and quantity, they find another path, and in this case, the number that cleared was in its citizens, in the year to September 2025 New Zealand recorded a net loss of around 46,400 of its own citizens, mostly to Australia.

The credit system was insulated by design buffered on Australian balance sheets, and the adjustment was rerouted through household cash flow into aggregate demand, output, and ultimately emigration. The banking system emerged intact. The productive economy and the young absorbed the correction instead.

The country that invented the cure

The most infuriating element of this case, is that New Zealand has already tried the cure, it became one of the worlds wealthiest nations, then subsequently, ripped it to shreds through spurious exemptions, and now they are sitting in the results.

In 1878, New Zealand introduced the world’s first national land tax. The 1891 version was explicitly graduated to break up the great pastoral estates, and it worked. The estates were subdivided, closer settlement followed, and the small-farm export economy that resulted, made New Zealand by the middle of the twentieth century, roughly the third richest country on earth per person. By 1895 the land tax supplied about three quarters of combined land and income tax revenue. When you have the tax, land disaggregates, capital flows into production, the country gets rich.

Then, over the following century, the tax was dismantled. Not repealed, at first, merely Exempted, bastardised, truncated. Sports clubs, Charitable estates, Agricultural land, In 1976, the family home. By 1982 an official review found that only five percent of the country’s land value remained in the base, and that the tax had no perceptible redistributive effect, a finding that is less an indictment of land taxation than a description of what remained after the exemptions had eaten it. When abolition came in 1990, the government’s stated justification was that the exemptions had made the tax unfair. The loopholes became the argument for removing what was left.

The local story is equally damning. For over a century, New Zealand ratepayers could petition for a poll on whether their council should rate land value or capital value, that is, whether to tax the land or to tax the buildings on it. In hundreds of polls, they chose land. By 1982, ninety percent of municipalities rated on land value, covering roughly eighty percent of local government revenue. Wherever the question was put to the people, the people chose to tax land, the reversals came administratively. In 1988 the right to demand a poll was withdrawn. The 1989 local government amalgamations then dissolved land-rating councils into larger capital-rating ones, and through the 1990s most major cities completed the switch. By the end of the decade New Zealand had moved from taxing what people hold to taxing what people build, at both national and local level, inside a single political generation.

Keep track of the timing, the poll right died in 1988. The national tax died in 1990. Then in 1989, in a change an establishment economist would later call likely the most distortionary tax policy towards housing in the OECD, New Zealand moved to taxing retirement savings on an income basis while leaving housing untouched, sharpening the tax penalty on the main alternative asset at the precise moment the tax on land was removed. Both blades of the wedge, set in the same three years. The capital rotation chart begins its structural break shortly after.

What the Reserve Bank found

Which returns us to AN2022/07, because the note deserves a closer reading than it has received, including by its authors.

The note measures, with entirely conventional methods, the following. Housing delivered the best risk-adjusted return of any asset class available to New Zealanders over 2000 to 2020, a ratio of 1.5, against 0.5 for global equities and 0.4 for the local stock exchange. Leverage, uniquely available against housing, improves it further. The tax system improves it again, to the point of the corner solution, the optimal portfolio becomes entirely housing. Housing returns were negatively correlated with KiwiSaver funds, making the house not merely the best asset but the portfolio’s hedge. And the note observes, in passing, that the accumulated wealth reflects mainly rising land values rather than investment in new dwellings, driven by the constrained supply of land.

Read that list against the three conditions. The tax wedge is charted. The credit channel is measured. The supply constraint is named. Every input of the black hole appears in the document. What never appears is the loop. The note states its own boundary with admirable precision, the modelling exercise takes past asset price changes as given.

But the prices were not given. In an asset with near-zero supply elasticity, the buying is the price, the price is the return, and the return recruits the next buyer. The 10.9 percent average return the model treats as an input was the output of two million households running the model’s own logic for twenty years. The remarkably low volatility that makes the risk-adjusted return so attractive is not a property of bricks; it is the signature of a one-way flow into a fixed stock combined with the variance suppression of a recourse market. The Bank measured the gravity, precisely, and did not notice that the gravity was self-generated. Its own sensitivity analysis contains the tell, at sustainable price growth, the optimal allocation collapses to zero. There is no version of this asset that is both sustainably priced and worth holding. The entire portfolio case is the unsustainability.

There is one more detail. The note exists because the Minister of Finance directed the Reserve Bank in early 2021 to have regard to house price sustainability, a unique instruction internationally, resisted by the Bank at the time. That clause was moved out of the Bank’s monetary policy objectives in 2023, and from December 2023 the committee was refocused on price stability alone. The system briefly instructed itself to look, looked, published the anatomy, and then deleted the instruction.

Who’s Holding the Bag?

Since 1978, New Zealand’s measured labour productivity has roughly doubled. Real wages have risen by roughly half that. The two series track each other closely for a decade and then break apart, and the break occurs between 1988 and 1992, the same window in which the land tax died, the rating polls died, and the savings tax flipped.

The honest decomposition of that gap has two phases, and I will claim only one of them. Through the 1990s the gap is substantially a bargaining story, the Employment Contracts Act, eleven percent unemployment, the collapse of union coverage. The labour share of income fell sharply, and a wage-bargaining account explains much of it. But the labour share has been roughly flat since 2012, and the gap has kept growing. A bargaining story cannot widen a wage-productivity gap while the labour share stands still. What can is a price wedge, when the cost of living, dominated by rent and land, inflates faster than the price of what workers produce, real consumption wages detach from real product wages with no change in shares at all. That component, the wedge that runs through land prices rather than through bargaining power, is the black hole’s fingerprint.

I call it the housing wedge, visible in numerous economies globally, notably in the UK with the ‘productivity puzzle’. With a simple dissection however, it is easily revealed. Imputed rent, is included in the GDP figures of every nation as an accounting methodology that allows nations with different rates of home ownership to be compared fairly. It also breaks the basic calculation of simply productivity, once the home ownership and the rent starts screaming upwards. This represents approximately 15% of New Zealands GDP currently.

Productivity simplified is GDP split across hours worked in the economy, the hours are the same, yet the property and the rents have soared. So the headline productivity figure naturally detaches, from real wages.

Money for nothing

The accumulation accounts, which Statistics New Zealand publishes and nearly nobody reads, record the last layer, the one the investment chart cannot see. They decompose changes in each sector’s net worth into transactions, things bought, built, and saved, and revaluations, things that simply became worth more.

For households, from 2008 to 2024, net saving out of income totalled 14 billion dollars. Residential capital formation, the actual building of houses, totalled 212 billion. But, the revaluation of household-owned land totalled 425 billion dollars, with a further 207 billion of revaluation on the buildings themselves.

Over seventeen years, the land under New Zealand revalued by thirty times what its households managed to save, and by twice what the entire nation spent building homes. In the single year to March 2021, land revalued by 176 billion dollars, roughly half a year’s GDP, materialising in section prices in twelve months. Two years later, 139 billion of it evaporated. A national balance sheet growing overwhelmingly through a channel that produces nothing, and contracting through the same channel, is not an economy accumulating wealth, It is an economy revaluing its own collateral and booking the revaluation as wealth.

Hōnea Kore

New Zealand matters because it is the control group that ran every treatment. Foreign buyers, banned since 2018, except Australians and Singaporeans. Speculation, taxed through the bright-line test which was rammed up to 10 years. Landlord deductions, removed. A major city, genuinely upzoned, with genuine marginal results in densification. Monetary policy, tightened into the largest correction in the country’s history, deliberately, with the Governor accepting in select committee that the Bank was engineering a recession. Everything the housing debate proposes, somewhere on its spectrum, has been tried on these islands, and most of it has already been partially reversed, the bright-line test cut back, interest deductions restored, both while prices were still falling.

And after all of it, prices remain above the central bank’s own sustainable range, machinery’s share of investment remains half its 1987 level, the wage-productivity gap remains, and the young remain in the departure queue. Because none of the treatments touched the three conditions. The land is still fixed. The credit still flows against it. The tax system still pays you to hold it, and taxes you for holding anything else.

The country that invented the land value tax, that voted for it in hundreds of local polls for a century, that rode the productive boom it enabled to third place in the world, dismantled it by exemption, procedure, and reorganisation, slid to twenty-sixth, and then watched its central bank rediscover the mechanism, publish two thirds of it, and file the findings under portfolio advice.

What has happened is a simple sleep walk, of seemingly rational small pruning, nipping and tucking of a policy that made this nation so fantastically wealthy, that fundamentally killed the mechanism for its own development.

The results of remaining within this Hōnea Kore are simple to diagnose, its affects are terminal without intervention, and make up the remainder of my body of work, but in brief:

Real wages will remain stagnant, the productivity real wages gap will widen, inequality will continue to soar, household formation will be further delayed, the birth rate will remain below replacement, fixed capital formation will be stuck in appreciating housing structures not production or innovation. Left with sufficient time to run, what you find if you are lucky is the clinging effect is merely a glass floor, pressed hard enough it shatters into a Minsky style collapse. What remains afterwards when the smoke rolls out, will be the manufacturing, real industry, that was left to rot while the economy decided instead to gamble on housing.

This recent crash is a preview, if it is left to run again without intervention, the results will not improve. It is not a miracle that has prevented a financial collapse to date, it is the crushed new entrants who name themselves mortgage prisoners, locked into payments or total destitution by recourse. This market, unable to clear effectively on price and quantity, has cleared instead on immiseration, the unborn, and a generation who have decided their best choice is to leave.

I would recommend the RBNZ, digs out what they left on the shelf, give it a thorough read once again, before the nation is beyond the event horizon.

Share

Subscribe now

Sources: RBNZ Analytical Note AN2022/07; Treasury/IRD marginal effective tax rate analysis (Tax Working Group, 2018); Stats NZ national accounts Table 3.1 and accumulation accounts 2008 to 2024 (provisional); RBNZ banking sector statistics and Monetary Policy Remit history; REINZ house price index; Stats NZ international migration; Rosenberg (2010); Reece (2003); Barrett and Veal (2012); Coleman (2017); Gemmell, Grimes and Skidmore (2019); Land Tax Abolition Act 1990. The two charts are drawn from the raw Stats NZ series; data and code available on request. The video version of this essay is on TikTok and YouTube.

This recent AI boom has drawn in hundreds of billions of dollars in investment, and trillions of dollars of valuation paper gains.

But the industry itself is built in concentric rings of diminishing quasi-rents. Empires worth billions eroding in front of our eyes, stacked from top to bottom, ordered by a careful logic, of the extent to which each rings rent, is temporary or permanent. Each ring is an imitation, a quasi-rent, each more transient than the last, ordered almost perfectly like stacked dominoes waiting to be pushed.

Here we will walk through all the layers of an increasingly fragile industry built on the sand.

Subscribe

Share

Ready Layer 1

At the surface you find the most fleeting and almost non-existent returns. Those of the AI firms themselves, the model creators.

In 2025, OpenAI booked $13 Billion in revenues, yet lost some $21 Billion, about a $1.6 loss for every $1 in revenue. By its own arguably optimistic forecasts, it will not break even until 2029.

This isn’t the balance sheet of a failing company, it’s the balance sheet of the company with arguably the most successful product launch in history, serving a billion people a week approximately.

Yet, it seems to be a victim of productive returns in a competitive market. The cost of a million tokens has utterly plummeted, falling from some $60 per million tokens in late 2021, to $0.06 per million in 2024 for GPT-3 standard models. The median rate of decline according to Epoch.ai is some 50x cheaper annually across all benchmarks.

Simultaneously, the frontier of the industry is burning through money at an alarming rate, while its core product erodes its own pricing power. The usual term for the money flooding into this sector would be ‘a bubble’. An industry spending wildly on a product it cannot yet truly or reasonably monetise. But that definition is shallow and simplistic, on deeper review, we find a structure organised almost linearly around a simple property, the quasi-rent and its half life. The surface level of the model developers is simply the start, and the interesting question is not whether this is a bubble, it is where the money through the stack comes to a rest, and how quickly each layer hands its surplus down the chain, given how little of it each level seems to retain.

Two Kinds of Return

Every return on capital fits within two simple categories, a return to production or a return to position.

A return to production is what is earned from manufacturing a good or a service, its most defining property is that it simply does not last. If a good or service can be reproduced, the market will reproduce it if the profits are sufficiently enticing to a competitor. Over time with free entry, the price paid falls toward the cost of producing it under fair competition. The ‘surplus’ of these reduced prices and expanded quantity made, is passed to the consumer. This isn’t something going wrong, it is the entire premise of free market capitalism, simply that fair competition allows for efficient production, and better prices and services for the consumer.

A return to position, is simply earned from owning something scarce that cannot be reproduced, the critical case being our rentier asset, the land and property, but many other examples exist. Returns to position, are sticky, the competition that would erode these returns simply never erodes as it cannot be reproduced. The easiest naming for this, is that these goods or services are supply inelastic, in the extreme perfectly so.

Most assets sit on the spectrum between these two, neither perfectly elastic or perfectly inelastic, but in the case of the AI industries and its many layers, you find a clean demonstration. The industry is laid out in order, from the most reproducible to the least, the most supply elastic, to the most inelastic, and the returns of each layer behave almost perfectly as their elasticities would predict. So we must follow the money down, from the eroding surface, to the structurally inelastic core.

Dante’s chatbot

At the top of this stack is the reproducible layer, and the returns play this out in public, with token costs being competed to zero in real time.

The model providers generate a clear productive surplus, a billion people now have access to cheap on demand inference, that four years ago would have cost small fortunes, and it would seem that they are able to keep essentially none of it. The collapse is not strictly a price war anyone is particularly losing, it is simply the ordinary behaviour of a highly reproducible (supply elastic) good under competitive pressure. Open weight models and local hosting have pressed the price floor to essentially zero for near perfect substitutes for the centralised private models we all know well from Anthropic and Openai. The revenue lines are still climbing, under a principle known as Jevons paradox, but while revenues continue to boom the operating margin on the product itself is collapsing.

Any temporary Schumpeterian rent model designers thought they could have from designing the best model is eroded within weeks, the average top spot model stays at the top of the leaderboard these days for an average of 35 days, it stays within the top 5 for some 5 months, and top 10 for some 7 months, and the rate of change is accelerating. The benefits of even being the leader given how fast the top spot is changing hands is diminishing rapidly, with platforms now focusing on customer lock in and third party integrations.

The compute spend behind training new models is progressing at some 5x year, with model creators brute forcing training quality with compute size and spend, all to realise a simple fact their own models could have parroted back to them in a simple query. Training expenses and leading the market is exhibiting huge diminishing marginal returns to capital, as is expected of any return on production. Spending 5x the amount on training does not yield a 5x better model, and the resulting new model most certainly won’t deliver decent returns in the 35 days on average it sits at the top of the leaderboard.

What we are witnessing is the decay of productive returns at a scale and a pace that has never been seen before in human history and the deflation of intelligence annually measured better in factors not percentages that all cluster over 99%. The most productive layer, and competitive layer of the entire AI market is performing exactly as expected, washed away as soon as it is built.

The greatest difficulty of these systems is simple, it is a return to production, whose inputs are increasingly as you go down the stack, returns to position. A company whose margins erode in days, paying rents that do not erode at all, is playing against a clock that is not ticking in its favour.

Fundamentally, on any reasonable timescale, these firms are loose sand, washed easily by the tide of time.

The structure

Below the loose sand, you find a slightly tighter packing, the cloud providers, AWS, Google, Oracle, Microsoft Azure. These currently seem like the landlords of the boom, or as Yanis Varoufakis might say, the ‘technofeudalists’. To a limited extent, they are, collecting a toll or a rent on every model trained and every token served. But fundamentally, this rent is reliant on systems that in principle can be reproduced, as is quite simply demonstrated by Coreweave, who pivoted out of crypto mining in 2019 after their founding in 2017.

The top 5 providers currently own 70.7% of the total market for compute, and are locked in a CapEx arms race to defend their market positions. This is not the expected output of a monopolistic system, this is an industry realising that the simple cloud rent they used to generate can be competed away with a dedicated and well capitalised new entrant, and are now scrambling to retain their market shares.

While they retain a stronger position, and are more supply inelastic, they are not perfectly inelastic. Their infrastructure moats, distribution, scale, are real moats, but shallower than publicly stated, a cloud position is a strong return but quite evidently not a permanent one, and it would seem by their actions, they know it also.

The Knight of the Sandcastle

Many consider the true winner of the AI boom or bubble, to be Nvidia. currently valued at some $5.3 Trillion, and dominating some 8% of the largest investment index in the world the SP500.

The company that designs the chips, can be easily mistaken for the man selling shovels in a gold rush, earning an extraordinary margin that seems somewhat permanent. It isn’t.

Nvidia generates a schumpeterian quasi-rent, a very big and complex term that translated into plain english, it generates high margins from its innovation, that innovation takes time for its competitors to imitate, during that period, it sees greater sales and greater pricing power for its latest generation of chips. This premium an innovator commands has a cost, it is not a true return to position. Nvidia’s R+D has scaled at an annualised rate of around 37% compounding annually and will need to continue to do so, to justify the prices of its new chips and its preference from its clientele. The supply elasticity of a new innovative chip design starts at near zero allowing Nvidia to generate a super normal profit, and rather rapidly decays as competitors become able to imitate the designs, back to a normal elastic good.

The chips themselves, are reproducible goods, their supply elasticity is relatively high, and rivals are pouring billions into catching up. What the research buys Nvidia is not permanence, it is a lag. Simply an interval before the competitors arrive with the same chips or same quality reproduced. The premium they generate is not a property of the asset, it is the property of the gap that is becoming increasingly expensive, in research that exhibits diminishing marginal returns.

Nvidia is currently fighting against power costs, ASMLs EUV machine capacity, and physics itself to continue to deliver the kind of performance jumps its shareholders and its customers require. It can no longer deliver the performance from a single die chip, and must rely on dual die chips with exorbitantly expensive connectors to tie them together as it hits the lithography reticle wall. The build costs of this added complexity have jumped from its Volta series in 2017 at approximately $800 per unit, up to $6400 in its new Blackwell units in 2024, an annualised cost base compounding jump of some 34% per year across the series, or from its last hopper H100 units at approximately $3000 a unit, some 46% annualised. The unit cost jumps are not just increasing but they are accelerating.

In fighting with increasing difficulty, to defend and expand its temporary Schumpeterian rent, this knight of the sandcastle, must innovate constantly at exponential cost, with diminishing returns, to maintain a margin that is permanently washed out to sea.

The cruel irony being, the faster it innovates to maintain this rent, the faster it erodes the value of its installed base. the pace of new chips, now close to annual upgrades, means every buyers installed chips are outdated almost by the time they are installed in the racks. The frantic speed that maintains the rent is the speed that guarantees the thing that earns the rent will not last more than a year.

The sandcastle being built here is quite clear to see, the cloud providers have been scrambling to maintain their fortress positions in their markets, as technofeudalists, built to be rented, by model providers who’s returns have already washed away, and they have built these fortress walls out of silicon… quite literally sand.

I am sure even Jesus had a fitting line about houses and sand, that probably would have been worth reading for the technofeudalists. But, given the existence of Bill Hwang, I might avoid quoting Jesus in markets.

The Costume

The mistake being made, of building these sandcastles and triumphantly declaring them as impregnable is quite easily revealed in the financial statements, where bold claims of their leaders quickly become accounting reshuffles and blurring.

Depreciation schedules. A fundamentally quite boring element of accounting until this recent AI frenzy and now they are the accounts most pawed over pages. Choosing a long useful life, allows them to spread the costs over longer financial years in smaller segments, the annual charges low and giving a smaller dent in the reported profits. Choosing a short (and more honest) useful life, incurs chunky charges, across shorter periods, and notably more dents in the reported profits.

The assumption broadly in the industry for the sandcastle, is some 5-6 years. The effective rate is closer to 3-4 including burn outs and maintenance, and the innovation rate screams back a much more harsh 1-2 years. The auditors at various firms, seem to have looked at the same sandcastles, and come to staggeringly different conclusions. Amazon shortened in 2025, and took a $900m additional charge on the additional depreciation, Meta instead lengthened, saving itself some $3bn.

Generally it is a good filter, between those who believe in their new silicon walls, and those who acknowledge it for the rapidly washing away sand it truly is. The two actions divide two major allocators between understandable strategies of sandcastles, one realizes it was pretty while it lasted, the other rather foolishly is fighting the tide that washes it away by frantically scooping on more sand to keep it standing for a moment longer.

Michael Burry, by our analogy usually bets on the sea not the sand, estimates the industries overstated profits by delusional depreciation schedules at some $176 Billion between 2026-2028. By Goldman Sachs’ measure, the whole industry moving to a 3 year depreciation schedule rather than a 5 year schedule, would add nearly $1 TRILLION to cumulative depreciation over the next five years. For most reasonable investors, it is generally good practice to watch the cash not the adjusted earnings, amazons free cash flow is down some 95% in a year.

Fundamentally the depreciation schedules and their varying adjustments amongst these sandcastles are a poor costume on a fundamentally ugly business being washed away.

The layers aligned

We have at the top, the models, who pay a rent to the layer below, but whose core product margin is washed away faster than it can be built. Tens of Billions spent on model training to gain a top spot that lasts a month.

The cloud operators receive a rent from this top slice, but to maintain their position over a cloud fief, they have rushed against their competitors to build silicon walls, that are simply sand eroding on a one to two year schedule, with the cost to build them accelerating, dressed up in a costume cosplaying this crumbling structure as one made of stone.

The chip designer is paid a handsome fee to build the walls, but is only chosen for the quality of its sand, an advantage that lasts a year at most, and at this point they are fighting physics itself to generate this premium, while competitors nip at their heels, their customers increasingly aware, that the sand seems to be sand, regardless of how innovative or new it might be.

A cascading layer cake of quasi rents in real time, each with decreasing elasticity and time lags to trend to competitive elasticity, all exhibiting diminishing marginal returns.

At the bottom of it all, the most inelastic un-reproducible factor, the land for the data centers, the water for the cooling, the grid connections and transformers that have a 5 year back log of approvals and installations. A parcel of land, in a country with cheap enough power, and cheap enough and abundant enough water for cooling, is near to unreproducible on a 5 year schedule, it is also precisely where the money from private credit and pension funds seems to be flowing.

It is tempting to read this as a designed system, a layer cake of increasingly sticky rents, but simply it is capital doing what it does naturally, seeking the highest risk adjusted return. The reason the investors are fighting for the data centers, the well placed land with adequate grid connections, is not that they have conspired to become landlords.

The most secure returns are found in the most inelastic factors, the ones where competition cannot rapidly enter to compete such returns away. The capital flows to the inelastic factor in the same way water flows to low ground, unintentionally but as a simple process of gravity.

Yanis Varoufakis, in his fantastic work describes what he sees as capitalism distorted into ‘technofeudalism’ a new order where cloud platforms extract a cloud rent that has replaced traditional profit. He is on to something we also observe, but he has stopped half way through the layer cake and has not found his way down to the true foundation, the land. By our mechanism, the Capital is naturally drifting in order down from a return to production to a return to position, simply by a rational process of seeking risk adjusted returns, a rational sleep walk of the Rentier black hole. The cloud providers, are not the lords of this system, they are at best the lords of sandcastles eroding in real time. The returns they derive at their scale and market dominance, require a tithe to maintain in capital and expansion, in this intense scramble to retain the position they once had in the market, they have burned their cloud rents to build bigger walls made of sand, they have realised with quite a blunt shock, these were not lords of technofeudalism, they are barons at best, in a war they cannot afford, to maintain lands they never truly owned, that are being washed out to sea.

Their master is whomever can provide them the sand for their crumbling walls at extended costs annually, and their murderer is a clock that ticks against them on the balance sheet.

A Mortgaged Peasantry

The peasant paying the tithe in this sandcastle, has already determined how this will crumble.

In their attempts to maintain the competitive edge, a Schumpeterian rent that lasts some 35 days, the model operators are leveraging themselves to the hilt to acquire compute at scales that boggle the mind to eek out tiny and fleeting advantages over their competitors with diminishing marginal returns.

With $73 Billion in cash on hand, OpenAI burns some $15 Billion a year, while token prices depreciate at a median rate of 50x a year, and somehow has commitments to acquire and spend some $750bn until 2030. Even without a calculator you can notice a pretty sizable gap, and here lies the problem. The runway relies on the next fundraising round, and the next, and the one after that. A borrower whose income covers neither its losses or its commitments, betting on a future fundraise, while its product devalues by some 50x per year. This is definitionally what Hyman Minsky describes as ponzi financing.

Now, the issue here is not a single model provider failing, equity hitting zero, while sizable, is isolated generally. The shareholders take a hit to the chin, but the system stands, the result is the kind of short clearing market crash à la 2001 Dot-com. The issues only truly start once the integration is made into the machine, of credit, securitization and lending.

The issue lies in these unfunded commitments being treated as bankable collateral. The commitments of Ponzi financing being pledged against true lending in the cloud providers. As can be seen in particular with Oracle, recently downgraded to barely above junk rating at BBB- by S&P ratings, as half of their receivables are against OpenAI alone, who have the cash today excluding burn to cover approximately a fifth of their commitment to just Oracle.

The rest of the machine has been funneled into SPVs for the construction of data centers, some $500bn in total lending is against brand new vehicles to keep debts off the balance sheet and in isolated vehicles. The assets with the data center comprised some 70-80% in the sand that is depreciated by a new generation of chips within 24 months.

The investments solicited from the chip designers into the model providers, under this guise, are simply loans to acquire its chips, thrown through equity to avoid regulatory scrutiny it’s previous $100bn cash for chips deal it structure was victim to.

The structure now, contains trillions in securitized debt structured against the ponzi finance of a handful of companies whose product is subject to the fastest erosion in true returns to production.

The difference between a pop and a bang is the credit integration, which is now at heights not seen since the financial crisis, and is built on returns that never existed and erode faster than they arrive.

The current outstanding CMBS on data center financing deals is expected to hit $115bn this year according to Bank of America. With other securitized credit around this AI financing extending beyond $500bn already.

When the Tide Arrives

Suppose the correction comes. The tide arrives to wash away the sandcastles, what remains, what is left standing?

Not the model providers, who seem to be superseded every 35 days. Not the ‘technofeudalists’ that without a customer or the financing, sit on silicon that turns to sand within 3 years. Not the cloud providers receivables, who disappear in a flash with the model providers.

The only thing that remains is the return to position, the thing that could not be competed away, the land, the grid connection, the substations. The thing that made them valuable, their inelasticity, the thing that made them truly valuable, is not a promise that can be broken. When the elastic tower crumbles, what remains is the inelastic floor.

Even if this tide does not arrive, the Ponzi financing is reformed by Jevons paradox, the revenues boom and AI turns out to be all it was promised to be. This technology changes the world in some positive manner boosting the productivity of all workers and industries leading to real wage growth across the whole economy. In an economy where the housing market and its land is close to perfectly inelastic, it does not stay as higher wages, it becomes higher bids for a fixed factor absorbing whatever income chases it. In the case AI turns out to be all its largest believers want it to be, the result is the same that we see in the sandcastle, the value and the cash drains to the most inelastic factor as higher rents and higher prices.

The effect can already be seen in a perfect microcosm of San Fransisco, where the burgeoning salaries of AI engineers, the exits of RSUs, have converted themselves into a 19% annual jump in real estate prices, and a commensurate bump in rents.

AI itself, for the doomer conversation of a financial collapse, or the deluded notion of Elon Musk, of a world free of scarcity, is a simple demonstration of an older fundamental system. Enormous value is created, it is subjected to competition across every layer that can be reproduced, a network, a minimum efficient scale, a product, an innovation, recreated and handed forward as a lower price. This surplus settles to the last drop in an inelastic system to the one thing that cannot be reproduced and cannot be competed away. The chips depreciate, the labs bleed, the clouds ignite themselves as the Cashflow burns to zero, the consumer pockets the difference in cheap intelligence, just another product subject to the process of capitalism. The only true beneficiary is the land, fertilized with the blood, the sweat, the tears of its inhabitants toil.

These castles made of sand will fall, the tides come in. The labour, the fortunes, the castles, are all subjected to a natural process of erosion, the only survivor is the beach itself.

What I see is a structure built upon the sand, regardless of which sand castles are built, how high they may be, how intricate they are or the talents of their designers.

Until we build on the stone not the sand, all structures must fall. There is no techno-feudalist on a sufficient time scale, there is only a feudalist.

An ephemeral capitalism of sandcastles, built on a dark remnant of feudalism, will always revert to feudalism by the same rationality of capitalism that seeks risk adjusted returns, capitalizing into a plot that always was and always will be.

For what comes from the earth must return to it. Even you, my dear reader will one day fertilize the soil you toiled upon, and your labours, your innovations and your productivity is merely capitalized within it.

We are all upon a beach, assisting in the productive construction of better sandcastles, but while the beach is rented, and the tide exists, what happens above it past a day is irrelevant, and on a risk adjusted basis, I would rather always own a beach, and watch you build a sandcastle.

Subscribe

Share

Within the framework I have built around the Rentier Black Hole, one element of it is the most interesting and misunderstood. Reference dependent utility. It sounds rather intimidating, or conceptually difficult, and so I thought I might give a simple metaphor that most anyone could understand, and quite a few of us already feel.

To understand it, you need a lake, a boat, a fisherman and a drowning man.

Subscribe

Share

The lake

You are at a lake. The surface is relatively calm, the weather is quite fair up here. There’s a man in a boat, rather relaxed, he casts a line over the side, soaks in the sun with a beer in hand.

A small bubble rises to the surface. A hand reaches out of the water, grasping the edge of the boat. He hauls himself in. The panic on his face has dissipated. The fisherman hands him a beer and a rod.

“How did you get up here?”

The nearly drowned man coughs out

“I guess I must be a good swimmer.”

Below the boat, there are still more bubbles coming up. The water seems to be rising. The bubbles seem to be growing.

Above

You are in the boat. You got yourself into the boat. You struggled under the water for some time.

You must be a good swimmer. Maybe simply stronger than the others. Possibly they should have learned to swim.

This is being above the reference. The framework of our reality is often dictated by our position. Even those who have been ‘under the water’ once above, adopt the language of the boater.

I earned this position. I worked hard. Getting into the boat is the rational option, swimming is rather tiring after all. This is not objectively wrong. Within this reference, it is a perfectly rational world view. Nobody handed you the boat.

Once you are ‘in the boat’, life is all more rational. You may crack open a beer, consider where to steer the boat for a better catch, or focus on the fishing.

Above the reference in reference dependent utility, agents are what we commonly understand in economics as rational, they make reasonable risk averse choices. They optimize on rational parameters as we would expect them to.

Below

There is a man drowning. Sucked below under a cold black current. The surface is pulling away from him faster than he can swim.

He struggles, he frantically writhes, he moves wildly, in any attempt grab something that might pull him back to the surface, even something flimsy and nearly impossible to help, a small branch that might snap. He is still sinking.

At the bottom, his breath gives way. The water enters his lungs, and he screams. The bubbles filter out to the surface as the ice cold water floods in.

He continues to sink.

It is not often a drowning man simply stops swimming. Usually as the darkness closes in, and the water takes you down, the further you go the more frantic you become, as the surface pulls away from you.

If he made it an inch closer to the surface before sucking in the water, he would not have been better off. The answer is simple, you either get to the surface or you don’t.

Any frantic motion that is required to get to that surface is a matter of survival, made in a split second while you suck in water and attempt to simply not die. Any thrashing, grabbing, kicking, is all rational down here in the depths.

The further from the surface you are, and how fast that surface rises away from you, determines how visceral that panic becomes.

This the dark implication of reference dependent utility in our economies. The further below the reference you go, the more risk you are willing to take to reach a surface, you may even step on another poor soul down here to push yourself up. Anything to reach a surface is justified below the water.

If the man had tried to swim, with perfect form and pace, no wasted strokes. At a certain depth, if the surface is rising away from you, he still would have drowned. The rational prescription of swimming, is irrational if he still would not have reached a surface. There is nothing else to do but thrash, kick up off another drowning man, or grab for branches certain to break, because some chance always beats no chance.

Across the surface

The man in the boat has seen the bubble hit the surface, that left the lungs of a man condemned below. He peers over the side of the boat. Below he sees a man thrashing, panicked, grabbing at anything.

He says “You should have learned to swim like my friend here. I got my own way into this boat, you just can’t help some people.”

He doesn’t mean any of it as a condemnation. It’s simply the only advice that makes sense within his reference, what worked for him before the water rose so quickly.

The survivor beside him if anything is tougher about it, as survivors often are. He did get into the boat, he doesn’t remember much else, other than the man in the boat remarking what a good swimmer he must be.

The drowning man looks up. He sees the hull from below. He would shout help, but with little breath left and an expanse of water between them, to scream would only let the water in faster. He’s slightly more focused on trying not to drown as you could imagine.

The two references fundamentally from a difference in perception based on their placement relative to the reference, have no basis to understand the views of a person across the surface.

In our economic reality, we don’t often callously watch people drown, but we do often hear the same words. Work harder. Buy less avocado. Get an education. Have you considered moving somewhere cheaper.

None of this is strictly irrational advice, given from someone above the reference to someone below. Within their reference and their lived experience of how they got there, they believe truly that it was meritocratic, from their hard work, and to some degree, this is understandable. They only faintly remember swimming.

A Rising Tide

The man in the boat does not notice the water level rising or the speed at which it may be rising.

He is just as far from the surface as he was yesterday. He is further from the lakebed and where he started than ever, but he doesn’t carry an instrument to measure the depth, he just sees the surface.

The reference moves up, without anyone above it truly noticing it. The expanse of water below for those damned below, has grown faster and is now wider than ever. Certainly larger than when our sailor first swam to his boat in a time when swimming still worked.

Those in the boat are not doing anything to those below it. They simply sit above the reference buoyantly.

The Bubbles

Deep below the surface, a collection of the damned are choking for breath.

In all drownings there is a point when you realize the surface has escaped you, there is a feeling when ice cold water hits your lungs.

What comes out is a scream, the water floods in, the air displaced. Whether it was in terror, or simply the world “help” is irrelevant. Only the bubble reaches the surface.

The size of the bubble depends on how long you held your breath, and how many people are down there drowning.

Here the analogy and the economics are both quite dark. Below the surface, the risk preferences are distorted by the binary choice of reaching the reference point. The further away you are, the more severe it is. In our economies this is where we see desperate gambling, lottery tickets, high kurtosis bets. All things that broadly, are negative expected returns, they will generally lose you money, but they carry a tiny chance to get you above the reference, when all other strategies are guaranteed to fail.

For a rare few, the bubble rising from below was enough to push them and a hand above the surface. The rotten branch they grabbed held just long enough. They pull themselves onto the boat, for a towel and a beer, they did not see through the murky depths where the bubble came from.

In my framework, I believe it is reasonable to imagine, that the bubbles started with a scream that sounded like “help”

Multiple down below

Now consider that there are hundreds if not thousands of people down here, deep down below. All sinking and screaming at the same time.

The Lake is rather small, all of those bubbles together and the thrashing down below drives a current, is enough to disturb the man in the boat.

If enough people are risk seeking simultaneously below the reference, in a small enough market, the sum of their inflows is no longer absorbed by the venue. Individually, on negative expected value investments, they may lose quietly. Small bubbles rise to the surface. Collectively in a venue with limited capacity, enough inflow can affect the pricing, that pricing becomes recursively based on the inflow rather than fundamentals.

This is observed as irrational to those above the reference broadly, but below the water, nearly anything that can get you to a surface can be justified.

Whether this coordinated bubble and thrashing beneath the waves rocks the boat to a noticeable degree, or even capsizes it, depends on if there is a rope connected to the boat. The credit system.

Without a ‘rope’ the screaming and the thrashing below, may make some notable ripples on the surface, you may even rock the boat. The credit isolated venues pop below, with only a ripple at the surface.

With a ‘rope’, the yanking from below, from a thousand drowning souls screaming, can easily pull over the boat.

The difference between bubbles that ripple and bubbles that bang, is a rope Hyman Minsky named the Minsky collapse.

If you can’t see the water

Someone who cant see the water, sees a man in a boat calmly and reasonably enjoying their day at the lake. Looking down slightly he then sees some frantic man at the bottom acting rather strangely. Grabbing at things, kicking himself off another man. Screaming without words coming out.

He notes that there must be two types of people. Calm sailors, and an irrational few who are behaving quite bizarrely.

This is not an entirely ridiculous conclusion to a man who cannot see the water. This is roughly the current micro-economics that you are taught in your lecture halls. All agents are rational and utility maximizing. The poorest in society gambling at rates that correlate almost perfectly inversely to their position by relative wealth, is an anomaly they swat away in their mathematics.

The model is not strictly wrong, it was simply never constructed in the water, or by those who have ever dared to swim, in an institution far above the waterline.

When a Billion People Drown

A boat of any size, in a lake of any size, will notice the ripples of a billion below writhing, struggling and screaming.

It does require that those below still have the breath in their lungs to scream with, and energy sufficient to fight a dark current. Some lakes are simply quiet because the screaming stopped. Whether they are all in boats or graves is irrelevant.

The man in the boat doesn’t know whether the lake is still, whether a single man or a billion are down in the dark drowning.

If down below, a billion people are drowning, locked below a surface rising that they know they can never reach. The collective scream of a generation sinking, is loud enough to boil the water.

All ropes will be yanked, the bubbles at the surface when they arrive, are more than sufficient to flip any boat of any size.

If a billion people are below. You are not safe in a boat.

If it capsizes, you will then know that the water is colder, deeper and darker than the time you first learned to swim.

Share

Subscribe

The Black Hole

There is a country where the state owns all the land. Every square metre beneath every tower in every city belongs, in the last analysis, to the public. No private freeholder holds the ground under the flats. By the oldest argument in political economy, the line that runs from Smith and Ricardo down to Henry George, this country should have been spared the disease that quietly organises every other. The disease is rent, the tribute that flows to whoever owns a scarce location, levied on everyone who has to stand on it. Take the land into public hands, George’s followers said for the better part of a century, and you drain the pond in which rent breeds.

China did precisely what they asked. It kept the land. Then it assembled one of the largest property booms in the history of the world, and is now living through the bust.

The figures are those of a textbook unwinding. By the middle of 2026, new-build prices across seventy cities had fallen year on year for thirty-five months without a single break. Property investment was down about sixteen per cent on the year. The six largest banks had watched their mortgage books shrink three years running as households, rather than borrow, quietly repaid what they owed. Land sales, once the single richest vein of local government money, had roughly halved from their peak. New bank lending had dropped to its lowest since 2018. None of this is the signature of a market that ran too hot for a season. It is the signature of a structure coming down.

You might stop me here and say this is simply demography. China is ageing, and its total population has been shrinking since 2022, so surely fewer people means fewer flats and softer prices. The demography is real. But look at where the fall actually landed, and the simple story comes apart. Even as the country as a whole began to contract, its cities went on filling. Urbanisation continued, the urban share of the population kept rising, and the tier-one cities remained the most sought-after addresses in the country, their flats rationed by lottery and residence test. Beijing, which turns away far more people than it admits, saw its prices fall regardless. Shanghai, still drawing people in, saw its prices hold while most of the country slid. Same demographic wind, opposite outcomes, which is exactly what you get when it is the scarcity of the location, and not the size of the national population, that sets the price. And the timing gives the rest away. The decline did not steal in slowly as a generation aged. It arrived sharply, in cities that were still growing, once the authorities had set out, quite deliberately, to let the air out of the boom. That is not what a demographic bust looks like. Demography steepened the ground the whole thing stood on. It did not stack the structure, and it did not push it over.

So the question almost asks itself. How does a state that owns all of its land end up with a rentier black hole at the centre of its economy? If ownership were the thing that mattered, public ownership should have settled it. It did not settle it, which tells you that ownership was never the operative variable. Something else was doing the work, and it was doing it in plain sight.

Consider where a Chinese household could actually put its savings. It could hold deposits at the bank, at interest rates that rarely kept pace with the cost of the thing it was saving for. It could buy domestic shares, in a market with a long reputation for parting the retail investor from his money. It could purchase various managed products of uncertain quality. What it could not do, and still cannot, is move its money freely across the border into the wider world of foreign shares, foreign bonds and foreign property. The annual quota for taking money out sits at fifty thousand dollars a person, and even that may not lawfully be spent on property or securities abroad. The border was, and remains, closed to the ordinary saver.

Inside that closed system, one asset behaved differently from all the others. Property could be borrowed against. It had appreciated, reliably, for a generation. It was bound up with the things a life is measured by, a marriage, a family, a school place, a claim that could be passed to a child. It was visible in a way a brokerage balance is not. So the savings of a nation, denied the exits, found the one destination that seemed to reward them, and poured in. This is the black hole. Not a figure of speech for collapse, but for concentration, a region of the economy whose pull on capital grew so strong that, once money crossed the threshold, very little of it ever came back out. With a closed door to the rest of the world and limited domestic options, the household wealth concentration into property is a global anomaly at approximately 74% of household wealth.

In Beijing, Shanghai and Shenzhen the flat stopped being somewhere to live and became the measure of whether you were winning. It was the benchmark against which a young worker judged their own progress, and increasingly the benchmark receded faster than they could advance towards it. Hold that thought, because the behaviour it produces will matter later. For now the question is why the reference asset behaved the way it did, and answering it means taking the black hole apart. It has three moving parts.

The first is the one everyone can see and almost nobody believes. You cannot build your way out. China’s response to expensive property was to build property on a scale without precedent in human history, and the black hole survived the attempt, because a flat in an overbuilt city in the interior is not a substitute for a flat that comes with access to Shanghai’s labour market. You can lay another million foundations. You cannot lay down another Shanghai. Economists call this a low elasticity of supply, and the phrase rather flatters how strange the thing is. A careful study of thirty-five Chinese cities by Li and Malpezzi put numbers to it, in the coastal tier-one cities, Shanghai, Shenzhen, Qingdao, supply barely responds to price at all, while in the interior it responds almost without limit. Build a tower in the interior and the price gives way. Build a tower in Shanghai and the location absorbs it and asks for more.

There is a quieter piece of evidence, and it is the more telling for being a confession. The tier-one cities are precisely the ones that ration who is allowed to buy. They bar purchases by people without local residence. They cap the number of homes a family may hold. They impose waiting periods and residence tests. A government reaches for demand rationing only when it has given up on supply. If you could build enough, you would let people buy, you ration the buyers because you cannot build the thing they are trying to buy. The purchase restriction is the state conceding, in the dry language of policy, that the location cannot be manufactured.

The second part is the machinery that bolts the flat to the banking system. A Chinese buyer puts down as little as fifteen per cent and borrows the rest, on a loan that can run thirty years and whose rate is not fixed but reset periodically against a benchmark that moves with policy. The asset and the credit are welded together. When the location rises in value it becomes collateral for more borrowing, which becomes demand for more location, which lifts the value again. When it falls, the same machine runs in reverse. By 2025 the average household carried debt worth close to a hundred and forty per cent of its disposable income, most of it secured against the very asset whose price was by then sliding. That is not a market with a lot of leverage in it. That is a market that is leverage, wearing the costume of a home.

The third part is the one that turns the paradox inside out, and it lives in the tax code, or rather in the space where a tax ought to be. In most countries the state that plays host to a property boom at least taxes it as it runs, taking a slice of the value every year through a recurring property tax. China does not have one, not at any scale that matters. Two pilot schemes have run in Shanghai and Chongqing since 2011, and between them they raise tax equal to about three per cent of local tax revenue, which is to say they are symbolic. The plan to take a property tax nationwide has been announced, deferred and shelved more than once. Instead, local governments raise their money by selling the use of land outright, in a single lump, for seventy years at a time. And this is where the ownership everyone points to stops protecting anyone and quietly begins to do the opposite.

Think about what that arrangement does to the incentives of the owner. A landlord who is paid once, at the moment of sale, does not profit from land being useful. He profits from land being expensive. Having sold the seventy-year right, the local government’s revenue no longer depends on the productive life of the site but on the next sale, and the one after that, each of which it needs to come in richer than the last. The state that owns all of the land has arranged its own finances so that it, too, requires the price to keep climbing. The public landlord and the speculator are no longer on opposite sides of the table. They want the same thing.

Selling the land once and taking the proceeds is, on the face of it, exactly what a Georgist would want, the public captures the land value, rather than a private owner pocketing it. But a single sale can only capture what the land is expected to be worth on the day it is sold. It cannot capture what the land turns out to be worth after four decades of the fastest sustained growth any large economy has ever recorded. The price struck at auction was set against the expectations of that moment. The rent the location went on to throw off ran far ahead of those expectations, and every yuan of the difference accrued not to the state that had sold the right, but to the private holder who happened to be sitting on it, and who could now borrow against it. The state captured the land value once, and cheaply, and then watched the miracle it had done so much to create flow straight past it into private hands. The country that owned all the land had, through the design of its own tax system, sold itself out of the upside. That is the inversion. It is why public ownership did not save it, and it is where the black hole was always going to form.

Return, now, to the young worker measuring their life against the reference. Below a benchmark that keeps receding, a person has three moves. They can work harder and try to close the gap, although the gap has a habit of widening faster than wages. They can take a large risk in the hope of clearing it in a single bound, which is a polite description of a good deal of speculative behaviour. Or they can stop playing, and the phenomenon the Chinese internet calls tang ping, lying flat, the quiet refusal to keep competing for a prize that has floated out of reach, is at the very least consistent with a cohort that has done the arithmetic. All three responses are precisely what the theory predicts when the reference asset climbs beyond the reach of the people measuring themselves against it.

The state’s ownership of the land was never a defence against the rentier black hole. It was, through the accident of how that ownership was monetised, the very thing that guaranteed one. A socialist state, having taken all the land into public hands, built a fiscal system that gave the public landlord a private landlord’s appetite for a rising price, and then presided over exactly the boom that appetite demands. The remarkable thing is not that the bubble formed. The remarkable thing is that it formed in the one country that, on paper, had already solved the problem.

Which leaves the more interesting question. What does such a state do when it finally looks at the machine it has built, and decides to switch it off?

Pulling the Plug

Every part of the machine described so far was behaving ‘rationally’. The household that stretched to buy a flat in Shanghai was not being reckless; it was putting its savings into the one asset the system reliably rewarded. The developer that borrowed to the hilt to buy land was not being greedy; it was responding to a market in which land had risen every year anyone could remember. The bank that lent against that land was not being careless; the collateral was appreciating and the state stood behind the whole edifice. The local government that sold the land, dearer each year, was not being cynical; it was paying for schools and roads out of the only revenue base it had been handed. Each player, looked at on its own, was doing the sensible thing. The trouble was what the sensible things added up to.

Put them together and you get a loop. Capital buys land. Land becomes collateral. Collateral supports credit. Credit chases land, which rises, which supports more credit, which chases more land. Round it goes, and with every turn a little more of the nation’s savings is drawn out of everything else and into the same widening well. By the end, an economy that told the world it meant to build the future in solar panels and semiconductors was sinking an extraordinary share of its capital into the ground beneath its own cities. Nobody chose this, It was the sum of a billion rational decisions.

You do not need to credit anyone with a theory to see what happened next. The state did not have to read Henry George to notice that a rising share of the national resource was disappearing into an increasingly leveraged machine, and that the machine stayed upright only so long as the borrowing and the prices both kept climbing. That is a fragile way for a large economy to hold itself together. In 2020, the authorities moved to change it.

The instrument was a set of limits on how much a property developer could borrow, measured against its assets, its equity and its cash. The rules were known, with the bluntness the Chinese state sometimes favours, as the three red lines. A developer that breached all three could take on no further debt at all. On paper it was a piece of prudential housekeeping. In effect it was a decision to reach into the engine and turn off the fuel.

To see why that was enough, borrow an idea from Hyman Minsky. Some borrowers expect to repay their debts out of income. Others expect only to service the interest and roll the principal over, again and again, so that the debt is never really repaid, merely refinanced in perpetuity. A structure of the second kind works beautifully while the money keeps moving. It has a single requirement, that the refinancing never stops. The large Chinese developer, by 2020, was in many cases the pure case of this, funding today’s obligations with tomorrow’s pre-sales and next year’s loan, never expecting to clear the balance so much as to keep it rolling. The three red lines removed the one thing such a structure cannot do without. The moment fresh borrowing was capped, the developers that had been rolling their debts could no longer roll them.

The company that became the emblem of this was Evergrande, at the time the most indebted property developer on earth, carrying liabilities past three hundred billion dollars. Denied new credit, it could not meet the obligations that only new credit had ever met. It defaulted. A Hong Kong court ordered its liquidation at the start of 2024, and in the summer of 2025 its shares were struck off the exchange for good, after eighteen months suspended, with more than forty-five billion dollars of creditor claims lodged against a carcass whose assets sat, largely stranded, back on the mainland. It is tempting to cast Evergrande as the villain of the piece, the reckless borrower who brought the house down. That is precisely the wrong reading. Evergrande did nothing the logic of the system had not been rewarding for twenty years. It was not the disease, It was the most advanced case of it.

There is a part of the Evergrande story the liquidation figures miss, and it is the part that matters most for what followed, not what the company owed, but what its buyers had thought they were buying. For the household standing below the reference, the pre-sold flat was never only a home. It was the closest thing the walled economy offered to a lottery ticket. A buyer put down a deposit of between ten and thirty per cent on an apartment not yet built, in a tower not yet standing, discounted below the going price by a developer almost everyone assumed the state would never permit to fail. China is a recourse market, so the loss was never truly capped, if the project collapsed, the buyer still owed the bank. But behaviourally the downside was believed away, held off by the near-certainty of official rescue, while the upside ran on leverage. A ten percent deposit is a tenfold gearing, so a market that rose ten percent in a year, as this one reliably had, could double the buyer’s initial equity. A relatively small ticket, levered upside, and a downside the state was assumed to have quietly underwritten. In an airless investment universe it looked enough like a lottery ticket to draw the whole below-reference cohort in, and when the developers fell it did not merely strand a balance sheet. It closed the lottery.

Beside that flat sat a second instrument, sold on the very same assumption. Trust firms and shadow banks packaged high-yielding wealth management products and offered them to the comfortable saver as though the return were as safe as a bank deposit and just as quietly guaranteed by the state. The money they raised was funnelled, in large part, straight back into the property complex, to the developers and local vehicles the banks would no longer lend to directly. When property turned, the products turned with it. The largest of these houses, Zhongzhi, collapsed into insolvency owing sixty four billion dollars against less than half that in assets, and roughly a hundred and fifty thousand of the country’s better-off savers discovered in a single afternoon that the guarantee they had assumed protected them had never once been written down.

Here the Chinese episode parts company with the one every Western reader has in mind. In 2008 a comparable structure came apart on its own, at speed, and the unwinding fed on itself: forced sales drove prices down, which forced more sales, which broke the banks that had lent against the collateral. A Minsky moment, then a fire sale, then a financial heart attack, all inside a single autumn.

China’s version has not gone that way, and the reason is that this reversal was triggered from above, on purpose, by a state with unusual power over the pace of what came after. There was no single day of panic. There has been, instead, a long and managed deflation. Developers have been allowed to fail, but slowly. Prices have been allowed to fall, but by degrees. The banks, mostly state-owned, have been leaned on to stay standing. What in 2008 took months has in China been drawn out over years, which is why the West kept waiting for a crash that never quite arrived in the shape it expected.

What arrived instead was quieter, and in its way more revealing. Households stopped treating property as the thing to pour money into and began, in very large numbers, doing the opposite, repaying their mortgages ahead of schedule, to be rid of the debt. The mortgage books of the biggest banks have shrunk three years running. New lending across the whole system fell in 2025 to its lowest in seven years. This is what economists, after studying Japan’s long slump, call a balance-sheet recession: a whole population quietly deciding, at more or less the same time, that the priority is no longer to acquire assets but to pay down debt. It is not a panic, It is something slower and much harder to reverse, a collective change of mind about what money is for.

On its own terms, and set against the argument of the first part, what the state did was broadly right. It had a machine drawing the nation’s capital into unproductive scarcity, and it deliberately cut that machine’s capacity to keep doing so. If the black hole was the problem, shrinking its pull was a sane response. Very few governments manage to move against a bubble on purpose while it is still inflating, because the political pressure runs entirely the other way, the people who own the asset are the people who vote, and they do not thank you for ending the party. That the Chinese state could do it at all is a measure of how much less constrained it is than most.

But it made one mistake, It closed the old savings vehicle before it had built a new one, and closed the only lottery left on-shore, and left the door open to just one.

For a generation, property had been the place the nation’s savings went. It was the store of value, the collateral, the pension, the inheritance, the visible proof of a life’s work. When the state throttled it, it did not open an alternative of anything like comparable size. The border stayed shut: an ordinary saver may still take only fifty thousand dollars a year out of the country, and may not lawfully spend even that on property or shares abroad. The domestic stock market commanded little trust. So the savings did the only thing left to them. They sat.

And they have been sitting in enormous and growing quantities. Chinese households now hold 173.48 Trillion yuan (approximately 25.6 Trillion USD) in time and savings deposits, a figure that has bent sharply upward since 2022, as money that would once have gone into a second flat has flowed into the bank instead, to earn almost nothing. This is not a sign of confidence. It is the reverse, a nation saving harder precisely because the thing it used to save into no longer feels safe, and because there is nowhere else for the money to go. Rather than open the exits, the state has been closing them further. In the spring of 2026 the authorities moved again to tighten the channels through which money could be sent abroad, confining what outbound investment remained to a handful of state-supervised routes.

A country has recognised, in effect if not in name, that it cannot go on pouring its savings into the ground beneath its cities. It has acted, deliberately, and with a control few states could match, to stop. In doing so it has produced an enormous and restless pool of national savings, with the old destination closed, the foreign exits barred, and no new home of any real size yet built.

Money like that does not stay still. It has to go somewhere. The question of where is the one the Chinese state has spent the years since trying to answer, and the answer it has reached for begins to reshape not only China but the world beyond it.

The Factory at the End of the Universe

The money had to go somewhere, and the state had a destination in mind. If the disease was that the nation poured its capital into the ownership of scarce things, the cure looked plain enough, point the capital instead at the making of useful ones. Stop rewarding the man who owns the land and start rewarding the firm that builds the factory. Take the savings that had been flowing into flats and channel them into plant, machinery, research, the physical capacity to produce. This is, near enough, what the first part of this argument would prescribe. Scarcity concentrates wealth by making things dearer. Production compounds it by making things cheaper and more plentiful. If you must choose where a nation’s savings go, abundance is the better bet.

This is broadly how China avoided the consequence of a Rentier Black Hole that the West could not. The hollowing that shows up as declining production in the Western cases shows up, in the Chinese case, as booming production.

In the West, the black hole drains industry precisely because the allocation is made by dispersed private hands, each optimising on its own account, and for each of them the certain return on land beats the risky return on a factory. No one intends the hollowing; it is the sum of a million rational private choices, and capital finds the rent on its own.

That choice was never China’s to make in the same way, because the allocation was never private. The state sat at the tiller, directing the flow of the nation’s savings, and the state answered to motives no private allocator carries, employment, industrial capacity, the self-sufficiency of a country that intends to depend on no one. So it did the thing no rational private investor would, and forced the savings into production long past the point where the return justified it.

The black hole did not vanish. Its symptom was diverted. Where the private machine drains capital out of industry, the state machine jammed it in, and the bill for that would come due in another currency.

Given a decade and a torrent of capital, it built the deepest industrial base the world has ever seen, and then it built more. It came to dominate the manufacture of the very things the future is supposed to be made of: the batteries, the solar cells, the electric cars, the drones, the components without which the rest of the world cannot build its own green transition. Where the West debated industrial policy, China simply executed it, at a scale and speed that left established producers in Germany, Japan and Detroit staring. By the middle of this decade it was not merely a maker of cheap goods. It was the maker, of some of the most advanced goods there are, and the price of nearly everything it touched came down.

And there, in that last clause, the trouble begins. Because production has a property that scarcity does not, and it is the property on which this whole story turns. Productive capital runs into diminishing returns. Scarcity does not.

Consider a farmer. Give him his first tractor and his output leaps, one machine does the work of many hands, and the harvest he can bring in multiplies. Give him a second and he gains again, though by less. By the time you have handed him his tenth he is not ten times the farmer he was with one, he has more machines than fields to drive them across, and the tenth sits idle in the barn for most of the year. Each tractor after the first adds a little less than the one before. Build the first steel furnace in a region and you create an industry. Build the fiftieth and, at some point, you are producing so much steel that the price of every tonne, including all the tonnes from the other forty-nine furnaces, begins to fall. The return on the next furnace does not merely shrink. It can turn negative, dragging down the return on all the furnaces already standing.

Scarcity behaves in exactly the opposite way, and this is why the black hole was so stable to begin with. You cannot build a fiftieth Shanghai to drive down the value of the first. The location does not saturate. Its return does not fall as you add more of it, because you cannot add more of it. Land, the scarce thing, holds its yield precisely because it cannot be reproduced. Productive capital, the abundant thing, erodes its own yield precisely because it can. Pour a nation’s savings into scarcity and the returns hold, which is a slow disaster for everyone who has to pay the rent. Pour the same savings into production, past a certain point, and the returns fall, which is a different kind of problem, and the one China now has.

For roughly three years, from late 2022 into the opening months of 2026, the prices Chinese factories charged at the gate fell, month after month, one of the longest runs of producer-price deflation any major economy has recorded. And it was not weakness spread evenly. It was concentrated, tellingly, in exactly the industries into which the most capital had been poured. The advanced-manufacturing sectors at the centre of the national strategy were the ones posting the steepest price falls, and by 2025 they carried the highest share of firms actually losing money, more than a third of them, worse than the industries that had been starved of investment. The more a sector had been favoured, the thinner its margins had become.

The Chinese have a word for this, and it is a revealing one. Neijuan (内卷), usually translated as involution, describes a frantic kind of effort that produces no advance: everyone working harder and competing more fiercely simply to stay in place, or to fall behind more slowly. It began as a term for the exhausted striving of students and office workers. It migrated, accurately, to whole industries, dozens of solar firms and carmakers locked in a race that swallows ever more capital and returns ever less, each cutting prices to survive, all of them together destroying the profit of the sector they share. Involution is diminishing returns experienced from the inside. It is what the fiftieth furnace feels like to those who built it.

There is a formal name for the same trap seen at the level of the whole economy, coined by the trade theorist Jagdish Bhagwati: immiserising growth. A nation can, in principle, grow its way to being worse off. China is not there, and it may never be. But the mechanism is plainly at work. The abundance it manufactures is real, and it is a genuine gift to the world’s consumers. It is also, for the producer, a falling return on an ever-larger pile of capital.

Where does the surplus go? Some of it, unavoidably, abroad. A country that produces far more than it can consume must sell the difference to foreigners, and China’s trade surplus has swollen to a record, well over a trillion dollars of goods sent out into the world beyond what it takes back in. This is the overflow valve of the whole system, the excess capacity, unable to earn its keep at home, pushed out across the borders, which is why the rest of the world has found itself awash in cheap Chinese manufactures, and why tariff walls have begun rising to meet them. But a valve is not a cure. It relieves the pressure, it does not remove the cause.

And here the story rhymes with itself. Faced, a few years earlier, with capital piling into property until the machine grew dangerous, the state had reached in and throttled it. Faced now with capital piling into production until the factories were eating one another’s margins, the state has done the same thing again. Beginning in 2025 it launched what it calls a campaign against involution, ordering capacity cuts, leaning on the worst of the price wars, telling whole industries, in effect, to stop building furnaces nobody needed. And it worked, at least in the narrow sense. By the first half of 2026 factory-gate prices had stopped falling and turned upward once more. Two machines that drew in the nation’s capital and gave back too little of value, two deliberate interventions to shut them off.

Which leaves it, and us, exactly where the logic has been pointing all along. Set out the options facing that enormous pool of trapped national savings and count them off. It cannot go back into property; that was the black hole, and in any case it is still deflating. It cannot keep flooding into domestic industry without limit; that is the furnace problem, and the state has just moved to stop it. It cannot sit in cash; deposits earn almost nothing, and 173.48 trillion yuan is already there doing precisely that. And it cannot, under the rules as they stand, simply flow abroad in search of a better return, because the border is shut.

Every domestic door is either closed or closing. And this is the point at which a certain kind of arithmetic becomes irresistible. If the return on the next furnace at home has fallen close to nothing, then a return available somewhere else, even a distant one, even a risky one, even one that must be built from the ground up in a country on the far side of the world, starts to look not charitable but merely rational. The tenth tractor is worth little to the farmer who already owns nine. It may be worth a great deal to the farmer who owns none.

That single comparison, between the exhausted return on capital at home and the untapped return on capital abroad, is the engine of everything that follows. It is why the ships leave port.

The Treasure Ships

The trapped savings split in two: the state's capital could leave the country, the household's could not. The first became a fleet, and this part follows it out to sea. The second was left to find whatever door remained at home, which we cover fittingly at the end.

So the state’s ships leave port. Denied a home for its savings inside its own borders, China’s capital turns outward, and here the story could become, for a moment, almost utopian.

China takes the savings it can no longer profitably invest at home and sends them to the places that have almost none. It builds a railway across a country that had no railway. The railway lowers the cost of moving goods, and a factory that made no sense before the railway suddenly makes sense. The factory raises the productivity of the people who work in it. Higher productivity, in time, means higher wages. A person with higher wages is the thing China now needs more than almost anything else in the world, a customer. He buys a Chinese motorbike, a Chinese phone, a Chinese solar panel. The demand that China’s own saturated market could no longer supply is manufactured, from nothing, on the far side of the world. China has built its own customer.

Capital flows from where its return has been exhausted to where it has barely begun, and in doing so it does not run into the wall of diminishing returns, because it has moved the wall. It has enlarged the frontier of the world economy rather than crowding further into the part already built. The part that makes the whole thing more than wishful is that none of it requires China to be kind. It does not build the railway because it loves the people at the far end of it. It builds the railway because, one day, they might buy the train.

Here lies our difficulty, considering a railway. It raises the productivity of a place, and therefore the value of being in that place. But we have already established what happens when the value of being somewhere rises and the somewhere cannot be reproduced. The gain does not float free as higher wages for everyone. It capitalises into the price of the land around the station, the ground beside the new port, the plots along the new road. By the framework’s own first principle, a productivity gain that lands on a fixed location becomes rent before it becomes a wage, and it is captured by whoever owns that location. The railway that was meant to lift a nation’s workers can just as easily lift a nation’s landlords, and leave the workers roughly where they were, now paying more to stand near the thing that was built to help them.

Which means the hopeful loop carries a hidden condition. For the productivity to become wages, and the wages to become the demand China is counting on, the country receiving the railway must capture the location premium for its people rather than let it pool in private hands. It must, in other words, do the one thing this entire framework has spent every previous part explaining that countries cannot do: tax the land, hold down the rent, and refuse to let a new rentier class form around the new infrastructure. The benevolent loop is real. It is also conditional on a land value tax, which is to say conditional on the single reform the theory predicts will always be defeated. Left to itself, the treasure ships do not end the Rentier Black Hole. They seed new ones, abroad, wherever they make a place valuable and let someone else own it.

So everything turns on a single question. When the railway raises the value of the land, who gets the uplift? The gain can spread thin across the many, where the infrastructure is diffuse enough to settle nowhere in particular, a grid or a trunk road serving land too plentiful to concentrate it. It can be captured by China, which builds the port and owns the ground beneath it, taking the location premium back as the rising value of an asset it holds. It can be captured by the recipient’s own public, through the land value tax that would hold the rent down and let the gain become wages. Or it can go to no one at all, because the project never pays, and the port sits half-used and the loan is quietly restructured into the long ledger of visionary infrastructure that became a distressed asset.

Read down that list and the cruelty of it is plain. The arrangements that maximise development, the diffuse gain and the land tax, provide China with the weakest and slowest return. The one arrangement that secures China’s return, self-capture, converts development into rent extraction and develops nobody. A state choosing between these on cold self-interest, project by project, is not choosing between good and evil. It is choosing between a certain return that helps no one and an uncertain return that might, and we know which way that choice tends to fall.

Economists have long puzzled over why capital does not, in fact, pour from rich countries to poor ones, despite the enormous returns that ought to await it there. The standard answer, due to Robert Lucas, is that the returns are not really higher once you account for everything that can go wrong: weak institutions, unenforceable contracts, the risk that your factory is nationalised or your loan repudiated. Capital stays home not because it is timid but because, once the risk is priced in, home is genuinely where the return is.

The places where property is secure, contracts hold and arbitration is reliable, are not a random sample of the poor world. They are, overwhelmingly, the places that have built the strongest protections for ownership. The economies in which the very safety that attracts foreign capital is the same institutional machinery that lets land and property become an untouchable store of private wealth. Secure property rights are what make a country safe to invest in. Secure property rights are also what make a Rentier Black Hole possible. The same protections that cover IP, Factories, contracts, shareholders, also protect the ownership of property. They are one thing, seen from two sides.

So the capital does not, in the end, sail for the capital-starved frontier where the marginal return is highest and the risk of losing everything is highest too. It flows, as it always has, towards the securest ground it can find, which means towards the property of the rich and the near-rich: London, New York, Sydney, the safe cities where a foreign buyer knows the title will be honoured. Lucas is not an obstacle the treasure ships must overcome on the way to enriching the poor. Lucas is the current that keeps them from ever setting out for that shore in the first place. The development loop asks capital to go precisely where it is most afraid to go. The rentier loop is simply where the safe returns already are.

And when we stop theorising and look at where China’s outbound capital has actually been going, the theory is confirmed with uncomfortable precision. In the first half of 2025, the most recent period for which the full breakdown has been tallied, China’s overseas engagement under the Belt and Road reached its highest level for any six-month stretch on record, well over a hundred billion dollars. But the composition tells the story the theory predicts, not the one the hopeful loop requires. The largest destination was energy, and within it oil and gas, more in six months than in the whole of the year before. The second largest was metals and mining, a record in its own right, much of it plain extraction. Money poured into securing resources, and into relocating China’s own factories abroad to leap the tariff walls now rising against its exports. The connective infrastructure the hopeful loop actually depends upon, the roads that would raise a region’s productivity, the ports that would open it to trade, dwindled to the lowest level in the programme’s entire history. Not one new port was recorded in a Belt and Road country at all.

The people who compile these figures put the matter more bluntly than any critic would dare. The large projects, they observe, are resource-backed deals rather than development financing, and are structured to carry unusually low financial risk to the Chinese side. That is not the profile of a benefactor building customers. It is the profile of a landlord acquiring assets.

There is one further reason the benevolent version was always going to struggle, and it lives inside the loop rather than outside it. Suppose China did raise a country’s productivity, patiently, all the way up. What it would have built is not a permanent customer but a temporary one, because a country productive enough to buy Chinese machinery is soon productive enough to make its own. Japan made customers of the world and then watched Korea take its markets; Korea did the same and then watched China take its. The ladder does not stop climbing to wait for the country at the bottom. The very success the loop depends on turns the customer, in time, into the competitor, which only sharpens the case for taking the guaranteed thing now, the oil, the copper, the asset, over the patient thing that may one day compete with you.

There is a grim joke folded into the name. The original treasure ships were Chinese: the enormous fleets of the admiral Zheng He, which six centuries ago sailed further than any European yet had, out across the Indian Ocean to the coast of Africa and back. They were not, whatever the romance suggests, engines of development. They carried tribute and demanded recognition, and then they were called home, the fleet left to rot, the shipyards closed, the whole outward-facing enterprise abandoned by a state that decided its future lay in turning inward. The treasure ships are, historically, the symbol not of a China that enriched the world but of a China that reached out once and then shut the door. It is worth remembering, when imagining what the next fleet might do, that the last one was recalled.

So we return to the question the whole diagnosis was undertaken to answer, now sharpened to a point. Is China, after the bust, the diagnostician who sails out into the world to cure the disease it survived, or the landlord who sails out to spread it?

The honest answer is that the theory permits the first and the evidence, so far, shows the second. The benevolent loop is not a fantasy. It is a real thing the mathematics allows, and it does not even require China to be good, only for the return on capital at home to have fallen far enough that a return abroad, in whatever form, is worth reaching for. That condition is evidently met; the ships are unmistakably sailing. But between the two cargoes they might carry, the development that enriches the recipient and the extraction that enriches only the owner, self-interest chooses the second, because the second is guaranteed and the first is not. The ships are sailing. They are sailing for oil and copper and cheap land, not for wages. The diagnostician and the landlord put out in the same vessels, on the same tide, for the same reasons, and only the cargo tells them apart.

Whether that ever changes rests on the one thing the whole framework says it will not: whether the countries receiving the ships can capture, for their own people, the value that lands on their soil, rather than letting it pool in the usual private hands. If they could, the treasure ships would genuinely enrich them, and enrich China in turn, and the loop would close as the hopeful version imagines. They almost certainly cannot which is why the optimistic reading, though real, is unlikely, and the extractive one, though bleak, is where the evidence points.

The capital that arrives from abroad is only ever a wind. The thing it topples is a house of cards, and the cards were stacked, by the country that receives them, on a windy day. A rentier state near collapse, its property inflated, its coalition of owners defending the structure to the last, is a house that will fall to the first strong gust from any direction. When the gust comes wearing Chinese colours it is tempting to blame the wind. But the wind did not build the house, and it did not choose to stack it on open ground in a rising breeze. The most that can be said of the treasure ships, in the end, is that they have become very good at finding houses that were always going to fall, and at being there, holding the deed, when they do.

The Tigers of Canton

Return to the fleet that could not sail. The ships were the state’s, the 173.48 Trillion yuan in the nation’s savings accounts was never allowed on deck. An ordinary saver may still take only his fifty thousand dollars a year past the border, and may not lawfully spend even that on a foreign share. So while the state’s capital crossed the water in search of oil and copper and cheap land, the people’s capital stayed home, pooled, and went looking for the one exit still left to it. A pool of money denied every door but one will always find the one.

The one is a channel called Southbound Stock Connect, a single licensed pipe running from the mainland’s brokerages to the stock exchange of Hong Kong. It is not a breach in the wall. It is a gate built into the wall, quota’d and monitored and settled in yuan, precisely the sort of state-supervised route to which the authorities confined what outbound money remained when they tightened the controls in the spring of 2026. The border did not open. One licensed port was left standing.

There is an older rhyme in that than the modern name admits. When the Ming and then the Qing turned their backs on the sea, they did not merely recall the fleets. They funnelled what foreign trade they would still permit through a single licensed harbour, so that for the better part of a century every Western cargo that entered China entered through one port on the Pearl River Delta. Canton. Six hundred years after Zheng He’s ships were called home and the shipyards left to rot, the wall is back, and the single gate in it is back, and it opens onto the very same delta. Canton then, Hong Kong now. A state that has spent this essay walling its wealth in has left, exactly as its forebears did, one door to the water.

In 2025 the money running south helped make Hong Kong, for the first time since 2019, the busiest market for new share listings anywhere on earth. In the first half of 2026 raising HK$209.9 billion across 85 IPOs, a 92% increase in funds raised and a 102% increase in the number of IPOs compared to H1 2025.

And what the money reached for, above all, were the companies the moment adored, a cluster of barely revenue-generating artificial-intelligence firms the market had taken to calling the tigers, listing into first-day gains that belonged to another era. Lightelligence, listed in April 2025 surged 408% on its first trading day. Zhipu AI up 13% on its IPO day, to HKD$131.5 on January 8th 2026, hit a high that June of HKD$2980, a >2200% gain, in 6 months. The valuations tell the same story from the other side Minimax’s price sales ratio currently sits at 106.45x, Zhipu AI at 583.31x. Even in the terms of the AI arms race, these valuations are ‘chunky’.

The recent correction does not refute the diagnosis. Shares unlocked, early investors took their profits, competitors shipped stronger models, and the prices came off. But note what the firms did in response, Zhipu and MiniMax met the demand by issuing new equity, raising billions to finance ever larger clusters. That is the signature of a flow, not a verdict on value, capital arriving faster than the companies can absorb it, and the companies printing paper to soak it up. These are the ordinary fluctuations of a young and capital-intensive industry, and they are beside the point. The claim is not that these are good businesses, nor that they are bad ones. It is that once the property door closed, a remarkable quantity of Chinese household savings found itself trying to squeeze through one of the few doors left open, and the price of whatever stands on the other side moves accordingly.

The wheel is the oldest one in finance. The rising price draws the money, and the money lifts the price, and for a while it turns on its own.

Recall the below-reference cohort, and the three moves left to anyone standing beneath a benchmark that keeps receding: work harder, though the line outruns the wage; lie flat, and stop; or stake everything on one risk in the hope of clearing the gap in a single bound. Recall, too, the instruments that risk had once been taken in. The pre-sold flat, small and levered and believed to be underwritten by the state, is gone, taken down with the developers. The wealth products are gone, taken down with the trusts. The domestic exchange was never trusted. One by one, on grounds of prudence or vice or simple collapse, every venue on which the below-reference saver might have placed the great bet has been closed, until a single wheel is left still turning, in Hong Kong, and a whole cohort turns towards it at once.

This is the oldest architecture of a bubble, it is the architecture that produced 1929 by our diagnosis. Not a mania, not a madness, but a rational convergence. Take a large population held below a reference that keeps climbing out of reach. Give it, through real wages that go on rising inside a deflation, more dry fuel than it has ever carried. Bolt shut every speculative door but one. The pressure that has nowhere else to go will find the door that remains and lean on it until something gives. The tigers are not being bought because a nation has lost its mind. They are being bought because a nation has done the arithmetic, and the arithmetic leaves one answer.

That this is flow and not judgement can be shown more cleanly here than almost anywhere, because many of these firms are listed twice, once on the mainland and once in Hong Kong, the same company, the same earnings, two prices. For a decade the Hong Kong price sat at a stubborn discount to the mainland one.

Into 2026 that discount fell to its slimmest in five years, and for some names it turned over entirely, the battery giant CATL coming to trade dearer in Hong Kong than at home. Nothing about the company differed between the two tickers. Only the buyer did, and where the mainland saver is now the marginal bidder, he prices the asset not toward the world’s estimate of it but toward his own.

China’s households held 173.48 trillion yuan in bank deposits. The record southbound flow into Hong Kong over the year to March 2026 was around one trillion yuan, in context that is 0.58 percent of the ‘reservoir’ of Chinese excess savings. Yet it was already sufficient to account for a large share of Hong Kong turnover and compress the discount on mainland companies’ Hong Kong shares. The flood had not arrived. The market was moving under the weight of the first leak.

So the setup rhymes with 1929, and it is worth being exact about where the rhyme holds and where it breaks. What repeats is the funnel: a large cohort held below a rising reference, handed more fuel than ever by real wages that climb inside a deflation, with every speculative door bolted but one, converging by cold arithmetic on the venue that remains. That machinery is genuinely present. What does not repeat, at least not yet, is the fuse. The crowd of 1929 was levered on margin, so a fall in price forced a sale, and the sale forced the next, and the market came down in a single autumn. This crowd is, for the most part, not levered at all. The saver buys his tiger outright and can lose only his stake. Take away the mechanical selling and you take away the crash, and what remains is not 1929 the event but 1929 the pressure, the same crowd at the same kind of door, without the powder keg beneath the floor.

There is a second reason to be slow with the word crash. This is a state that has already reached into the machine twice and switched it off, once when it throttled the developers, once when it moved against involution. It can reach in a third time, and it holds the levers to do it, for the door itself is a quota. Southbound flows, listing approvals, the whole width of the gate are the state’s to narrow. A regulator in 1929 could only watch the tape. This one built the valve, and can close it. Whether it does so in time, or too late, or in a panic, no one can say. But the option exists, and its existence alone tilts the odds away from the sudden ending and towards the slow one.

Which is the graver risk, and it is not a crash at all. The ignition may be American. but the burn might be Japanese. but a long, grey deflation, in which the bad debt is never cleared, only carried. For the leverage that matters was never in the saver’s hands. It sits one deck below, on the balance sheet of the state itself, in the credit that raised the tigers’ world: the state banks, the local governments and the sovereign bonds that financed a wall of data centres for the models to run on, a wall of which, by the most recent reckoning, as much as four-fifths stands idle, some of it built for domestic chips that do not yet exist. Whether that risk is large or small turns on a single figure this essay cannot yet responsibly name, the scale of that state and local-government credit behind the build-out. If it is modest, a fall in the shares is a private disappointment and little more. If it is vast, the state has quietly written itself a bill it will be paying down for a decade, in the Japanese manner, whether or not the tigers ever crash at all.

The Flood

A state looked at the machine that hollows out nations, the private scramble into the ownership of scarce things, and it reached in and redirected the flow by its own hand. It pointed the nation’s savings at production rather than at the endless recapitalising of old bricks, and in a single generation it built the deepest industrial base the world has ever seen and became its dominant exporter. Real wages rose for hundreds of millions. Whatever else is said here, that is among the largest improvements in human material life ever compressed into so short a time. There is a lesson in it for every economy that let its own capital drain into land: a policy, even a heavy-handed one, can pull a country back from the event horizon, if it insists that savings build things rather than merely own them.

But the disease was only ever diverted, not cured, and the rest of this essay has been the bill arriving. A state may own all the land outright, as China’s does beneath its seventy-year leases, and still generate a rentier black hole, because ownership was never the point. Scarcity was. Booming productivity has to capitalise somewhere, and no quantity of concrete, not more than the United States poured in the whole of the twentieth century, can manufacture a second Shanghai. The value pooled where it always pools, on the ground that cannot be reproduced.

To its credit, the state kept reaching in. It saw the speculative engine its developers had become and switched it off deliberately, buying a slow deflation in place of the sudden smash the West took in 2008. It saw the involution its own success had bred and moved against that too. Each intervention worked, more or less, on its own terms. But the sum of them was a wall, and behind the wall a rising flood: a nation’s savings sloshing in a sealed room, every familiar exit closed, waiting for a release.

The trapped savings have split in two. The state has done the thing this nation once did six centuries ago. It has loaded its treasure and set out for distant shores, and we cannot yet say which cargo it truly carries, the development that would enrich the world and make customers of it, or the quiet appetite of an owner seeking only the stable return it was starved of at home. But the ordinary saver, shut out of every room, has found the one crack in the wall, and glimpsed through it a small, bright, AI-shaped lottery ticket on the far side.

What has come through so far is only a trickle from a reservoir measured in the hundreds of Trillions. The flood has not yet begun.

Henry Fudge is a writer creator and entrepreneur based in Switzerland. His work focuses on political economy, capital allocation, housing markets and the long-term consequences of rent-seeking institutions. He is the creator of the Rentier Black Hole framework, which examines how modern economies increasingly concentrate savings into existing assets rather than productive investment and the dark consequences of it.

Subscribe for weekly essays on economics, finance and public policy.

Subscribe now

Share

Further Reading

What is the Rentier Black Hole?

Reference dependent utility and risk seeking how does that work?

Oi, Andy

A black hole gives off no light. Not one photon. Everything anyone has ever photographed of one is the disc, the ring of matter spiralling in, torn apart, glowing white-hot on its way down.

The disc is bright. The disc is measurable. Every instrument we own points at the disc, because the disc is the only thing there is to point at.

The hole itself is a place where the equations stop returning finite numbers.

Prosperity 2030 is a serious document. Thirty policies, costed to the pound, no new borrowing. It says, correctly, that the cost of living and the fiscal gridlock and the crumbling infrastructure and the sense that ordinary life has become precarious are not four problems. They are one problem. The only difficulty is, they have picked the wrong problem.

It is a photograph of the accretion disc, mistaken for a photograph of the black hole.

This is the document you write when you can see every consequence except the thing causing them. It is not stupid. It is what intelligence looks like from inside the tidal gravity. One eye open, the mostly blind will lead the blind on a journey faster and faster into the black hole.

Subscribe

Share

Three conditions

The corpus this essay draws on rests on three things being true of an asset. Not on ideology. Not on greed. Not on anyone's intentions. Three mathematical conditions is all it takes.

One. You cannot make more of it. (E)

Pour money into land and no more land appears. Pour money into a factory and you get another factory. This is the difference that does all the work.

Two. You can borrow against it, and the more it is worth, the more you can borrow. (C)

The bank lends against the price. The lending raises the price. The higher price supports more lending.

Three. Its returns are taxed more lightly than the returns to actually building something.(T)

Hold those three and everything follows. The return you get for the risk you take rises as more money floods in, which is the exact reverse of how productive assets normally behave. There is no resting point. The productive economy contracts because capital keeps leaving it. Wages compress. The cost of living becomes the visible burn mark of the compression. And the crisis that would force a reckoning never quite arrives, because the pain is spread thin and paid weekly rather than delivered all at once as we are all forced down, and pressed to the subsistence floor.

Insecurity. A Decayed social fabric. A democracy nobody trusts. That is the disc. That is what the configuration radiates while it eats.

Now score the report against the three conditions.

E

There is no planning reform in the document. None. The supply measures are a public housebuilding programme, a scheme for councils to buy homes from their existing owners, the abolition of Right to Buy. But fundamentally nothing, that puts building land back into productive hands, and no mechanism other than the same state that has failed to build sufficiently for generations, promising for the umpteenth time, that this time is different.

C

Nothing. Not one word on how banks value the collateral behind a mortgage, on loan-to-value limits, on capital risk weights, on any part of the credit machine. This is the single lever the framework identifies as the one that works. It is the difference between Britain and Germany. It is written down, in regulation, in a form any government could amend on a Tuesday. It does not appear in thirty policies.

The word mortgage appears once, in the passage explaining that when councils buy homes out of negative equity, the debt will be converted into long bonds in order to protect the mortgage finance companies. That is LITERALLY a put option on property for owners.

T

Here they act, and here they barely graze the Rentier asset, with a tax that is empirically a failure in any economy it is tried in, simply passed on to its tenants and disincentivizes building.

To be clear, it’s a tax that gets flopped onto the renters, stops building, and does nothing to the core dynamic

Over 145 years and sixteen countries, housing and shares returned roughly the same: about seven per cent a year after inflation. Housing did it with less than half the volatility. Same reward, half the swing. That is the steepest reward-to-risk line in the recorded history of capitalism, and it is not close.

Its flagship tax, National Contributions, taxes realized gains. You sell a company, you pay. You sell shares, you pay. Land does not have to be sold. That is the whole point of it. The gain accrues quietly, untaxed, year on year. If you want to spend it you do not sell. You borrow against it, and a loan is not income, so nothing is taxed at all.

A tax on selling is not a neutral tax. It is a tax on the people who have to sell in order to eat, and a gift to the people who never sell anything.

The founder who spends eleven years building a business and sells it once pays the top rate on the lot. The man with forty flats pays nothing, because he never sells a flat. He does something better with them.

The man with forty flats

He does not own them personally. They sit in a limited company. Company landlords deduct their mortgage interest against rental income in full, which individual landlords have not been able to do since 2017. So the rent comes in, the interest goes out, and there is very little profit left to tax. That is not a loophole. That is the structure working as designed.

He never sells, Not one. So there is no realised gain, and National Contributions never touches him.

He wants liquidity, of course. So he borrows against the portfolio. Ten million of equity across the book, a facility drawn against it, drip-fed to his current account. Borrowed money is not income. There is nothing to declare.

He wants more flats. So he levers to the ceiling, because every pound of debt buys another pound of exposure to an asset that cannot be made more of, in a country that has just announced it will not build any.

And his one tax under this programme? One per cent of the value of the buildings, annually.

Which he passes to his tenants. Who can pay it or leave, to find the next man with 40 flats, doing the same.

Buy. Borrow. Die. Two of those three legs are visible in the report as published. The third leg, what happens when he dies, unless they also intend to remove the zero-ing of gains at death to then settle through inheritance tax, he will continue to pay nothing until the grave. combine this with the litany of off-shore shenanigans that are not commented on and are a book in themselves, and the brief summary of the taxes due on the man with 40 flats is pretty simple to calculate.

Fuck all.

Meanwhile the founder pays the top rate.

This is what a set of policies looks like when the people writing them have not asked what the money will do on the morning they commence.

"But a property tax cannot be passed on"

It is the simple textbook answer and It says, the landlord already charges the highest rent he can get. If he could charge more, he would already be charging more. So a new tax comes out of his pocket, not the tenant's.

Look at Canada. Look at Toronto and Vancouver, the tightest metros in the Anglosphere, where the same argument was made and where the costs went straight through into rents anyway. It happens because the textbook is describing a landlord who has already solved an equation. Real landlords have not solved anything.

Rent is not calculated. It is felt out. There is a floor and there is a ceiling.

The floor is what the rent must cover, the mortgage interest, the void weeks when nobody is in it, the management, the insurance, the repairs, and now the property tax. That floor is not soft. A landlord levered to the limit cannot charge below it and stay solvent. Because the tax has to be paid out of rent that is itself eaten by voids and costs, every extra pound of tax needs roughly £1.25 to £1.40 of extra rent to cover it.

The ceiling is what the tenant can pay before they stop eating.

Between those two lines is a corridor, and the rent lives somewhere inside it. Where exactly? Nobody knows beforehand. The landlord discovers it. He puts the flat up at a number based on what the neighbors listed it at last month on zoopla. Twelve people view it in a weekend. He learns something. Next year he puts it up higher. Eight people view it. He learns something else. Over a decade, in a market where nothing is being built, the rent walks up the corridor towards the ceiling, one tenancy renewal at a time.

Now watch what the report does to the corridor.

It raises the floor. The property tax is an operating cost, it lands in the same bucket as the boiler and the letting agent, and the levered landlord will recover it.

And it raises the ceiling. The report gives the tenant free water. Free bus travel. Free basic energy. It says so proudly. One pound of universal service replaces about one pound twenty-one of private cost. Every pound of that is a pound the tenant is no longer spending on anything else. Which means it is a pound the tenant can now pay in rent.

They have not passed a tax onto the tenant and given them services to compensate. They have raised the tenant's capacity to pay rent, in a market where rent rises to meet capacity, and then given the landlord a cost he must recover from exactly that capacity.

And notice who sets the rent. Not the little landlord with one inherited flat and no mortgage. The rent in any market is set by whoever is closest to going under, and that is the man with forty flats and maximum leverage. The one-flat landlord raises his to match, because why would he not, zoopla told him to, and pockets the difference as pure unearned gain.

The programme lowers the price of buses, water, energy, food, care and broadband. Housing is the one thing in that list it does not touch.

It lowers the price of everything except the thing whose price is set by whatever is left over.

The machine

Take each policy. Ask the only question that matters: does it make land a better bet relative to building things, or a worse one?

Free water is not nationalization. The water company keeps its pipes, keeps its licence, keeps its regulated return, and now the state guarantees the volume. Demand risk gone. Cash flows certain. The equity is worth more the day it passes, without earning a penny more. A gift, capitalised.

Right to Sell hands leveraged homeowners and their lenders a floor under the price. That is literally a put option, written by the taxpayer, given away free. Options are worth money. The value goes into the asset.

The one per cent falls on the value of the property, land and building together. So it taxes the bricks. Tax the bricks and you tax the only part of the thing that can actually be produced. The developer's margin on the marginal site disappears, and with it the site.

And it is deferrable. Anyone can postpone it until the property changes hands. So it becomes a note against the estate. The holder feels nothing, sells nothing, and keeps every penny of the appreciation. The bite is on paper.

One instrument in the entire document does real structural work. Compulsory purchase at use-value, before planning permission is granted. That confiscates hope value, which is the purest unearned gain in the British economy, at the exact moment it is created. However, I am somewhat hesitant to applaud this, given the structuring of the rest of the rest of the paper, the devil is in the detail.

Why it was always going to look like this

Here is the part that should disturb you and disappoints me , the framework predicts this document. Even the best and brightest are merely variables in a mathematical model.

It predicts that in a late-stage rentier economy the national accounts will report health, because imputed rents from housing are counted as output, so the instruments say the economy is fine and the instruments are not lying about what they measure.

It predicts that the professional class, the people who write reports like this one, will by now own property and earn their living in the industries that service property, and that the coalition capable of reform therefore shrinks towards the people who own nothing and command nothing.

It predicts that the pain will never concentrate into a crisis, because it is dissipated continuously into the weekly shop, the rent renewal, the energy bill as we are all pressed down to the subsistence floor. Food bank use rose roughly tenfold in sixteen years and nothing broke. Nothing was ever going to break.

Put those together and you can predict the shape of every reform programme that will be published between now and the end. They will aim at the cost of living, because the cost of living is what is felt. At insecurity, because insecurity is what is measured. At public services, because public services are what the state controls. They will be funded out of the asset, because the asset is where the value is, but never too harshly, just a nibble from the fringe, stamp duty, as a perfect example, to a real citizen a burdensome sticky tax, to institutional landlords a tiny hurdle to uncapped returns. They will not touch the collateral channel, because nobody is looking at it, because it does not glow.

Nobody in that room wanted to raise the risk-adjusted return on residential land. Nobody set out to write a free option to leveraged landlords or hand a capitalised gift to a water monopoly. Every instrument was chosen to address a real harm by people who meant it. The configuration did the rest blinding them, drawing attention to what is visible, not what created it.

That is what a structural attractor is. It does not need your consent. It does not require anybody's malice. It requires only that the three conditions hold, and that the people who could disable them are looking somewhere else.

This is the exact prediction of the Rentier Black Hole.

The best and brightest among you, academics of real repute, sit inside its tidal field and look only at what they can see. The glowing disc. Never the thing at the centre.

The anxiety is palpable now. The panic is palpable. The suggestions come faster and more frequently, each one arriving as the thing that will save us.

You will not be saved.

Your academics, your politicians, your people, are dazzled by the flash around the singularity in your economy. They will treat the cost of living. They will comment on inequality. They will lament the state's failure to balance its books.

They will fail.

This document is not your salvation. It will sit only as a damning confirmation of the prediction, and the prediction is simple.

This inelastic, collateralisable, tax-privileged asset at the centre of your economy is a hole. It was diagnosed almost a hundred and fifty years ago, and read, and admired, and set aside.

The word mortgage comes to you from the Old French. ‘Mort gage’. The dead pledge.

In a financial system of sufficient scale, that pledge holds a weight that is very nearly infinite. It tears a hole in the fabric of an economy and reveals, at the bottom of it, a singularity of slavery. The infinite darkness of a new feudalism.

We will be in a nation that produces nothing, that lives hand to mouth crushed to the subsistence floor. Each new frantic remedy recommended, will never see the heart of darkness, just the burning rings around it, representing our old reality collapsing into damnation.

Don’t worry however, the GDP will look fine. the housing market will be called ‘stable’, it is only you my dear reader who will be beyond the event horizon.

Welcome to the Rentier Black Hole

Subscribe

Share

Return and volatility figures from Jordà, Knoll, Kuvshinov, Schularick and Taylor, "The Rate of Return on Everything", Quarterly Journal of Economics, 2019. The floor-and-ceiling mechanism, the amplification of cost shocks through voids and operating costs, and the result that the most leveraged landlord sets the market rent are derived in the monetary working note. Figures attributed to Prosperity 2030 are taken from its published summary and policy pages.

Canada has a glut of unsold condominiums and a housing crisis at the same time, in the same cities. Around twenty thousand finished or nearly finished units sit unsold in the Greater Toronto Area. Thousands stand empty in Vancouver. Developers are filing for insolvency. Yet the median family in either city still cannot afford to live there.

Read as an ordinary market, that is a contradiction. Empty supply and unmet demand are meant to meet at a price. Read through the framework these ratings use, it is not a contradiction at all. It is the signature.

The Rentier Black Hole Ratings score a country on three structural features, each from one to ten. Not on how expensive housing is, which is a symptom, but on whether the system is configured to pull in capital and refuse to let it back out. The three features are the elasticity of well-located supply, the collateral channel that binds credit to the asset, and the tax treatment that favours the asset over everything productive. Canada scores eight, nine and eight. Composite, 8.5/10. Ahead of the United Kingdom, the country that more or less invented the modern version of this. The student outscoring the teacher.

Here is how a country earns a score that high.

Subscribe

Share

Elasticity: the national average that lies

The first feature is whether supply can respond to price. On the headline number, Canada looks healthy at a figure of 1.187. The OECD rates its housing supply as more responsive than Britain's at 0.39, and almost as quick to build as the United States. So why can nobody afford Toronto?

Because that number is a national average, and it measures the freedom to build outward into empty land. Canada has a great deal of empty land. What it does not have is a national housing market. It has a handful of metropolitan ones, and in those the supply that actually matters, well-located land near the jobs, is frozen. While being a colossal country, 50% of its population lives along a tiny corridor between Quebec and Windsor, just 1% of its land.

In the Toronto region, the Greenbelt rings off the land at the edge, and inside the city the so-called yellowbelt zoned roughly seventy per cent of residential land for detached houses only, until a multiplex reform began to loosen it in 2023. To the local housing market, the yellow belt hits like a gut punch from a black belt. Around Vancouver, the Agricultural Land Reserve locks the farmland and the geography does the rest, with the city pinned between ocean, mountains and the border, and a set of protected view corridors capping tower heights so the mountains stay visible. Where it counts, the elasticity that the OECD measures collapses towards zero.

So the supply response that does occur gets funneled into the one channel left open, condominium towers in the urban core.

Collateral: the five-year fuse

The collateral channel is the engine of the entire dynamic, and it is where Canada outscores everyone. Household debt runs at roughly one hundred and seventy-five per cent of disposable income, having peaked near one hundred and eighty-eight. About three quarters of it is secured against property. The asset and the credit feed each other. Rising prices create collateral, collateral supports more lending, more lending bids up prices.

What makes Canada unusual, and worth a special comment, is the shape of the mortgage itself. An American borrower typically locks a rate for thirty years and is then insulated from whatever the central bank does next. A Canadian borrower is not. The Canadian mortgage amortises over twenty-five years or so, but the interest rate is fixed only for a term of five years at most, and often less, before it renews at whatever the prevailing rate has become. The entire national stock of mortgage debt therefore reprices inside a five-year window.

Additionally, while the UK often limits its lending to 4.5-5x the salary of the applicant, Canada works on an affordability metric 39% of gross incomes, with a sensitivity test applied. This makes Canadian housing far more interest-sensitive than the American equivalent, and the sensitivity runs both ways. On the way up, when rates are low, cheap credit floods through the whole stock quickly and feeds the asset fast. On the way down, when the central bank tightens, the bite is just as fast and just as broad, reaching almost every household on a rolling schedule rather than only new buyers. It is a short fuse at both ends.

That short fuse is why the rate rises of 2022 and 2023 hit the Canadian asset so hard and so quickly. It looks, at first, like a point in the system's favour. If monetary policy has this much purchase on house prices, surely the central bank can simply manage the thing. Keep that thought too. It does not survive contact with what the tightening did to everything underneath the asset.

Tax: the brake that was never fitted

The third feature is the tax wedge, and Canada has the cleanest example of it anywhere. The capital gain on a principal residence is completely untaxed. Not deferred, not discounted, not taxed beyond some holding period. Zero. Of all the OECD countries, only a handful fully exempt the family home, and Canada is one of them. It is the single largest housing tax expenditure in the federal accounts. The rentier asset is handed an exemption the productive economy never sees.

A recurring annual tax on the value of property is, in theory, the natural counterweight to accretion, because it raises the cost of simply holding the asset and sitting on it. Canada has such a tax. It does not function as a brake, for two reasons.

First, the rates are low, and lowest of all in exactly the places where the dynamic is hottest. Toronto carries one of the lowest residential property tax rates in the country. At those rates the holding cost is trivial against the expected gain, so the tax discourages nothing. Second, to the extent the tax falls on rented property, it tends not to stay with the owner. In a supply-constrained rental market the landlord has the pricing power to pass a recurring cost through into the rent, so the incidence drifts onto the tenant. The portion that sits on the land is harder to pass on in principle, but the practical result in tight metros is that the one annual tax touching the asset neither raises the holding cost enough to slow it nor reliably lands on the person holding it.

Put the two together. The gain is exempt, and the holding cost is negligible and passed through. The tax system is not neutral towards the rentier asset. It is configured to accelerate it.

The condo paradox

Now back to those twenty thousand empty flats, because they look like the fact that breaks the whole theory. If supply is so inelastic, where did twenty thousand surplus condos come from?

They came from the only channel the frozen land left open, and they were never really housing. The collateral channel did not finance homes. It financed investment vehicles. Pre-construction units were sold, often years before completion, to buyers using leverage to acquire a financial asset in an investor-dominated market, not to people who needed a place to live. Supply responded, but in the asset layer, and it never reached the shelter layer. That is why the glut and the unaffordability arrive together and sit side by side. The empty units and the priced-out families are not a contradiction. They are two different layers of the same market, and only one of them was ever being built for.

You can watch the two layers separate in the data. For decades, prices and rents climbed together. Then rates spiked and they came apart. Real house prices fell roughly a quarter from their 2022 peak, because price is the leveraged asset and the leverage is what the rate shock attacks. Rents, meanwhile, kept climbing to their own peak in 2024, because rent is the raw cost of shelter and the shelter shortage had not gone anywhere. And then the strangest turn of all, rents have fallen for twenty consecutive months since, not because Canada finally built the homes people need, but because the unsold investment condos were dumped onto the rental market. The glut leaked sideways. The wreckage of the asset layer became the only new supply the shelter layer received.

What happens next is the part the framework predicts most confidently. Rather than let prices fall to a level that clears, governments have begun buying the unsold stock. Up to three billion dollars in British Columbia with federal support, more in Ontario. In a textbook market the developers default, the condos fall to a price local residents can actually pay, and the correction does the work that no programme could. That outcome, the one that would most directly help people buy homes, is the single outcome the system will not permit, because letting the asset fall means imposing losses on the collateral channel behind it. The correction that helps residents is structurally indistinguishable from the correction that threatens the banks, so it is not allowed to happen. The intervention looks odd in a plain market sense and entirely predictable in a rentier one.

What the score predicts

A score like this is not a description. It is a forecast about the rest of the economy, and the forecast is about where the country's capital goes.

It goes into the asset. You can read it straight off the household balance sheet. All through the boom, even while the stock market was rising, Canadian housing wealth grew faster than every financial asset the country held put together. Statistics Canada said it plainly, the growth of financial assets did not keep pace with real estate. For the typical family it is not close. Real estate is the majority of what the bottom and middle of the distribution own, while financial wealth sits mostly with the top. For most Canadians the house is not part of the portfolio. The house is the portfolio.

Capital this concentrated in one asset has to come out of somewhere, and what it comes out of is the productive economy, the machinery, the equipment, the tools that make a worker more productive. So measured productivity stalls. Canada's own central bank has called its productivity record an emergency, and used the phrase "break the glass." By some estimates the country now produces several thousand dollars less per person than it would on a normal productivity path, and sits roughly a third below American output per hour.

This is the point to make a careful comment about, because there is a tempting version of it that is wrong. Recently, as rates rose, house prices fell, condo prices kept falling, rents softened, and productivity and output weakened, all at once. It is tempting to say the productive economy fell in step with housing and call that the proof. It is not the proof, and the direction matters. The deep signature of a rentier black hole is not the two falling together. It is the long divergence, the asset soaring for decades while the productive economy crawls. That gap, not the recent dip, is the fingerprint.

The recent fall in step is something else, and it is the bind the country is now in. The same short mortgage fuse that makes the asset rate-sensitive makes the household sector rate-sensitive, and the productive base underneath has been hollowed by years of capital flowing past it into property. So when the central bank tightened to cool the asset, it cooled the fragile real economy at the same time, and the asset deflating pulled credit and demand down with it. That is the reverse of the collateral channel, and it is reasonably what the framework would expect of a structure like this one under tightening. It is worth being honest that the recent co-movement, taken on its own, is also just what a sharp interest-rate shock does to any economy. The structural claim does not rest on it. It rests on the long divergence and on the fact that other countries, built differently, do not show this at all.

Which is the real trap in the monetary story. The tightening did hit the asset, hard, exactly as the short fuse predicts. But it hit the fragile economy underneath just as hard, and it dismantled nothing. The frozen land, the collateral channel and the tax exemptions are all still there. So the country gets the pain of the correction without the structural resolution, and the moment rates fall the accretion resumes. Execute monetary policy to slow the black hole and property does get hit, but so does the real economy living beneath it. There is no setting of the instrument that reaches the configuration.

Where the money went

If capital drained out of the productive economy, it left a paper trail, and the trail is the cleanest part of the whole case.

Canadian firms have not been short of money. Profits sit near record levels. What they have not done is reinvest them. Business investment per worker has fallen since 2015, by around sixteen per cent over a decade, while it rose by more than a quarter in the United States. The productive kinds of capital are the worst starved, machinery and equipment per worker runs at about forty cents on the American dollar, and intellectual property at about thirty. The country's stock of capital per worker has been shrinking, so the average worker now has fewer tools to hand than a decade ago. The institute that tracks it calls the condition decapitalization, which is exactly the right word. A workforce being quietly stripped of its equipment.

So where did the money go instead. To the owners. In a typical year Canadian companies spend between twenty and seventy billion dollars buying back their own shares, and in 2022 the figure reached sixty-nine billion, about two per cent of the entire stock exchange, led by the energy sector handing back a billion dollars in a single quarter at a time. The rest goes out as dividends, or simply sits. The cash pile has a name already, because a Bank of Canada governor christened it ‘dead money’ back in 2012, watching corporations hold cash they would not deploy. The same governor now runs the government.

It did not, for the most part, get spent by those firms on property directly. The financial side of the economy grew its share of the whole, finance, insurance and real estate went from under thirty per cent of all corporate profit at the start of the century to over thirty-five, and took two thirds of every dollar of corporate capital gains booked in 2022. And the vehicles built to own housing did their work. Real estate investment trusts held no rental suites in Canada in 1996, by 2021 they and the rest of the largest twenty-five financial landlords held over three hundred thousand, roughly a fifth of the country's purpose-built rental stock, and close to half of it in a city like Edmonton. The productive firm did not cross the street to buy the building. It handed the cash to its shareholders, and the cash found the building on its own.

The people who defend the practice describe the mechanism more honestly than any critic could. The case against the buyback tax, put plainly in the financial press, is that firms do not invest when they cannot find a return high enough to justify the risk, so the responsible thing is to hand the cash back and let it be redeployed to more productive uses elsewhere. Read through the framework, that is a confession delivered with a smile. The capital is not staying out of Canadian production by accident, and not out of greed. It is staying out because nothing inside the productive economy clears the hurdle that the asset clears. The more productive use elsewhere is, at the level of the family balance sheet, a portfolio that is roughly forty-eight per cent property and eight per cent business equity. The money knows where it is going.

Which is why the one tax aimed at the exit cannot work, and the framework can say so before the receipts are counted. A two per cent levy on buybacks does not touch the cause. The buyback is only the visible end of capital that cannot find the return per unit of risk its owners demand, and across every rentier economy, confirmed by a century and a half of data on the return on more or less every asset there is, the thing that best clears that hurdle is property, which has paid about what equities pay at a fraction of the volatility.

A dominant inelastic asset, carrying most of the weight of the banking system on its back and left almost untouched by tax, will win the competition for capital every time. You can tax the exit. You can make it marginally less efficient to move money from a company to its owners. You cannot change where the money goes once it is in their hands, because the configuration settled that question before the tax was drafted. Capital does not pour out of corporations because buybacks are cheap. It pours out because there is nothing left inside worth building that beats owning the asset.

The clues

All black holes are not created equally, but they do often spin out similar effects, Canada however seems to have a slightly different fingerprint to the others.

Broadly we should observe, a gap between the stated productivity and real wages, such as the ‘British productivity puzzle’, Canada does indeed present the symptom, but in a moderated state. With a productivity to real wage gap open since the late 80’s to early 90’s.

The answers around this are relatively simple, Canada has strong union participation and has legislated its minimum wage up quite aggressively, its real wages have been dragged up by legislation and collective action. This should present itself as quite a clean solution we might transplant to other economies circling the black hole, however the displacement of real wage suppression has found another outlet in Canada, unemployment.

Canada has regularly and repeatedly arrived near the top end of the tables amongst the G7 in terms of unemployment, coming in second place to either France or Italy, both hardly lauded globally for their employment figures. Some element of this is from good old Canadian honesty, that they simply accurately report their unemployment figures and have not tampered with its definition like some other states, or their seasonal trends with a number of its industries in forestry and fishing being relatively seasonal. Accounting that, still Canada sits at the higher end of the table, and the answer is simple.

The Rentier Black Hole effect is present, the real economy is starved of productive capital, total productivity is in a crisis, and real wages are dragged up to a minimum floor as legislated. If the productive economy is hollowed out, and real wages are higher than labor factor productivity, the natural result of classical economics is unemployment, and Canada seems to present this.

The verdict

A vast country, most of it empty, draining into two or three metropolitan points it has made it almost impossible to build in, financing towers nobody can live in as financial assets, exempting the gains and waiving the brake, and buying up the wreckage rather than letting it clear. The productive economy thins out to feed the asset, and the one tool that can reach the asset reaches the productive economy first. 8.5/10.

Canadas case is a most brutal irony, one of the largest nations on earth, handcuffed to a few metro regions, chained in by policy and regulation. A nation entirely abundant with any resource a nation might need to dominate this next century, has condemned itself with a most difficult curse, that of the rational investor. Why should they take a risk, why should they build, why should they innovate, when they can simply knock your door in Toronto expecting the rent to be paid.

This prison is self constructed and gilded. Canadians are simultaneously some of the wealthiest people on earth, and the most indebted. A nation filled with oil, minerals, and educated work force of capable talented people, watching tools vanish from their hands into bricks and mortar.

This productivity crisis, this ‘decapitalization’, the housing crisis, its recent economic difficulties are all simple to diagnose.

This is not 4 moderate illnesses at the same time, it is one terminal one beneath it all, you are just now seeing its symptoms.

If you would like to hear about the cure, the other patients, or some more on the theory of the Rentier Black Hole, be sure to follow along.

rentierblackhole.com

Subscribe now

Share

Australia has more land than almost any country on earth. It has run a sustained construction boom. It has, by the standard international measure, a housing supply that responds to prices more readily than Britain's. And it has some of the least affordable housing on the planet.a national price-to-income ratio of 8.2, a Sydney ratio of 10.1, and a Sydney house priced at roughly thirteen times median household income, second in the world only to Hong Kong. Three years ago, on one widely used measure, 43 per cent of median-income households could afford a median home. Today the figure is 14 per cent.

There are two popular explanations for this, and Australia has helpfully run the experiment on both.

The first is immigration. The second is that Australia simply does not build enough. Both are wrong, and the country's own data is what shows they are wrong. Once you clear them away, what is left is not a market that has failed. It is a machine working exactly as built.

Take immigration first. If population growth were the engine, closing the borders should cool the market. Australia closed its borders. During the pandemic, net migration fell to its lowest level in roughly a century, and house prices rose anyway. Whatever drives Australian house prices, it is not the marginal migrant, because the market kept climbing while the migrant stopped arriving. This is not an argument about immigration policy. It is the observation that the variable does not move the outcome.

The second explanation is more stubborn, because it is half true. Australia does not build enough where it counts. But "build more" as a general prescription runs straight into a measurement trap.

On the OECD's national estimates, Australian housing supply has a long-run price responsiveness of 0.528. That is mid-table, and, awkwardly for the undersupply story, higher than the United Kingdom's 0.395. The trouble is twofold. First, 0.528 is a long-run figure, the response after full adjustment over many years, the same OECD work shows the actual speed of adjustment is a slow crawl, and short-run estimates collapse by an order of magnitude. As a point of order, by the definition of economists, the ‘short run’ could be a quite a significant chunk of your adult life. Second, and more important, a national elasticity is an average over wildly different local markets. The Institute for Fiscal Studies has modelled this at neighbourhood level for England, and the figure runs from around zero in the high-demand, job-rich areas up to roughly 0.23 in the cheap periphery. The national number is dragged upward by the places nobody is fighting to live in.

This is the whole game. The one thing that cannot be manufactured is well-located land near where the wages are. Australia can build, and does, but it builds on the fringe, where the jobs are not. For a good example, building two million empty homes in the outback would lift the national construction statistic and do nothing for a flat in Sydney.

When we look at the pattern of housing stock increases, this is almost essentially what Australia has operated. Massive percentage booms in the housing stock, in the north west, the literal wrong end of the country when we consider which part would truly benefit from such an expansion in the housing stock.

For anyone who pictures Australia as a permissive build-anywhere paradise, it is, by the OECD's count, slower to issue a building permit than Britain, around ninety days against seventy. The country you imagine as endless sprawl is, on paper, more restricted than the UK.

So it is not the people, and it is not, in any simple sense, the building. It is the machine, and the machine has three parts.

The thing that bids

The first part is credit, and Australia has built one of the most concentrated, most property-saturated banking systems in the developed world. Four banks hold roughly three-quarters of every mortgage in the country, a structure formalised since the 1990s as the "four pillars," under which the big four may compete but not merge. Their share of total banking assets closely tracks their share of mortgages, which is to say the system's balance sheet is, to a first approximation, a single claim on residential land. A housing stock worth around eleven trillion dollars against mortgage debt of roughly two and a third trillion. Household debt sits near 182% of income, among the highest on earth.

Here is why the concentration into mortgages matters, rather than being a neutral fact. When a bank lends against land whose supply cannot respond, the loan does not call forth new land. It cannot, the land is fixed. So the credit does the only thing left to it. it bids up the price of the land that already exists. Lending against an inelastic asset is not the financing of supply. It is fuel for price. The collateral rises, which supports more lending, which bids the collateral higher again. This is the loop, and it requires nobody to intend it.

Australia's regulator is not unaware of this. In February 2026 APRA activated a debt-to-income limit, capping the highest-leverage lending and holding a serviceability buffer and a countercyclical buffer alongside it. These are the structurally correct instruments, because they act on the quantity of credit rather than its price, which is where the dynamic actually lives. But they were calibrated, by the regulator's own account, so as not to overly constrain lending or disturb the smooth functioning of property transactions, and most banks already sit comfortably beneath the limit. The right tool, set deliberately below the level at which it would bind. That is not a criticism of any individual. It is what happens when the instrument that would work is also the instrument that would hurt, and the system chooses not to be hurt yet.

Paid to play

The second part is the one Australia, unusually, has written down in plain legislation, which is what makes it such a clean case. Two rules do the work.

The first is negative gearing. An investor who runs a rental property at a loss, with the mortgage interest counted as a cost, may deduct that loss against their wage income. The state, in effect, refunds part of the cost of holding the asset. The second rule, introduced in 1999, taxes only half of the capital gain when the asset is eventually sold.

Read the two together and the design becomes visible. You are rewarded for running the rental at a loss, because the rent was never the point. The point is the capital gain, and the capital gain is taxed at half rate. The structure converts taxed salary into discounted, deferred, lightly taxed appreciation on land. It is, quite literally, a mechanism for turning income from work into income from owning, with the tax code subsidising both ends of the trade.

The scale is not marginal. The capital-gains discount alone is estimated to forgo around 21.8 billion dollars of revenue in 2025-26, with roughly 83 per cent of the benefit flowing to the wealthiest tenth of earners. Even the Reserve Bank has conceded that Australia's tax treatment is friendlier to property investors than that of comparable countries. And a long-run chart of real Australian house prices is broadly flat for decades and then lifts off almost exactly when the 1999 rule arrives. That last point is correlation rather than proof, and ought to be stated as such, but the timing is difficult to ignore.

Fuel on the fire

If the tax code subsidises the supply of leveraged demand, a third set of policies subsidises the demand directly. Australia lets first-time buyers in with almost nothing down, a five per cent deposit for first home buyers, as little as two per cent for single parents, with the government guaranteeing the gap, and, since late 2025, no cap on the number of places. There is also a shared-equity scheme in which the Commonwealth takes a stake of up to forty per cent in a new build.

These are presented as help for buyers, and for the first cohort through the door they are exactly that. The difficulty is what they do to everyone behind that cohort. Hand buyers more borrowing power in a market where supply cannot respond, and the extra borrowing power does not become houses. It becomes price. Britain ran precisely this experiment with its Help to Buy scheme, and the academic evidence is fairly settled. It raised prices more than it raised supply or ownership, concentrated where supply was already tight. A demand subsidy poured into an inelastic asset is capitalised into the asset. We have watched this film, and we know how it ends.

What the machine does

A configuration like this leaves fingerprints, and they appear far from the property pages.

The first is in wages. Since the early 1990s, Australian labour productivity has climbed steadily, output per hour worked has gone up. Real wages per hour have not kept pace. The gap between the two has widened for more than two decades, and because the standard series deflate both sides by the same price index, that gap is not a measurement quirk. It is, arithmetically, the shrinking share of national income going to labour. Part of that shrinking share is precisely the transfer this machine performs. The economy's gains flowing to whoever owns the land and the credit, rather than to the people doing the work.

The second fingerprint is in the national balance sheet. Around two-thirds of all Australian household wealth, roughly 67 per cent, is held in residential property. The country's banks, as we have seen, are about three-quarters mortgages. Both sides of the national balance sheet, the assets households hold and the loans the banks make, are, to a first approximation, the same bet on the same asset. An entire developed economy is long one thing, and that thing is land it cannot make more of.

And the lived experience is worse than the official figures admit. The government's rent index has risen about 88 per cent since 2005. Advertised rents, what a new tenant actually pays on signing a fresh lease, have risen about 170 per cent over the same period. The official measure is dominated by slow-moving sitting tenancies; the marginal renter lives on the higher line. The statistic quietly understates the very burden it exists to measure.

(Rental stress by SA3 region: the share of renting households spending more than 30 per cent of income on rent)

The experiment

Here is what makes Australia worth watching rather than merely diagnosing. It is the first of these economies to try to take the machine apart.

The 2026-27 federal budget begins unwinding the tax part. From the 1st of July 2027 the fifty per cent capital-gains discount is replaced by indexation of the cost base plus a minimum tax, and negative gearing on established dwellings is restricted for purchases made after the 12th of May 2026. The legislation is before parliament. It is a real reform, aimed at a real accelerant.

It will not be enough, and the framework says why with some precision. The transfer this machine performs is a property of all three parts acting together. Land that cannot be made, a banking system that bids against it, and a tax code that subsidizes the bid. Remove the tax accelerant and the other two keep running. The land is still fixed. The banks still lend against it. The deposit schemes still pump demand in. And the reform is built to land softly, existing holdings are grandfathered, new builds are carved out, and the family home is untouched, so it bites at the margin by design.

So here is a dated, falsifiable prediction, which is what a diagnosis ought to leave behind. After July 2027, watch two numbers, the imputed-rental share of GDP, and the price-to-income ratio. If this were a tax problem, both should ease. The framework predicts they will not, that the float keeps expanding and the ratio holds or climbs, because the binding constraints were never the tax. The tax was the most visible part of the machine, which is precisely why it was the part that got touched.

In conclusion…Crikey

The Australian economy, has in no uncertain terms, looked at the UK and stated proudly ‘hold my beer’, and derived for itself a singularity of obscene size and pull.

The commentary seen about affordability, the cost of living, of hard working Australians being priced out of a life their parents could have expected, hides a darker and more insidious element.

When everyone decides that only one investment in the economy works, that is ‘as safe as houses’, inelastic in its supply, pro cyclically boosted by loose credit, and with tax advantages that look more fitting for Gran Cayman than Canberra, the story today is the house you can’t afford, the story tomorrow is about the industry and real economy you can’t afford to save.

As property dominates the investment decisions of all Australians, productive capital is starved, the relative value of business investment in the country as a percentage of GDP will decline in relative terms. In fact it has, for 60 years.

That investment, is the capital, the intellectual property, the machines, the factories, the capability, the real industry that pays the real wages. That is what is being suffocated by a scramble for patches of red dirt.

The question then becomes. How long can a real wage pay an inflated rent, and how long can a real economy support an imagined one.

If you would like to learn more about the core Rentier black hole concept, come along, we will be running through the list of the worst offenders here on Substack, or for a look at the working papers in progress they are available on rentierblackhole.com

Share

Subscribe

You won. And before the votes were even counted, two newspapers, the chairmen of two parties and a former head of the farmers' union were already attacking a tax. Not a tax you have introduced. A tax you might introduce, if you take the leadership, if you remove the Prime Minister first. Three conditionals deep, and the alarm was already deafening.

That reaction is not noise. It is the most useful piece of information you will be handed this year. Nobody clears a front page to stop a policy that would not bite. The volume is proportional to the threat, and the threat is real, because for once a frontline politician has pointed at the actual problem. So this is written in your favour, mostly. You have reached for the one lever that reaches the disease.

The bad news comes in two parts. The first part you can fix. The second part you cannot, and I am going to be straight with you about which is which.

The wall is made of collateral

The objection that matters does not come from the Tory chairman or the farming lobby. It comes from the people who agree with you. Charles Goodhart spent a career at the Bank of England and thinks the case for a land tax is overwhelming. He will also tell you why it cannot be done in one move. Bring it in suddenly and land values fall, not a little, a great deal. And because the entire credit system is built on property as collateral, a fall like that does not stay inside the housing market. It becomes a banking event.

The reason you cannot tax the land is that the country has been wired on top of it. The tax base is holding up the building.

This is not a thought experiment. Britain ran it. In 1909 a government you would recognise as your ancestors passed taxes on land value. The taxes devalued building land. That wrecked the collateral housebuilders borrowed against. Construction collapsed. Within a decade the duties were quietly repealed and filed under valuation difficulty. Same asset, same collateral, same retreat, one hundred and seventeen years ago. So when the property industry says it always fails, they are not lying to you. They are describing a trap.

The only question worth asking is whether the trap has an exit. It does. Here it is, in six moves.

Share

Subscribe

The way through, in six moves

One. Phase it in, and stand behind the banks with real money.

Start low and climb. Half a percent rising to two and a half over five years. But be clear with yourself about what the phase-in does and does not do, because this is where the well-meaning versions of your policy go to die.

Markets are forward-looking. The day you credibly announce a terminal rate, the market prices the whole future stream and reprices the asset at once. The phase-in smooths the cash a landlord has to find each year, which matters for politics and for pass-through, but it does not smooth the hit to collateral, which is the thing Goodhart is actually worried about. What defuses the credit event is not the gentle rate. It is the work you do on the banking system before a single pound of the new tax is ever collected.

So start two years out, quietly, with the Bank of England, and turn the dials the other way from where they have been jammed since 2008. Affordability tests go up, not down. Maximum loan-to-value on new lending comes down. The capital that banks must hold against their mortgage books goes up, so the system is carrying a thicker cushion by the time the tax arrives. The reason is brutally simple. You do not want to wake up on implementation day with a banking system whose mortgage book is rammed full of week-old ninety per cent loans, written against valuations your own policy is about to lower. You want the freshest, thinnest-equity lending to have stopped well before the repricing, so that the loans most exposed to negative equity are old enough to have paid down and inflated away some of the gap.

Then the backstop itself, and be honest about its scale, because the number frightens people and it should not. The country's outstanding mortgage debt is around 1.7 trillion pounds, spread across roughly twelve and a half million accounts. You are not insuring that. Most of it sits at comfortable loan-to-value ratios and never goes near negative equity even under a serious markdown. What you are insuring is the tail: the slice of recent, high-leverage lending that a fall in land values would push underwater, together with the short-term cash the banks need so that a markdown never forces a fire sale. That is a contingent facility in the tens of billions, committed and visible from day one, not spent. It is closer in spirit to the guarantees thrown around the system in 2008 than to a cheque anyone actually writes, and like those guarantees its real job is to be believed, so that the panic never starts. The precise figure, the true size of that tail under a given repricing path, is the single most important number in the entire programme, and it is the one thing I would model to death before saying another word about this in public. Get it right and the wall comes down. Underfund it and Goodhart wins.

Two. Tax the rent, not the valuer's guess.

The thing that killed 1909 was valuation. You cannot cheaply and defensibly value the land under every building in the country, and the moment you try, the lawyers bleed you to death in the courts. So do not try. And here is the elegant part, the part I would build the whole reform around: you do not need a new army of valuers, because the number you want already exists. Every landlord in the country already tells HMRC what their property earns, in rent, every year, on a self-assessment return. So take it. Take the declared rent, capitalise it into a value with a standard multiple, and run that value through the bands. The rental market values itself, every year, automatically, out of data the state already collects. No surveyors, no tribunals, no reopening of 1909. You simply make the owner's own declaration the basis of the tax.

Then borrow the oldest anti-cheating device in European fiscal history. For four centuries Denmark ran the Sound Toll. Every ship passing the strait declared the value of its cargo, and the Danish crown reserved the right to buy the cargo at the declared price. Lie low and you lose the cargo. Apply the same logic here. You self-declare the rent. If you lowball it, the state, or a buyer, can take the property at the price your declaration implies. Modern economists have a name for this, the self-assessed tax with a purchase option, and a literature to go with it, so you will not be accused of inventing it on the back of an envelope.

One rule is not negotiable. The purchase option applies only to let and investment property, never to anyone's home. Forced sale of a family home is intolerable, and you should never let it within a mile of the proposal.

Now make the rent itself the mechanism. Set the tax in bands, and ratchet them so that raising the rent pushes the landlord into a higher band and a bigger bill, while lowering the rent drops him into a lower one. Done properly, putting the rent up costs the landlord more in tax than he gains in rent. That is your answer to the oldest objection of all, the one that says the tax just gets passed to tenants. Under the ratchet, passing it on makes the landlord worse off, and cutting the rent makes him better off. Raising rents makes him much worse off on the bill. Lowering them makes him much better off. The incentive is welded the right way round for the first time in living memory. Two birds, one stone: the same mechanism that values the property also makes cutting the rent the landlord's most profitable move, which is the nearest thing to an automatic brake on pass-through anyone has designed.

This is not a fantasy mechanism. Switzerland runs the nearest thing to it and has one of the most stable rental sectors in Europe to show for it. Swiss rents are tied by law to a published reference interest rate and surrounded by tenant protections, so that rents move slowly and predictably, and can even be pushed down by tenants when underlying costs fall, in a country where most people rent for the long term and the market still turns over and still builds. The lesson is not that regulation freezes a market. It is that a rental market which has been told, in effect, that the rent is the thing being watched can stay both liquid and calm. The part worth borrowing is the rental side, where pinning the tax to the rent has sat alongside stability for decades.

The catch, stated plainly, this only works if the bands are fine enough that there is no slack to raise rent inside a band, and not so fine that you have quietly reinvented rent control, which would shrink the supply you cannot afford to lose. The reconciliation is move three, plus a public builder holding the floor underneath the whole market.

And now close the dodge that every property tax invites: the empty flat. If the tax is assessed on declared rent, the obvious move is to declare no rent at all, leave the place dark, and wait. So the empty property is exactly where the tax has to be at its most aggressive, never its most forgiving.

Here is the process. A property with no declared tenancy and no owner living in it is, by definition, being withheld from use. Allow a short grace period for genuine voids, the months between tenants, a probate, a real renovation, call it six months. After that, the unit is no longer assessed on a rent it is not earning. It is assessed on its capital value directly, and the land tax on it escalates the longer it stays empty. Standard charge once it crosses the grace line. Double after a year dark. Treble after two. And it keeps climbing from there, because the whole point is that there is no level of vacancy at which holding an empty asset is cheaper than putting it to use. The valuation for an empty unit is not a fresh survey to be argued over, either; it is the last known assessed value, uprated, so refusing to let the place creates no gap to hide in.

The friend-for-a-pound move dies here too, against the purchase option from a moment ago. Declare a peppercorn rent to slip under the escalator, and you have told the state the flat is worth a peppercorn, at which price someone is now entitled to buy it from you. The empty-homes problem that every council in the country has flailed at for a generation turns out to dissolve the instant leaving a property empty costs more than filling it.

Three. Make planning permission a clock, not a trophy.

The standard complaint, that a land tax still will not get anything built, is fixable by aiming it. Grant permission and the clock starts, with an agreed delivery window inside which there is no land tax to pay at all. Build it out on time and you never pay a penny on the site. That is the reward for doing the thing the country actually needs done.

Miss the window and the meter starts, and it runs harder the longer you sit. Run past schedule and you pay the full land tax on the land. Twelve months late and it rises to one and a half times. Twenty-four months late and it is three times the standard charge, and still climbing from there. Sitting on permitted land, which has been the most profitable passive position in British development for forty years, becomes the single most expensive thing you can do with a plot.

The fairness valve is the clock-stop. If the delay is demonstrably not yours, the grid that will not connect you, the judicial review that freezes the site, the supplier who failed to deliver, you make that case and the escalator pauses. But if you are simply slow, that is your cost to carry. And if you are fast, the saving is your profit to keep. The incentive points one way only: build, and build promptly. Nobody is forcing a spade into the ground at a loss. The tax just ends the long era in which doing nothing with permitted land was the smartest play on the board.

Four. Tax the building, but price the land.

A pure land value tax needs you to separate land value from the bricks on top of it, which is the hard, litigable part, and the part that buried Lloyd George. Skip it. Tax the assessed property value, which you already have, and apply a density multiplier that recovers the land share.

A detached house on a large plot is almost all land, so it carries a multiplier of one. A mid-rise block spreads its plot across many homes, so each home carries a fraction, perhaps a fifth. A tower spreads it across hundreds, so a twentieth. You recover the Georgist incentive, build densely and stop hoarding land, without ever conducting a formal land valuation. Be honest that this approximates a land tax rather than being one. That honesty is a strength. It heads off the purists who will tell you it is not real Georgism, and it keeps you out of the courtroom that ended the last attempt.

There is one trap inside it. A low multiplier on a tower means the empty investment flat in a prime block, exactly the parked capital you most want to reach, is barely touched. Which is why move four only works bolted to move two. State the rule as a single sentence and it comes clean: the multiplier rewards occupied density, real homes with real people in them, and the vacancy escalator punishes empty density, capital parked in the sky. Reward the first. Hammer the second.

Five. Protect the pensioner, then phase her in.

The emotional core of every attack on you is the widow in the family home she bought for very little and cannot afford a new tax on. Take her off the board at the start. Exempt primary residences up to two million, which draws the teeth from the transition while still raising serious money from investment property and the genuinely expensive. Then bring that cap down slowly across a decade, so owner-occupiers are phased in gently rather than shocked in a single budget.

But do better than simply deferring her bill until she dies, because a tax whose central promise is that it can be paid from beyond the grave is grim, and worse, it leaves her rattling around a four-bedroom house that could hold a family. Give her a reason to move instead. Offer a capital gains tax holiday on the way out: an owner over a certain age who sells the large home and buys something smaller pays no tax on the gain and keeps the difference in cash. The tax stops being a threat and becomes a nudge, and the nudge releases precisely the under-occupied family housing that no amount of new building ever seems to free. For the genuinely asset-rich and income-poor who simply will not move, deferral stays on the table as a backstop. But the better outcome, for her and for the housing stock alike, is the door held open, not the bill rolled forward.

The same logic rescues a group nobody mentions: the people who bought one or two flats to let because a pension never looked like enough, and who are now sitting on a retirement made entirely of the asset you are taxing. Hit them with the full apparatus on day one and you get a political disaster and a fire sale at once. Offer them the same exit, a time-limited capital gains holiday to rotate out of the buy-to-lets across the transition, and you convert a cornered constituency into willing sellers, which is exactly the supply you want reaching first-time buyers. Tax a man into a corner and he fights you to the death. Give him a costed, time-limited way out, and a surprising number simply take it. Keep both holidays inside the transition window and capped, so they stay a bridge out of the old regime rather than a permanent loophole into it.

Here I owe you the part that matters most, because it is the part your cheering section will skip. The decaying exemption is exactly the kind of concession that the structure you are about to enter freezes in place. The moment the cap drops far enough to touch the median homeowner who votes, the pressure to stop it right there will be overwhelming, and the temporary exemption becomes permanent. The same framework that says this tax would work also predicts that this particular sweetener never fully dissolves, which quietly smuggles back the distortion you were trying to remove. I am not telling you to drop the exemption. You cannot pass the thing without it. I am telling you to expect it to get stuck, because the same machine that is attacking you this week is built to make it stick.

Six. Give the money somewhere to go.

This is the move your advisers will skip, and it is the one that makes the other five worth doing. A land tax on its own simply lowers the price of land. Useful, and incomplete. The point was never to punish land. It was to move capital off it and into things that actually produce.

So the tax has to run alongside a destination. A real national investment bank with the scale and the mandate to deploy at industrial scale. Zero capital gains tax on productive investment that stays in the country. An energy programme that stops British industry paying half as much again for electricity as its German competitors. Dislodge the capital with one hand and offer it a better home with the other. Skip this and you get the pain without the point, a cheaper housing market bolted to the same stagnant economy.

Stare at one timing problem honestly. The pain from the tax lands in the first five years. The payoff from the investment compounds over ten and beyond. There is a valley in the middle where the cost has arrived and the benefit has not. The backstop and the exemption are, among other things, what carry you across that valley alive.

Why this probably fails anyway, and what that tells you

So there it is. The wall the property industry swears is permanent is, on the economics, nothing of the sort. Phase it, backstop it, tax the rent and not the valuer, make permission a clock, price land through density, protect the pensioner and then phase her in, and give the freed capital a productive home. The collateral problem is soluble. The pass-through problem is soluble. The valuation problem dissolves. The supply problem is fixable. None of that is the reason you will struggle.

You will struggle because the design moves the impossibility from one place to another, and the new place is harder. It is no longer the economics that forbid the tax. It is the politics and the public finances, and both of those obstacles fall straight out of the same structure that produced the problem in the first place. A tax that disturbs the existing stock of wealth has to be carried against the people who hold that stock, and they are organised, and they vote, and a few of them write the front pages. A tax on a mere flow can be passed against a diffuse and disorganised public who barely notice. The first is always harder than the second, in every economy shaped like ours. That is not cynicism. It is a property of the configuration, and you can write it down as cleanly as any of the moves above.

Which is the part nobody around you will say, Andy, so I will. The reaction that greeted you this week, before you had even won the seat, is not an obstacle on the road to the policy. It is the policy's natural predator, and it was already fully grown and lying in wait. The exit exists. It is costed. It is built. The reason no one has ever been allowed to walk through it is the thing you watched defend itself across the front pages this week, and it will still be standing there long after the leadership is settled.

The manual is yours. The full costed version is on the common platform. The economics is the easy part, and I have just handed it to you. The politics is your problem, and mine, and everyone's who has ever rented a flat they could not buy.

Good luck. Whatever else you do, fund the backstop.

Share

Subscribe

I. The inconvenient data point

Switzerland is the data point that should break the theory.

Feed it into the rentier black hole framework, the one that explains why, in country after country, housing swells into the asset the whole economy bends around, and every input reads off the chart at the extreme. Supply elasticity, the lowest in the developed world, a third of Britain’s, effectively zero in the cities where people actually want to live. The banking system, domestic lending concentrated in mortgages to a degree few rich countries approach, the collateral channel loaded and primed. And a tax code that, where most countries nudge gently toward property, shoves. A wealth tax against which mortgage debt is deductible. An imputed-rent regime whose deductible interest makes a large and permanent mortgage the rational thing to hold, which is one reason Swiss households carry the heaviest mortgage debt on earth. Worst supply, hottest credit, taxes that pay you to lever into property. On its components, this is not a mild case. It is the textbook terminal one.

And yet there is no fingerprint. No crash. No British-style productivity puzzle. No wages coming loose from a stagnating economy. None of the doom the configuration predicts. By every symptom you would think to check, the patient looks well, rich, stable, the productivity numbers enviable.

So one of two things is true. Either the framework is wrong, or Switzerland is on life support, and something we have not yet named is doing the breathing.

This essay argues the second. The configuration is exactly as dangerous as it looks; the country has the most rentier-prone structure in the rich world and the least rentier-looking outcome, and the entire gap between the two is made of two things. One is a set of unusually well-built brakes, which are real, and which Switzerland can take credit for. The other is a subsidy it did nothing to earn, which is real too, and which it cannot. Take the subsidy away and the brakes alone leave you with Britain, in mountains.

II. The patient’s chart

Start with the diagnosis, because the diagnosis is the part everyone gets wrong. The instinct on seeing a calm Swiss housing market is to assume calm Swiss fundamentals. The fundamentals are not calm. They are about as inflammatory as a developed economy’s get.

Take supply first, because it sets everything downstream. The OECD has measured the responsiveness of housing supply to price across twenty-one advanced economies, and Switzerland comes last. Its elasticity is 0.146, roughly a third of Britain’s and a fourteenth of America’s, and in the dense urban cores it rounds down to nothing at all. When demand rises, the stock does not. Some of that is geography, a country folded into the Alps has only so much buildable land. But most of it is choice, made deliberately and at the ballot box, again and again. Zurich voted in 1984 to keep towers out of its inner city. For two decades afterward nothing in the entire country stood taller than the Bern Minster, around a hundred metres, until an exhibition tower finally rose in Basel in 2003. Buildable land in Zug changes hands at something like twenty-eight times the price of land in the Jura. Switzerland did not fail to build upward through oversight. It decided not to, democratically, and it keeps deciding not to.

Now credit, the channel that turns inelastic supply into a spiral. Money has been cheap for years and shows no sign of becoming expensive. A ten-year fixed mortgage near 1.4 percent, a policy rate that has spent long stretches at zero, the ten-year swap around 0.6. And the banking system that lends it is concentrated in mortgages to a degree that would make a supervisor elsewhere uneasy. The collateral channel, the one that lets rising house prices finance the borrowing that pushes house prices higher, is not merely present here, it is the core of the domestic banking book.

Then tax, where the Swiss system does something genuinely unusual. In most countries the tax code nudges gently toward property and calls it housing policy. Switzerland shoves. The annual wealth tax falls on net worth, and mortgage debt is deductible against it, so a large loan is, among other things, a way to be taxed on less. On top of that sits the imputed-rent regime, owner-occupiers are taxed on a notional rent for living in their own home, but mortgage interest is deductible against it, so the rational move is to never pay the mortgage down, to hold the largest loan the deduction will carry, indefinitely. The two systems point the same way and they point hard, which is why Swiss households, among the richest on earth, are also among the most mortgaged. A nudge in other jurisdictions is a blunt shove here.

Worst supply, hottest credit, a tax code that rewards permanent leverage into land. Put the three together and you have, on the inputs alone, close to the most rentier-prone configuration in the developed world. And the prices behaved exactly as the configuration says they should. Swiss house prices ran for a decade and a half, and in real terms they ran harder than Britain’s, up around 61 percent since 2010 against Britain’s 11 on the same measure.

The boom is not in question. What is missing is its aftermath. The same configuration produced a price surge larger than Britain’s and none of the wreckage that followed Britain’s. The loop that ran away everywhere else did not run away here. The first thing to understand is why it did not. The second, and the harder one, is why that is not the same as being well.

III. The brakes, and what they cannot explain

The reason the loop did not run away is that Switzerland built the heaviest set of brakes any rich country applies to its housing market, and it built them deliberately, in response to exactly the danger the configuration poses.

The logic is worth seeing clearly, because it is the part Switzerland genuinely earns. Supply elasticity is the gain on the system, it governs how much of any fresh demand turns into houses and how much turns into price. Where supply is elastic, a surge of money is met by construction and the price barely stirs. Where it is inelastic, the same surge has nowhere to go but into the price of the houses that already exist. Switzerland’s elasticity sits at the floor, so almost any demand it admits becomes price almost immediately. A country in that position, if it wants to stay off the critical list, has to suppress demand and credit far harder than a country that can build. Worse elasticity demands bigger brakes, cheaper credit demands a higher stress rate. The heavy Swiss machinery is not national caution for its own sake. It is a control system calibrated to an extreme input.

So the brakes are matched to the configuration. Lenders must test affordability not at the 1.5 percent a borrower would pay but at a punitive five, so every mortgage has to survive a storm that has not arrived. Buyers must put down a fifth, and may not raise more than half of it from a pension, in a market where a deposit on an apartment in some cantons can be two years gross wages alone. Rents are pinned to a national reference rate so they cannot chase prices, a mechanism the next section examines in full. And foreign buyers, the loosest and most speculative money, are barred from the housing stock by statute. Of the three things that turn housing into a rentier sink, the supply constraint, the credit channel and the tax treatment, it is credit advanced against rising collateral that does the decisive damage, and it is precisely that channel the Swiss brakes disable. Germany disables the same channel by other means and reaches the same calm. The constraint on its own is survivable, the constraint wired to a live credit loop is not, and Switzerland cut the wire.

This is a real achievement and it is the honest core of any case that Switzerland did something right. But notice exactly what it buys, because it is less than it appears. The brakes prevent the cascade. They stop the fast, visible, self-feeding collapse, the crash. They are the answer to “why no British-style implosion.” They are not an answer to anything else. Containing a price spiral does not, by itself, make an economy productive, or keep wages tied to output, or stop a population pouring its savings into land. Those are different questions, and the brakes do not touch them. So the puzzle from the first page is only half-solved. We know why the patient did not crash. We still do not know why the patient looks well. For that, you have to stop looking for the symptoms in the obvious place, the price of houses, and start looking where they actually surfaced, which is everywhere the brakes do not reach.

IV. The capital glut

Start with the symptom hiding inside the figure everyone admires, Swiss productivity. The productivity numbers are the headline proof that Switzerland is thriving rather than merely un-crashed. Look at how they are built and the proof dissolves.

Over the three decades to 2024, Swiss labour productivity, output per hour worked, rose about 40 percent. That is the enviable number. But total factor productivity, the part that measures genuine efficiency rather than sheer accumulation, rose only 17. And real wages rose 13. Set the three on one axis and the story is not the one the headline tells.

Two things follow, and they overturn the obvious reading in opposite directions. First, wages did not come loose from what workers produced. They tracked total factor productivity almost exactly, lagging it by about three points across thirty years, which is to say the labour share of income held roughly constant, around 65 percent. This is not a story of Swiss workers robbed of their output. By the measure that matters, genuine efficiency, they were paid about what they made. Second, and this is where the headline breaks, output per hour ran 27 points ahead of both efficiency and pay, and that gap is not productivity in any sense a worker shares. It is capital deepening. It is the simple fact that each Swiss working hour now has far more capital standing behind it than it did in 1995.

How much more is the part that should give pause. Run the growth accounting and capital per hour rose by something like two-thirds. And the return on all that capital fell as it piled up.

Capital productivity, the output wrung from each unit of capital, declined about 17 percent. That is the signature of a glut. Switzerland did not get 40 percent more efficient. It got 40 percent more capital-intensive and 17 percent more efficient, and the wage followed the 17. The economy substituted cheap, abundant capital for expensive, immigration-constrained labour, and it did so well past the point of useful return, until each new franc of machinery and plant produced less than the last. The productivity that looks like health is, in large part, a mountain of capital with diminishing returns sitting behind a constant labour share.

This is the first fingerprint, and it is the same disease as Britain’s wearing different clothes. The rentier black hole is, at bottom, what happens when credit is too cheap and pours into the favoured asset until that asset’s marginal return sags. In Britain the favoured asset is land, and the sag shows up as a stagnant economy behind rising house prices. In Switzerland, as the next sections explain, the cheap credit is walled out of land and routed into corporate capital instead, so the over-accumulation lands in plant, equipment and intellectual property, and the sag shows up as falling capital productivity behind a calm labour share. Less destructive, because capital at least makes something. The same mechanism all the same, cheap money over-buying the favoured asset until it chokes on it. The glut is the rentier dynamic, relocated from the housing market to the balance sheet of Swiss industry.

V. The severed channel

The capital glut explains the symptom hidden inside the productivity figure. It does not explain why the other obvious symptom, the asset-price boom itself, leaves no mark on the national accounts. A boom that large should show up somewhere in measured output. It does not, and the reason is a second piece of Swiss machinery, one written into tenancy law.

National accounts record housing as a flow of rent, not as a stock of capital gains. The Swiss boom lived almost entirely in capital gains, and capital gains are invisible to GDP. They are invisible twice over here, because Swiss rents stayed nearly flat while prices ran away above them.

That flatness is written into law. Swiss rents are tied not to house prices but to a federal benchmark, the mortgage reference rate: a single nationwide figure, published quarterly by the Federal Housing Office, derived from the volume-weighted average interest cost of every mortgage in the country. The link runs through tenancy law. Under the tenancy ordinance, the VMWG, a quarter-point rise in the reference rate entitles a landlord to raise the rent by up to three percent, and a quarter-point fall entitles the tenant to claim very nearly the same back. Rising house prices, conspicuously, appear nowhere in that formula. A landlord may still pass through a share of consumer inflation and the cost of genuine renovation, so rents are not frozen; what they are is unhooked from the price of the asset and rehooked to the cost of the credit behind it. One of the principal channels through which a housing boom turns into a rising stream of income, the channel running from asset prices to rents to the next round of credit, is cut by ordinance. And there is a quiet irony folded inside it. Because rents follow mortgage costs rather than prices, the same near-zero policy rate that should be feeding the boom is, through this one rule, holding its rental echo down, the reference rate has spent the boom years falling, which means the law has pushed existing rents not merely flat but, on request, downward.

So the imputed-rent share of the economy barely grew, and the boom simply never showed up in measured output. Set Britain beside this one more time, British rents rose along with British prices, so the imputed-rent share of British output swelled, and the same housing boom that stayed statistically silent in Switzerland inflated the measured economy in Britain. Same boom, opposite footprint, decided by what rents were allowed to do. The fingerprint was never absent. It was suppressed, by a deliberate and elegant piece of law, into a part of the ledger that the figures do not count.

Two symptoms, then, both real, both disguised, the productivity that is mostly a capital glut, and the price boom that hides in uncounted capital gains. Which leaves the largest question still open. The brakes stopped the crash. The disguises hide the symptoms. But disguise is not cure, and a capital glut is not free. Something paid for all that cheap capital. The next section is where the money comes from, and it is not Switzerland.

VI. The money with nowhere to go

A glut of capital this size needs a source, and an economy that walls the world’s hottest money out of its housing stock ought, by rights, to be starved of capital, not drowning in it. Switzerland is drowning in it. It is not a Swiss policy. It is a Swiss inheritance.

The franc is one of the world’s safe havens. In every crisis, money runs toward it, and that money wants Swiss exposure. The most natural Swiss exposure, the one foreign capital reaches for everywhere else, is property, and in Switzerland that door is barred by statute. So the safe-haven flood, denied the asset it would ordinarily flow into, goes where it still can: into Swiss-franc bonds and Swiss equities. The wall that keeps it out of housing does not turn it away. It redirects it, into the financing of Swiss companies.

The central bank itself shows where that leaves Swiss borrowers.

In its Financial Stability Report the bank publishes the spread between corporate and government bonds across the major markets, and the Swiss line sits stubbornly below the others, below the United States and below the euro area, across the whole span from 2008 to the present. Swiss companies borrow at a thinner premium over their own government than companies almost anywhere else, and the premium sits on top of a government rate that the same safe-haven demand has bid toward zero, so Swiss firms fund cheaply twice over, once on the base and once on the spread. That cheap funding is what built the capital deepening of the last section. The flood the country could not put into housing, it put into machines.

This specific spread will be my next empirical study to determine the effect and its size. The routing channel is real but not unlimited, the sovereign bond market is kept small by the debt brake, and the central bank itself absorbs much of the inflow through intervention, so the claim is relative to the British counterfactual, not total.

This is not something Switzerland did. The country did not legislate the franc into a safe haven, it inherited the status, from history, from neutrality, from a century of accumulated trust it draws on without replenishing. The brakes are Swiss work. The flood is yesterdays work and today’s luck. And the flood is doing the load-bearing work that the brakes get the credit for.

VII. Life support

The brakes stopped the crash. But the brakes do not explain why Switzerland looks healthy rather than merely ‘uncrashed’, they explain the absence of a symptom, not the presence of vitality. What supplies the vitality, the productive industry, the cheap capital, the absence of the capital-starvation that should follow from walling off the world’s money, is the safe-haven flood. It was never the brakes that made the patient look well. It was the flow. The brakes keep the heart from arresting, the external money does the breathing.

A patient on a ventilator presents with normal oxygen, steady colour, a reassuring monitor. None of it is recovery. It is a machine doing the work the body cannot, and the readings are only as durable as the machine. Switzerland’s monitor reads beautifully: high incomes, low unemployment, enviable output per hour, a calm housing market. The readings are produced, in large part, by an external apparatus the country neither built nor controls, pumping cheap capital into an economy whose own configuration would otherwise be gasping.

Swiss pharmaceuticals and precision manufacturing are genuinely productive, genuinely world-class. But they were financed on a subsidy, and the subsidy was over-drawn. Cheap capital with no natural stopping point does not allocate itself with discipline, it accumulates until it chokes, which is precisely the falling capital productivity of section four. The flood that looked like a blessing built a glut. So the bent gravity, the redirection of the rentier flood from land into industry, is real, but it is not the triumph it first appears. It is a crutch the country lucked into and then leaned on past the point of health.

The savings that flee into the franc were saved by people elsewhere, the cheap capital that finances Swiss industry is the parked anxiety of savers the world over, looking for somewhere safe in someone else’s crisis. Switzerland is not healthy because it is virtuous and it is not even healthy in the ordinary sense. It is a structurally sick economy holding the receiving end of a windfall, of recent strict fiscal discipline layered thinly over centuries of stability and neutrality. Competent at the brakes, lucky in the lungs it inherited.

VIII. No escape at home

There is one place the windfall does not reach, and it is the place that gives the game away. Abroad, the flood was bent into productive capital. At home, where there was no flood to redirect and no statute walling savings away from land, the Swiss did exactly what the configuration predicts. They poured their money into property.

Look at the household balance sheet. In 2000, real estate was 38 percent of household assets. By 2020 it was 43.7, the single largest holding and still climbing. On its own that proves little, property appreciated, so its share would swell anyway. The composition underneath it is the proof. Over the same two decades, directly held shares fell from 11.3 percent of assets to 7.0, and directly held debt securities collapsed from 5.5 to 1.6. Direct holdings of productive financial claims roughly halved as a share of the portfolio, straight through one of the longest equity bull markets in history. Swiss households did not ride that boom in productive capital. They tilted further into land while it ran.

And the true tilt is worse than the headline, because part of it is hidden in the one sleeve that looks prudent. The balance sheet shows 23 percent held in insurance and pension schemes, the diversified, professionally managed portion. Look through it, and the professionals are making the same bet. Swiss pension funds hold around a quarter of their assets in real estate, and that real estate is roughly 90 percent domestic, foreign property is barely two percent of the entire pension portfolio. The pension wrapper is not a hedge against the household’s exposure to Swiss housing. It is that exposure again, in an institutional coat. Add the Swiss property funds tucked inside the household’s other holdings, and the real exposure of the Swiss household to Swiss real estate is not 44 percent. It is approaching half.

This is the rentier black hole, undisguised, with no windfall standing in front of it. About half the household balance sheet, all-in, committed to a single domestic asset, a concentration that is, if anything, worse than Britain’s. The valve that bends the foreign gravity into industry does nothing to the domestic kind, money saved at home rolls downhill into land, even inside the pension system, with every brake bolted on. And the brakes make it worse, not better, in the only way that counts here. Because renters are protected by the reference-rate system, the supply failure never becomes a felt crisis, the price of property only ever climbs and never crashes, and so loading more of the balance sheet into it remains the rational thing for every household and every pension fund to do, year after year. The cushion that contains the cascade is the same cushion that makes the slow concentration feel safe. Switzerland did not escape the black hole. Abroad it disguised it, at home it simply lived inside it, more deeply than the country it is usually held up against.

IX. When the machine is unplugged

Begin with what cannot be borrowed. The instinct, looking at a calm Swiss market from a country that has none, is to copy the policy. But the part of Switzerland that is policy, the brakes, is not the part doing the breathing, and the part doing the breathing is not policy. The ventilator is the franc’s safe-haven status, and a safe haven cannot be legislated. A ban on foreign buyers in a currency nobody is fleeing toward simply turns demand away, the same ban in a reserve-grade haven redirects a global flood into a country’s corporate sector. Britain can copy the stress test and the reference-rate rents and the foreign-buyer ban tomorrow, and it will redirect nothing, because there is no flood arriving to redirect. What makes the Swiss machine work is precisely the thing no parliament can vote itself.

There is, for completeness, one lever Switzerland’s own situation leaves open, and it is the one it will not pull. Of the three primitives, it neutralised credit and managed tax. The single brake it never touched is supply, the elasticity left at the global floor. The entire domestic policy recommendation reduces to one line. Build.

loosen the elasticity, let the cores grow upward. And it is exactly the reform the system has anaesthetised itself against, because the rent cushion means the supply failure never produces the crisis that would force the building. The country is not failing to fix its one fixable flaw out of incompetence. It is failing because it is comfortable enough not to have to, and the discomfort that would change that has been regulated away.

Which leaves the diagnosis whole, and the prognosis with it. Switzerland has the most rentier-prone structure in the developed world and the least rentier-looking outcome, and the gap between the two is made of brakes the country built and a subsidy it mostly inherited. Strip the subsidy and the brakes are not nearly enough, what remains is the worst supply elasticity on earth, a banking system fat with mortgages, a tax code that rewards permanent leverage into land, a productive sector resting on a capital glut with falling returns, and a population with half its wealth committed to property. It is Britain, with mountains and a better safety rail. The genuine efficiency underneath all of it, total factor productivity, has grown at roughly half a percent a year, the same quiet drag that sits under every rentier economy, the headline productivity that hides it is the glut, and the glut was bought on borrowed lungs.

The franc’s privilege is not a law of nature. Safe-haven status is a stock of accumulated trust over decades of strict policy and centuries of neutrality and stability, drawn down and not obviously replenished, and the one certainty about exorbitant privileges is that the country enjoying one always assumes it is permanent. When the flow ebbs, and someday it will ebb, the brakes will still be there, and they will still do their job, which is to prevent a crash. They will do nothing about the supply, the leverage, the glut or the half a balance sheet in land, because they were never built to. Britain is what this configuration looks like with the machine switched off from the start, the same disease, running without anaesthetic, in plain and painful view. Switzerland is what it looks like with the machine on, and the most expensive mistake a country in the same condition could make is to read the monitor, see the steady numbers, and conclude that the patient is well.

Share

Subscribe

Introduction

Here is a slogan at the centre of Modern Monetary Theory, and it is true. A government that issues its own free floating currency cannot be forced to default on debt denominated in that currency. It can always create the units. From this true thing, a large and confident programme has been built, and the programme is sold as liberation, money is not the constraint, only real resources are, so the state should spend until the economy runs out of capacity and worry about nothing until inflation appears.

Most of the criticism this programme attracts aims at the wrong target. People say it is reckless, or that sovereigns can in fact go broke, and the advocates swat these away easily, because on the narrow question of nominal default they are correct. The interesting failure is somewhere else. It is not that the theory is wrong about what it studies. It is that it quietly degrades one of the three things money is supposed to do, assumes nothing follows from the degradation, and builds a policy on the assumption. Everything follows from it. In an economy shaped like Britain's, what follows is the most regressive outcome available, a flight of savings into land, calm consumer prices, and a wealth transfer to whoever already holds the assets. Followed to its conclusion the same logic runs further still, until a doctrine that began as a left leaning, internationalist way to finance a green transition arrives, without anyone intending it, at autarky, and at the old economics of empire.

This piece is the long form of that argument. It concedes the theory’s accounting in full, isolates the function it forgets, and then derives, from orthodox premises, why the forgetting ends in asset price inflation and widening inequality rather than in the broad prosperity it promises. The same defect, followed out to the borders, dismantles the theory’s account of trade and foreign saving as well, and leaves the safe version of it available only near the top of the monetary hierarchy, to the hegemon and to almost no one beneath.

Subscribe now

Share

What the theory gets right, conceded in full

It is worth being generous first, because the argument is stronger if the concessions are real.

The accounting is correct. The government’s deficit is the non government sector’s surplus, to the penny. This is an identity, not a claim, and it follows from double entry bookkeeping rather than from any school of thought. A currency issuer borrowing in its own currency faces no external solvency constraint of the kind a household or a business faces, because it is the source of the unit. Money in a modern economy is created endogenously, by commercial banks extending loans, not multiplied up from a fixed base of reserves. The Bank of England conceded this plumbing in plain terms in its 2014 bulletin on money creation, and it is no longer a heterodox position.

The reframing that follows is also reasonable. If finance is not the binding constraint for a monetary sovereign, then the binding constraint is real, you cannot run out of pounds, but you can run out of idle labour and idle capacity, and if you spend past that point you get inflation. Taxes, in this telling, are not there to fund spending. They are there to create demand for the currency, to drain demand when the economy overheats, and to redistribute. This is functional finance, the doctrine Abba Lerner set out in the 1940s: judge a budget by its effects on the real economy, not by whether it balances. Stripped of the evangelism, it is a clarifying idea, and it is not obviously wrong.

So the quarrel here is not with the identities, the no default point, or functional finance as a lens. Grant all of it. The quarrel is with what the theory assumes about the currency itself once you start using it this way.

The function it forgets

Money does three jobs. It is a medium of exchange, the thing you hand over to settle a transaction. It is a unit of account, the ruler in which prices and debts are written. And it is a store of value, the vessel in which you can hold purchasing power across time and expect to find most of it still there when you return.

Modern Monetary Theory is built almost entirely on the first two. Its theory of why anyone wants the currency at all is chartalist, the state imposes a tax liability that can only be discharged in its currency, and that obligation manufactures demand for the unit. This is genuinely clever, and it does real work. It explains why an otherwise intrinsically worthless token has value. It secures the unit of account, because the state denominates the tax in it. It secures the medium of exchange, because everyone needs the unit to settle with the state. On its own terms, the chartalist account of currency demand is sound.

But look closely at what kind of demand it secures. The tax liability is a recurring obligation. It creates demand for a flow of currency, in each period, you must obtain enough pounds to pay what you owe. It creates no demand whatsoever for a stock of currency held as savings. Nothing in the chartalist story requires any agent to keep wealth in the currency for one minute longer than it takes to meet the next liability. You can earn in pounds, settle your tax in pounds, and rotate every remaining unit into something else the instant it arrives.

The store of value function is therefore exactly the function the theory does not provide for. And it is the function that the whole programme silently depends on. The promise that you can print to employ real resources without consequence assumes that the agents receiving the new currency will go on holding it, that money demand is stable, that the velocity of circulation does not bolt. The willingness to hold currency as savings is conditional. It rests on the expectation that the unit will not be systematically debased, that its custodian is committed to preserving its real value over time.

That is the precise commitment Modern Monetary Theory subordinates. It tells you, in the open, that the currency’s value is residual to the real economy goal, that the state will create as much of it as full employment requires, and that the brake on debasement is the promise to tax some of it back later, through a fiscal process that is slow, lumpy, and politically the hardest thing a state ever does at speed. A forward looking agent hears this correctly. The agent does not conclude that the currency is worthless, because the tax liability still makes it useful for transactions. The agent concludes something narrower and more corrosive: that the currency now carries a debasement risk it did not carry before, which makes it a worse place to keep savings than the available alternatives. The point is marginal, and it is a matter of degree, which is what makes it so easy to wave away and so impossible to escape. At the margin, holding wealth in the currency has become a worse bet. At the margin, wealth moves. And in an economy of any size, a shift at the margin is an ocean of capital changing direction.

This is the internal contradiction, stated cleanly. The theory wants to treat the currency as a costless financing instrument and simultaneously assumes agents will keep holding it. But the willingness to hold is conditional on the very commitment the theory dissolves. It saws off the branch it is sitting on, exactly once, and the rest of the argument is just describing the fall.

The flight into hard assets

If the currency is understood to be a worse store of value than the alternatives, savers do the obvious thing. They store value somewhere else. They transact in pounds and they save in something real, something whose supply cannot be conjured by a keystroke.

There is nothing exotic in this. It is ordinary portfolio behaviour. A rational saver holds wealth in whatever mix of assets offers the best return for the risk, and when the policy regime raises the expected loss on holding the currency, that saver re-weights away from it and toward assets whose supply cannot be expanded by decree. (The old name for the reflex, that bad money gets spent while good money is hoarded, is Gresham’s Law). No herd, no panic, no irrationality is required. It needs only that savers are not stupid, that they can read a stated policy, and that they would rather not watch their savings erode. The flight into hard assets is not a stampede. It is arithmetic, performed independently by millions of people who can all do the same sum.

The distribution of what happens next has an equally old name. Richard Cantillon noticed three centuries ago that new money does not descend evenly on an economy like rainfall. It enters at specific points and spreads outward from them, and whoever stands near the point of entry gets to spend it before the prices it will eventually raise have risen. In a modern economy the new money enters through the financial system and the asset markets. The people nearest the entry point are those who already hold financial and real assets. They receive the impulse first, and they bid for more of the same assets before the wage earner, far from the entry point, has felt anything but the later inflation. The Cantillon effect makes the regressivity structural rather than incidental. It is not that the policy was administered unfairly. It is that money injected into an asset economy reaches asset holders first by construction.

Put the two together. A currency made a worse store of value sends savings hunting for a better one. The new money’s path through the system hands the early gains to incumbent asset holders. The result is a sustained bid for hard assets, financed by money its holders would rather not keep, and captured first by those who were already wealthy. Strip the moral language away and the flight into hard assets is simply rational portfolio behaviour in response to a stated policy.

Why a rentier economy is the worst possible host

Where the savings go matters enormously, and this is where the argument stops being general and becomes specifically about Britain.

If the real asset that savers flee into is one whose supply responds to demand, the flight is partly self correcting. Money chases the asset, the price rises, the higher price calls forth more of the asset, and the new supply absorbs some of the pressure. You get some inflation in the asset and some genuine investment in producing more of it. That is not a catastrophe. It is a distortion with a relief valve.

British land has no relief valve. Its supply is, for the purposes of this argument, fixed. The planning system, the geography, and a century of accumulated constraint mean that a surge in demand for housing and land produces almost no new housing and land. This is the supply elasticity primitive that sits at the centre of the structural rentier account, and here it does something specific and grim. When savings flee a degraded currency into a supply inelastic asset, the entire force of the flight lands on price. There is no quantity response to absorb it. Every pound that rotates out of the currency and into land becomes, more or less directly, a higher land price, and from there a higher house price, a larger mortgage, a bigger collateral value, and another turn of the loop that the structural rentier framework describes.

So the same monetary experiment that might produce tolerable distortion in an economy with elastic asset supply produces, in a rentier economy, pure capitalisation. The money does not build anything. It re prices the thing that already exists and hands the gain to its owner. Modern Monetary Theory, run in Britain, is a machine for converting the printing press directly into land values.

There is a feedback in this that closes the trap on itself, and it turns the theory’s own instrument against it. The programme tells its operator to spend until the economy reaches full employment, and to watch consumer price inflation as the gauge of how much slack is left to fill. But if the new money is intercepted on its way to the labour market and capitalised into land, the gauge never moves. Consumer prices stay calm, not because there is still slack, but because the stimulus has been absorbed by an asset the index does not measure. The operator reads the quiet index as permission, concludes there is room to spend more, and spends more, and the next tranche capitalises into land exactly as the last one did. Full employment is never reached, because the money keeps being diverted before it arrives. The calm shops are not evidence of slack waiting to be filled. They are evidence that the money went somewhere the dashboard cannot see, and the silence of the dashboard is precisely what licenses the next round of printing. The theory’s safety check and the mechanism of its failure turn out to be the same gauge.

We have a decade of evidence that this is not hypothetical. After 2008, the Bank of England created an enormous quantity of new money through asset purchases, a programme that grew from its first round to a stock of hundreds of billions of pounds, and it held the policy rate near zero for more than a decade. Across that same stretch, consumer price inflation sat close to its two percent target. It did not run away. The shops stayed calm. Meanwhile the average house price rose by something on the order of three quarters between the 2009 trough and the 2022 peak, on the Nationwide measure. General prices rose by under a third over the same window; house prices rose by roughly twice that.

I am not claiming that quantitative easing single handedly caused the house price boom. The near zero rate channel, cheap mortgage credit, the supply constraint itself, and the various demand side subsidies were all pushing in the same direction, and the Bank itself has noted that isolating the precise contribution of asset purchases to the distribution of wealth is genuinely hard. The claim is narrower and harder to escape. It is the divergence that is the evidence. A decade of vast monetary expansion produced quiescent consumer prices and a roaring asset market at the same time. That divergence is the fingerprint of monetary expansion meeting an asset that cannot be built. The money did not show up in the consumption basket because the basket was not where it went. It went into the one asset whose supply could not answer it, where the consumer price index does not look.

The institution conducting the experiment audited itself and confirmed the mechanism. In its 2012 review of the distributional effects of asset purchases, written at the request of Parliament, the Bank stated that the programme had raised the prices of a wide range of assets and increased the net wealth of those who held them, and it noted, in its own figures, that the richest five percent of households held some forty percent of the relevant financial wealth that the policy lifted. The wealth effect was not a rumour. It was designed, measured, and disclosed.

A careful reader should be told exactly what this episode does and does not prove, because the honest version is the one that survives scrutiny. It is clean evidence for one half of the argument and silent on the other. The half it confirms is the capitalisation mechanism. Direct money into an economy whose key asset is inelastic, and the expansion emerges as price in that asset rather than as consumer inflation. That much the rentier account predicts and the decade delivered. But the quantitative easing years were not, in truth, a flight from a debased currency, and it is better to concede this plainly than to be caught assuming it. Through those years the pound was not debased and was held quite willingly. The velocity of money fell rather than rose, the demand to hold money was high, inflation expectations stayed anchored, and savers parked their wealth in gilts and cash without complaint. That was orthodox central banking under a credible inflation target, not Modern Monetary Theory, and the calm willingness to hold the currency is the proof of the difference. So the episode shows that an inelastic asset converts monetary expansion into price. It is suggestive, not probative, of what a genuine flight from a deliberately degraded currency would add on top. For the flight itself, the cleaner evidence comes from a place where a government actually told its savers that their currency’s value was negotiable.

That place is recent. Turkey, across roughly 2021 to 2023, ran something an MMT operator would recognise in outline. The political leadership pressed the central bank to cut interest rates into double digit inflation, on the announced theory that lower rates would bring prices down, and made it unmistakable that the currency’s value was subordinate to that goal. The adjustment was not orderly. The lira fell hard, inflation ran into the tens of percent, and Turkish savers did precisely what the flight mechanism predicts. They rotated out of the currency and into stores of value it could not erode, into gold, into dollars, and into property, and house prices in the major cities soared in nominal terms as the currency sank beneath them. Turkey is not a clean experiment, because it carries foreign currency debt that a true monetary sovereign would not, and that debt sharpened the damage in ways a purist would rightly distinguish. But in its essentials it is far closer to the mechanism described here than the British quantitative easing decade is. It is what the flight into hard assets looks like when the guardian of the currency announces, out loud, that the savers are not the priority.

The open economy trap

There is a second failure, and it is the one that turns a domestic distortion into an acute crisis for a country like Britain in particular.

The theory’s entire defence rests on a single instrument. Inflation is the only constraint, and when inflation appears, you drain demand by taxing it back. Set aside, for a moment, that this asks a central planner to know in real time where full employment is, which is unobservable, and to apply a fiscal brake that is slow and politically excruciating, so that by the time the brake bites the inflation has often already done its work on expectations. Set all of that aside and grant the theory its instrument. It is still built for the wrong disease.

Britain imports close to half of its food and the great majority of the tradable goods it consumes. The pound is a mid sized currency. It is not the world’s reserve, it carries none of the structural global demand that lets the United States create and spend with a buyer always waiting, and it trades freely on open markets. The moment a government runs the Modern Monetary programme in such an economy, the currency does the thing currencies do when their custodian announces that their value is negotiable, it depreciates against the currencies of countries that made no such announcement.

A depreciating pound reprices every imported thing upward. This is cost push inflation, inflation arriving through the exchange rate and the import bill, and it is categorically different from the demand pull inflation the theory is equipped to fight. We have a clean preview. After the 2016 referendum the pound fell by around a tenth, and that depreciation, feeding through the import channel, was a primary driver of consumer price inflation climbing to over three percent by late 2017, with no domestic demand boom to speak of. The inflation came in through the docks, not the shops.

Now watch the theory’s only brake meet this kind of inflation. Cost push inflation from a falling currency is not caused by excess domestic demand, so draining domestic demand does not address its cause. It simply layers a deliberate contraction on top of an external price shock. You tax demand into an economy that is already being squeezed by dearer imports, and you get the inflation and a recession at once. The single tool the theory offers is engineered for demand pull and is actively counterproductive against the cost push inflation that its own currency depreciation generates. The brake is built for the wrong disease, and pulling it makes the patient sicker.

The saver who has to exist

The open economy failure runs deeper than imported inflation, and it is worth following all the way down, because at the bottom the theory contradicts itself.

Modern Monetary Theory has an answer to the trade deficit, and on its own terms it is elegant. A deficit is not a problem, the argument goes, because it is the mirror image of something benign: the rest of the world choosing to hold your currency. You ship them paper, they ship you real goods, and the imbalance persists only for as long as foreigners wish to accumulate and save your currency. Imports are a real benefit, exports a real cost, and a floating rate clears whatever is left over. Let the currency float, the argument concludes, and the external account takes care of itself.

Look at the load bearing word. It is save. The whole external resolution rests on foreigners wanting to hold your currency as a store of value. Strip the accounting away and the claim is simply that the rest of the world is content to park its savings in your pounds.

But the entire domestic half of this essay was about a regime that deliberately degrades the currency as a store of value. That was the point, not an aside. Run the programme and you announce to every holder, at home and abroad, that the unit’s value is residual to your employment target and retractable only through a lagged political process. A foreign saver is not more sentimental than a domestic one. If anything the foreign saver is the harder to keep, because the foreign saver has no tax bill in your currency to anchor even the flow demand that chartalism provides at home. So the two claims pull against each other. To the degree the currency is a good store of value, foreigners accumulate it and the deficit is financed, but then the domestic store of value claim that powers the whole theory is weak. To the degree it is the worse store of value the domestic programme makes it, foreigners hold less of it, the deficit is less easily financed, and the comfortable line about the float balancing everything automatically gives way to its two real outcomes: trade forced back toward balance, or a currency that keeps falling. The external resolution leans on exactly the property the domestic programme degrades.

A capable MMT economist has a reply ready here, and it is worth meeting head on. The reply is that foreigners do not need the currency to be a flawless store of value. They will hold interest bearing claims in it, gilts rather than cash, and simply demand to be paid for the depreciation risk. The currency clears not at refusal but at a price, a higher interest rate and a weaker exchange rate, which is the daily existence of every emerging market sovereign. This is correct, and it is fatal, because that price is the financing constraint Modern Monetary Theory claimed to have abolished, walking back in through the side door wearing a yield. The theory said the float made deficits costless. In fact the float makes them clear only at a depreciation compensating premium, and a premium is a cost, denominated in interest.

And the premium does not sit still. Follow it round once. The state announces the programme, and rational foreign holders price in the debasement risk and demand a higher yield to compensate. The higher yield is a larger interest bill, which under the programme is met the only way the programme meets anything, by creating more of the currency. The extra issuance validates the very debasement the holders were guarding against, so they revise their expectations upward and demand a higher premium again. The higher premium is a larger bill still, met by still more issuance, which confirms the fear once more. This is not a one off adjustment to a new resting point. It is a flywheel, and it turns in one direction only. Each rotation raises the compensation demanded, each round of compensation is paid in freshly printed units, and each printing proves the holders right to have demanded more. The end of that spiral is not a slightly weaker currency. It is the road to zero, walked in steps that each look locally rational to the people taking them.

The theory does have a remedy, and the remedy is the tell. If imported goods are the weak point, the answer offered is to import less, build the productive capacity at home, substitute domestic food and domestic energy for the foreign kind, print to construct the supply you used to buy. Notice the direction of that arrow. Every time the open economy threatens the programme, the prescribed fix is to withdraw further from trade. The logic has no stable resting place short of self sufficiency. It does not name autarky as a goal, but the gradient runs there, because reducing import dependence is the only lever the theory holds against its own external failure, and that lever stops being pulled only when there is nothing left to import. Self sufficiency is not the slogan. It is the limit the slogan points at, and it is the economic posture of the closed system and the war economy, the thing that open trading orders have always defined themselves against, the terminal conclusion of the most dangerous ideologies of our history, Stalinist communism and pure fascism.

Now take the argument to its proper conclusion and ask what happens if everyone runs it. The external resolution needed a saver, a country willing to hold the very currency the issuer has degraded as a store of value. In a world with one such issuer, a saver can perhaps be found among the many who have not adopted the programme. In a world where everyone has adopted it, no one’s paper is a store of value, so no one wishes to hold anyone else’s currency, so the international savings balances on which the whole external account depends never form. The system has no reserve asset, because a reserve asset is by definition the currency that others agree to save in, and universal Modern Monetary Theory is the universal agreement not to. The mechanism meant to render deficits painless requires a saver of last resort that the theory, taken to its own logical horizon, abolishes.

Which leaves the corollary. The privilege the theory quietly relies on is not evenly available. It is tiered, and the full version of it sits at a single apex. There is a hierarchy of monies, the dollar at the top, holding well over half of the world’s currency reserves, then a short tail, the euro, the yen, sterling, the Swiss franc, gold, that enjoy fractions of the same trust. Modern Monetary Theory works to the degree that a currency sits near the top of that hierarchy, and it works fully, almost only, at the very top. The United States is the limiting case, and it can run the programme furthest not because its economists grasp something others miss, but because the dollar is the thing the rest of the world has already agreed to hold. And that agreement is underwritten by more than economics.

The country at the apex of the monetary hierarchy also commands the largest military on earth, prices the world’s oil and a great deal of its trade in its own currency, and can make the holding of its paper less a free choice than a condition of participating in the system it polices. Point a large enough gun at the world and the world will hold whatever value you place on your money, for as long as the instrument stays credible. That is not a monetary theory. It is a description of hegemony. So the honest statement of what Modern Monetary Theory requires is uncomfortable and short. To run it safely you must already be the hegemon, must issue the currency everyone else saves in, and must be large enough and armed enough to keep it that way. The familiar defence, that the doctrine was only ever meant for a sovereign floating issuer and that not everyone qualifies, is not a defence. It is the confession. It concedes that the theory describes a privilege of empire, available at the top of a hierarchy that, by construction, almost no one occupies.

The materials it cannot print

There is a further contradiction waiting at the end of this road, and it is the cruellest of all, because it turns on the very thing the movement carrying Modern Monetary Theory most wants.

The doctrine, in Britain, is championed largely to finance a green transition. Set aside the monetary objections for a moment and look at what that transition physically is. It is the most import intensive industrial undertaking a modern economy has ever attempted. Wind turbines, grid storage, electric drivetrains and the magnets that make them turn are built from materials a country either has beneath its soil or does not. Lithium, cobalt, nickel, copper, and the rare earth metals, neodymium and dysprosium among them, that are geologically concentrated in a handful of states and refined almost entirely in one. Britain has, to a first approximation, none of them. The green build is therefore not optionally an import programme. It is one by physical necessity, and no act of policy changes where the metals are.

Now set that against everything established above. The programme, run to its limit, drives toward autarky and toward a currency the rest of the world grows steadily less willing to hold. So the policy adopted in order to finance the transition is the same policy that dismantles the external capacity to physically build it. The money side and the materials side pull in opposite directions, and the materials side does not negotiate, because whatever else a printing press can do, it cannot print neodymium.

The obvious reply is that the currency is not worthless, merely weaker, so the metals still arrive, only at a higher price. This is true, and granting it is what shuts the last exit, because it is the flywheel again, now spinning on the physical inputs of the green build itself. A weaker currency makes the imported materials dearer in domestic terms, which makes the transition cost more, which under the programme is met by printing more, which weakens the currency again, which lifts the material bill once more. The transition does not strike a wall. It climbs a real cost that its own method of payment keeps raising. The choice was never import or do without. It is to pay an escalating tribute, forever, to the foreign holders of the materials, in a currency you are yourself busy degrading.

Refuse that tribute while refusing to abandon the autarkic logic, and only two doors remain. The first is to trade outside your own failing currency altogether, by barter, or by settling in someone else’s money, or in gold. That is a confession that the sovereign currency has failed at the one task, external settlement, that the entire theory was built to celebrate. The second is to stop asking the price and take the deposit, to secure the cobalt or the lithium by controlling the ground that holds it, put simply, conquest. The first is the medieval caravan, paid in specie because no one trusts the paper. The second is the nineteenth century gunboat. A doctrine that opened by promising to free a nation from the bond market closes by recommending either the barter economy or the colonial expedition, and it arrives there not in spite of the green ambition but because of it, since the green ambition is precisely what makes the import bill impossible to forgo.

So the most internationalist project imaginable ends up financed by the most nationalist monetary structure imaginable, and the contradiction between them resolves only into barter or into conquest. The movement reached for the windmill, and by declining to think past the four words “a sovereign cannot default,” it built, step by reasonable step, the case for sweeping imperialism and colonial conquest.

The turn

It would be easy to read all of this as a sound money sermon, a lecture about fiscal virtue and the discipline of balanced budgets. It is not, and the most important thing about the argument is the direction from which it lands.

Modern Monetary Theory is sold from the left, as an emancipatory doctrine, a way to fund public investment and full employment without bowing to the bond market or the deficit hawks. The rebuke here does not come from the opposite politics. It comes from the theory’s own stated values. Run this programme in a rentier economy and the outcome it actually delivers is the single most regressive transfer available in a modern economy. A direct, structural enrichment of incumbent asset holders at the expense of everyone whose wealth is their wage and whose savings are in the currency. The people the theory means to liberate are precisely the people standing furthest from the point where the new money enters, which is to say precisely the people it impoverishes first and relieves last.

So this is not an argument that the state must be disciplined for discipline’s sake. It is the observation that the liberation theory, applied to this terrain, builds the rentier machine faster than the orthodoxy it replaces. The constraint that Modern Monetary Theory wants to abolish is, in a rentier economy, the only thing standing between the saver and a forced march into the landlord’s balance sheet. Remove it in the name of the many, and you have handed the few the keys to the printing press, pointed at the one asset they already own.

It is worth being fair to the serious version before condemning the thing itself. The careful academic statements of the theory, the ones that fill the journals rather than the comment threads, do build in an inflation constraint and do insist that spending must halt at the real resource limit. The objection here is not that its better authors have forgotten about inflation. It is that none of the failures in this essay requires recklessness to appear. The risk premium returns the moment a rational foreign holder prices in the regime’s incentives, not the moment a government behaves stupidly. The leakage into land happens because the asset is inelastic and money is fungible, not because anyone mismanaged the disbursement. These are properties of the regime, not symptoms of its abuse, and a disciplined intention does not switch them off. Meeting the most careful version of the theory therefore does not soften the conclusion. It sharpens it, because the outcome holds even when every person involved is acting in good faith.

And the conclusion deserves to be stated without the usual academic anaesthetic, because what is on offer is not a harmless curiosity. Run as its advocates describe it, in an economy like Britain’s, the doctrine drives toward autarky, because its only answer to its own external failure is to withdraw from trade. It enriches the owners of assets and hollows out everyone whose wealth is their wage, because that is what capitalisation into inelastic land does to a society. It corrodes the currency and pours imported inflation onto the price of food, because that is what a degrading float does to a country that buys half its dinner from abroad. And the endpoint it gestures toward, the closed and self sufficient economy, is not a neutral destination. A nation that has cut itself off from trade to defend its currency must then allocate scarce goods by command, because the prices that once allocated them have stopped telling the truth, and command allocation of necessities is the economic skeleton of every authoritarian order that has ever stood.

This is not a programme that fails gently. It fails toward poverty for the many, fortunes for the few who already hold the land, and a state handed both the motive and the machinery to reach further into ordinary life than any peacetime government should. Offered as a serious prospectus for a country like this one, it is not merely mistaken. It is the kind of mistake that ought to be named for what it would cost, and the cost falls first and heaviest on precisely the people in whose name it is always sold.

There is a final irony, and it is the one worth leaving the reader with. Follow the programme to its limit and the destination is unmistakable, because it has been reached before. A single nation, sealed against trade, self sufficient by necessity, its currency held at the value the state declares, full employment maintained as a matter of policy and pride, the whole apparatus justified by having wrested control back from a foreign financial order that was holding the people down. Every authoritarian economy of the last century, of the left and of the right alike, has spoken some dialect of those same sentences. The point is not that the people advancing Modern Monetary Theory want any of this. They plainly do not. The movement that carries it wants a green transition and public investment, the most internationalist aims on offer, and it has arrived at the blueprint for the most closed and controlled economy imaginable without noticing the journey, because it stopped thinking one clause in, at “a sovereign cannot default,” and never asked where the rest of the sentence went.

That is the danger peculiar to a good idea with a true premise and an unexamined conclusion. The premise is correct. The road out of it, walked to the end, is autarky enforced by a hegemon that polices the value of its money by force, the oldest structure of empire rebuilt in monetary form, and it is reached, as these things almost always are, by people who meant nothing but well.

Honest limitations

The Gresham reference is an aside, not a load bearing beam, and it is worth saying so outright. The strict law concerns two monies forced to circulate at a fixed legal parity, which is not the situation here. It survives in the essay only as the old name for a reflex the argument derives independently, from ordinary rational portfolio choice. Strike the word Gresham out entirely and not a single step of the case so much as wobbles.

The empirical figures are directional. The house price move, the consumer price path, the quantitative easing stock, and the post 2016 depreciation are stated as magnitudes and orders of magnitude, drawn from the Bank of England, the Office for National Statistics, and Nationwide, and they are reliable as shape and scale rather than to the decimal. The divergence between asset and consumer prices is robust across measures, the precise percentages move depending on the index and the dating, and nothing in the argument turns on a particular decimal. The Turkish figures, the fall in the lira and the surge in nominal city house prices, are directional too, and are stated without precise numbers on purpose, pending exact sourcing. The case is asked to carry the mechanism, not the magnitude.

The materials argument is first principles and my own, welding the import intensity of the green transition to the autarky result. The geographic concentration of the critical minerals is well established, and Britain’s lack of them is not in dispute.

The single cause temptation is real and is resisted on purpose. The 2009 to 2022 asset boom had several drivers and monetary expansion was one of them, not the whole of it. The store of value mechanism is offered as the explanation for the divergence, the calm consumer prices beside the roaring asset market, and not as a monocausal account of every pound of house price growth.

And the argument is conditional on degree. A government does not have to be fully chartalist or fully reckless to trigger the dynamic. What matters is the expected commitment to the currency as a store of value, which is a continuum. A mild and credibly bounded version of functional finance might never move money demand at all. The failure described here is the failure at the limit, where the programme is run as its boldest advocates describe it, and the strength of the dynamic scales with how seriously the regime means it.

The external argument is first principles, not borrowed. The contradiction between the domestic store of value claim and the foreign saving that the trade account silently requires, and the corollary that the doctrine is therefore positional and available only near the top of the monetary hierarchy, are derived here rather than lifted from a named critic. Adjacent territory exists, in the monetary hierarchy literature that ranks currencies by the willingness of others to hold them, but the specific welding of that hierarchy to the store of value defect is this essay’s own. A reader is entitled to treat a fresh derivation with more suspicion than a citation, and is warmly invited to find the flaw. The claim is that there is not one.

Predicted misreadings

Four responses are predictable, and each is anticipated rather than dodged.

The first is that the tax liability gives the currency value, so it plainly is a store of value, and the central claim collapses. It does not. The tax liability secures a flow demand for the currency, the recurring need to obtain units to settle an obligation. It says nothing about whether anyone wishes to hold the currency as savings across time, which is the stock demand the store of value function refers to. The two are different, and the whole argument lives in the gap between them. You can need pounds every April and rationally hold none of your wealth in pounds in between.

The second is that the Job Guarantee anchors inflation, so the whole edifice is more stable than this allows. The Job Guarantee, in which the state stands ready to employ all comers at a fixed wage, is a buffer stock of labour, and as a wage anchor it is an elegant idea that is simply unproven at the scale required. It also invites the oldest objection to make-work there is. Milton Friedman, shown a public works canal being dug by hand and told the shovels were there to create jobs, is said to have suggested that if jobs were the point they should swap the shovels for spoons. A guarantee that scores itself on headcount has no reason to ask whether the headcount builds anything, and a great many reasons to keep it high, which is how full employment and a nation digging trenches with cutlery turn out to be the same number on a different chart. But the deeper trouble is that even a flawless labour buffer is silent on both of the channels that do the damage here. It says nothing about where savings go when the currency is degraded, and nothing about imported cost push inflation arriving through a falling exchange rate. A labour buffer does not anchor the price of land, or the price of imported wheat.

The third is that sovereigns cannot be forced to default, so the orthodox fear is misplaced and the critique is the usual scaremongering. This is conceded and it is beside the point. Nothing in this argument claims a forced nominal default. The mechanism is depreciation and the flight of savings, not insolvency. A government that cannot be made to default can still preside over a currency that no one wishes to save in, an asset market that has absorbed the entire monetary impulse, and an import bill that is rising because the currency is falling. Solvency is not the question. The question is what the currency becomes, and what the money does once people stop holding it.

The fourth is that the United States runs a version of this and manages well enough, so the model evidently works. It does work, for the United States, and the reason is the entire point. The dollar is the world’s reserve, the asset everyone else has agreed to save in, which is exactly the property the programme destroys for any currency that attempts it without already holding that status. The American case is not a counterexample to the argument. It is the argument. The doctrine functions for the issuer at the apex of the monetary hierarchy, whose currency others already treat as a store of value, and fails for everyone beneath it, who would first have to manufacture that trust while simultaneously announcing they will not honour it.

In closing

The constructive question, what a country shaped like Britain ought to do instead, given inelastic land, an import dependent consumption basket, and a currency that is no one’s reserve, is a real one, and it is outside the scope of this piece. The aim here has been only diagnostic, to show that the asset price inflation and the widening inequality are not accidents that a more careful application of the theory would avoid, but the predicted equilibrium of a regime that degraded its own currency as a store of value and then ran the press.

The slogan, in the end, is true. You cannot go broke if you print your own money. You can only watch everyone who trusted that money quietly convert it into the one thing it cannot print, and discover, too late, that you have made the landlords richer in the name of the tenants.

And beneath the domestic truth sits a colder one. The country that runs a version of this and prospers is the one whose currency the rest of the world has already agreed to hold, and that agreement rests on a reserve status and a reach that no act of policy can vote itself. It is not a recipe other countries can copy. It is a privilege of position at the top of a hierarchy, held there by more than economics, and it cannot be reached by deciding to want it. Modern Monetary Theory was never a key that any sovereign could cut for itself. It was a description of who already sat at the top, and of what they keep pointed at the rest of us to stay there.

Subscribe now

Share

Consider a leader who inherits a problem with a known cure. Not a contested cure, not a matter of taste dressed as economics, but a structural fault whose mechanism is understood and whose repair can be specified. Suppose the repair takes the better part of a decade. Suppose it imposes its costs early and delivers its benefits late, and that the costs fall on people who can see them clearly while the benefits accrue to people who do not yet know they are owed anything.

Now ask what happens to that leader’s popularity over the life of the repair.

The answer is the uncomfortable part, and it is worth stating before anything else, because everything that follows is an attempt to take it seriously rather than to wish it away. The leader is least popular at the moment the repair is working best. This is not the ordinary story of delayed gratification, the one where you suffer now and are thanked later. It is sharper than that. The phase in which the mechanism is doing exactly what it is supposed to do, the years in which the fault is closing and the new structure is taking the strain, is by construction the phase that shows only cost. There is nothing to point at. The benefits are real and they are coming, but they are not yet visible, and the costs are both visible and present. So the correlation between the reform’s health and the reformer’s standing is not merely weak. It is inverted. The better it goes, the worse they look.

There is a proverb about old men planting trees in whose shade they will never sit. It is a fine sentiment and it is not what this essay is about, because the proverb describes a generous choice freely made, and what we are describing is a trap. The tree-planter is admired. Our leader is despised, and despised most in the season the saplings take root.

The question this essay tries to answer is why a democracy would ever produce such a leader, and having produced one, why it would keep them. The answer turns out to be discouraging in a specific and useful way. But the route to it runs first through a problem that economics has already solved once, in a domain we no longer think of as remarkable at all.

Subscribe now

Share

The enemy is not the opposition

Begin with the nature of the reform, because the nature of the reform determines the nature of the failure.

A certain kind of policy can be delivered by force. You identify the lever, you pull it hard, you absorb the resulting pain, and the thing is done. The pain is the price and the price is paid up front. Reforms of this kind reward decisiveness, because decisiveness is precisely the input they require, and a leader who hesitates merely prolongs the agony without changing the outcome.

The reform we are concerned with is not of this kind. It is a reform of a system that feeds back on itself, where the variable you are trying to move is also the variable that determines how much room you have to move it. Acting too fast does not simply hurt more; it breaks the mechanism you are relying on to absorb the adjustment. These reforms do not reward force. They reward sequencing, pacing, and the discipline to move slowly while under maximum pressure to do the opposite. You cannot will a balancing act. You can only will a shove, and a shove is the one thing the balancing act cannot survive.

For a reform of this second kind, the binding threat is not the opposition party. The opposition was always going to oppose; that is free, and it is priced in from the first day. The threat is the future decision to soften. It is the moment, two or three years in, when the costs have landed and the benefits have not yet arrived and the polling has cratered, and someone, very possibly the reformer’s own side, very possibly the reformer, does the arithmetic and concludes that the gradient could be eased just a little to relieve the pressure. The reform does not die at the ballot box against the other party. It dies at its author’s own hand, in private, for entirely understandable reasons.

Economists have a name for this. They call it time inconsistency, and the canonical statement of it is now nearly fifty years old. In 1977 Finn Kydland and Edward Prescott showed that a policy which is optimal when announced can cease to be optimal once the moment arrives to carry it out, not because circumstances have changed and not because the policymaker was lying, but because the incentives that hold at the moment of action differ from the incentives that held at the moment of promise. The optimal long path is, in the technical sense, not credible. Rational observers know that the policymaker will be tempted to defect when the costs come due, and so they do not believe the promise, and the promise unravels in advance. The work was important enough to win the Nobel in 2004, and Robert Barro and David Gordon extended it through the 1980s into a full account of why discretionary authority, however well intentioned, struggles to commit.

This is the reformer’s true adversary. Not the other party, but their own future self, acting rationally, under pressure, with every reason to flinch.

We have solved this before

Here is the part worth dwelling on, because it is both the source of the solution and the source of the legitimacy the solution needs.

Democracies have already faced this exact problem, in one of the most consequential areas of economic policy, and they solved it. The area is monetary policy. For most of the twentieth century, the setting of interest rates sat in the hands of elected governments, and elected governments faced a textbook time-inconsistency problem. The optimal long-run policy was to keep inflation low and stable. But in any given month, with an election approaching or a recession biting, the government faced a powerful temptation to loosen, to buy a little growth now against a little inflation later. Everyone understood this temptation, which is precisely why low inflation was not credible. The expectation of future loosening fed into wages and prices in the present, and the economy inherited the inflation without even the temporary benefit of the loosening.

The solution democracies adopted was not to exhort governments to behave. It was to remove the lever from the hands that could not be trusted not to abuse it. Central bank independence is, stripped of its technical apparatus, a pre-commitment device. The state binds itself by handing a specific power to an insulated institution with a narrow mandate and a long horizon, an institution structurally protected from the monthly temptation that would otherwise govern the decision. Kenneth Rogoff gave the formal version of this in 1985, the case for delegating monetary policy to a central banker deliberately more averse to inflation than the median voter, precisely so that the institution would hold the line the public, in the moment, would not. In Britain this was done in 1997, when operational control of interest rates passed to the Bank of England, and it is now so thoroughly normal that its radicalism has been forgotten.

Notice what kind of act this was. It was not a suspension of democracy. It was a democratic decision to constrain future democratic decisions, made in the open, ratified by the ordinary processes, and broadly regarded as legitimate ever since. The electorate did not lose its sovereignty. It exercised that sovereignty to tie its own hands, having understood that its hands, left free, would do something it did not, on reflection, want done.

This is the precedent. The reform we began with faces the same structural problem that monetary policy faced, the problem of a long optimal path undermined by the short-run temptation to defect, and the instrument that solved it there is available here.

Extend the instrument

The proposal, then, is not heroism. It is plumbing. If the reform dies from the future discretionary decision to soften, the answer is to remove the discretion. You do not ask a leader to hold the line by character for a decade. You build the line into something that does not depend on character.

Concretely, this means writing the reform as a set of automatic mechanisms rather than a series of choices. Escalators that increase on a fixed schedule or on the achievement of a defined milestone, rather than at a minister’s discretion. Institutions with operational independence and multi-year funding commitments that a successor cannot quietly starve. Mandates whose design is fixed in statute, so that softening the gradient requires not a private decision over a weekend but primary legislation conducted in daylight. The aim is to convert the act of flinching from something easy and invisible into something hard and exposed. You cannot prevent a future government from reversing course. You can make reversing course expensive, slow, and public, which is often the difference between a reform that survives and one that does not.

Political philosophy has been circling this idea for far longer than economics. Edmund Burke, addressing the electors of Bristol in 1774, drew the distinction between a representative who is a mere delegate, bound to transmit the immediate wishes of those who sent him, and a representative who is a trustee, owing his constituents his judgment rather than his obedience. The trustee model is precisely a model of legitimate precommitment: the representative is authorised, within bounds, to bind the present to a judgment the present might not share. Jon Elster gave the modern image, in Ulysses and the Sirens and later in Ulysses Unbound. Ulysses, knowing that his future self will be overwhelmed by the song and will beg to be released, has himself bound to the mast in advance and orders the crew to ignore his pleas. The binding is not a defeat of his will. It is the fullest expression of it, the considered self protecting its purpose against the self it knows it will temporarily become. And James Buchanan, in The Calculus of Consent with Gordon Tullock in 1962, built an entire tradition on the distinction between the constitutional level, where a society sets the rules that will bind it, and the ordinary level, where it acts within them. Constitutions are nothing but precommitment written large. A democracy that binds itself is not a democracy in retreat. It is a democracy doing the most characteristic thing it does.

This is also the answer to the first objection the proposal will meet, which is that it amounts to insulating economic policy from democratic accountability, a technocratic power grab dressed in the language of prudence. The objection has force, and it deserves a serious answer rather than a dismissal, which we will come to. But the headline reply is simply the precedent. Central bank independence is the objection’s own counterexample. It was precommitment, it was democratic, and the people who worry most about technocratic insulation generally do not propose to abolish it. The question is not whether democracies may bind themselves. They plainly may, and do. The question is which problems warrant it, and on what terms.

The institution still needs a person first

Central bank independence was, in a sense, a single act. The lever was handed over once, the institution was stood up, and the binding held thereafter without requiring any particular individual to suffer for it year after year. The reform we are concerned with is not like that, because it cannot be locked in a single act. The locks themselves take years to build. Statutes must be passed, institutions stood up and capitalised, escalators legislated and survive their first legal challenge. Through that whole window, before the binding is complete, the reform depends on a person holding the gradient by will. The plumbing is the destination. Someone still has to survive the journey to it.

So the martyr is unavoidable after all, but their job is not what it first appears. It is tempting to imagine the role as endurance, a matter of gritting one’s teeth and holding firm against the mob for a decade. It is not. No individual will hold a falling popularity for ten years by force of temperament, the political market will remove them long before the decade is out. The real job is stranger and more self-effacing. The leader must spend their peak political capital, the large majority and the early goodwill, not on the visible reform but on building the locks that will make themselves unnecessary. They must use their strongest position to legislate their own future irrelevance to the process, so that by the time they are hated enough to be removed, the reform no longer depends on them.

This is a genuinely unusual demand. It asks a leader to spend capital on constraints rather than on actions, and constraints deliver no electoral credit whatsoever, because their entire purpose is to bind future governments, including the leader’s own. You do not cut a ribbon on a statutory escalator. You win no applause for a funding commitment that ties your successor’s hands and, in passing, your own. The leader is being asked to convert their popularity into machinery that will run after they are gone and for which they will receive no thanks while they remain. Almost nothing in political life rewards this. The incentive is to spend capital on the building, where the credit is, not on the locks, where the credit is not. The leader who gets this right is, by the standard of their own career, behaving irrationally.

The strongman wears the same costume

Now the danger, stated plainly, because the proposal is one short step from something ugly and the step must be refused out loud.

Everything said so far can be spoken by a tyrant. “I am hated because I am right.” “The people cannot see the benefits yet.” “History will vindicate me.” “Weak leaders flinch; I will hold the line.” These are not the words of the reformer we have been describing. They are the words of every authoritarian who ever justified the accumulation of unaccountable power, and they are, word for word, indistinguishable from the reformer’s own. There is no rhetorical test that separates the two. Both ask for patience. Both promise vindication after their tenure. Both are hated now and both insist the hatred is the proof. The strongman and the gardener give the same speech.

This is the heart of the second objection, the one that comes from a different direction, that this is simply a vindication of the hard man, the decisive leader who ignores the crowd and forces through what he knows to be right. The answer is that it is the opposite, and the reason it is the opposite is the only thing that distinguishes the two figures at all. It is not their words, their conviction, or their suffering, all of which they share. It is the plumbing.

The genuine reformer builds constraints that bind themselves. The strongman accumulates discretion that frees himself. The reformer legislates the automatic escalator so that even they cannot soften it later, and hands power to an institution they cannot subsequently command. The strongman takes emergency powers, suspends the inconvenient procedure, and explains that the gravity of the moment requires that his own hands be untied rather than bound. Same justification, opposite mechanism. One is trying to make the reform survive without them. The other is trying to make himself indispensable to it. Watch the hands, not the mouth. The reformer is the one walking out of office weaker than they entered, having given their power away into structures. The strongman is the one who has more power at the end than at the beginning, and a reason for all of it.

This is why the structural test is not a footnote but the spine of the whole argument. Strip it out and what remains really is strongman apologetics with a better vocabulary. With it, the position is precise, a democracy may bind itself, and the leader who binds the state including themselves is doing something categorically different from the leader who frees themselves to act. The test is hard to apply in the moment, which is a real limitation we will not pretend away. But it is the only test there is, and in retrospect it is decisive.

The public is not stupid

There remains the most tempting misreading of all, and it is the one this essay most wants to refuse. It would be easy to conclude that the problem is the public: that voters are short-sighted, that they demand visible action and instant results, that they cannot be trusted to leave a wise leader alone long enough to do the slow work, and that the tragedy is the tragedy of brilliance thwarted by a foolish crowd.

This is wrong, and it is wrong in a way that matters, because the public’s behaviour is not foolish. It is rational.

Recall the structural test from the previous section. The genuine reformer and the strongman are indistinguishable in real time; only the plumbing tells them apart, and the plumbing is technical, slow to reveal itself, and easy to obscure. Now add the base rate. For every leader who is hated because they are right and slow and building something real, there are many who are hated because they are simply wrong, or vain, or destructive, and who reach for the identical script of misunderstood vindication to explain away their unpopularity. The misunderstood visionary is real but rare. The person who merely claims to be one is common. And there is no reliable test, available to a voter in the present, that distinguishes them, because they present identically and the distinguishing feature reveals itself only over the horizon the voter is being asked to wait through.

Under those conditions, skepticism is not stupidity. It is a sound heuristic. A public that demanded patience and trust from every leader who claimed to need it would be fleeced constantly, because the claim is cheap and the script is universal. A public that withholds its trust, that demands visible evidence, that treats “wait and you will see” as the warning sign it usually is, will be wrong about the occasional genuine reformer and right about the many imitations. That is not a failure of the demos. It is the demos doing the only sensible thing available to it given the information it has.

So the tragedy is symmetric, and this is the shape of it. It is not a wise leader undone by a foolish crowd. It is that the correct reform is forced to wear the same face as a hundred incorrect ones, and the crowd is reasonable to distrust the face. The leader who is right cannot prove they are right, because the proof lies past the end of their tenure, and the only people who could be asked to take it on faith are precisely the people who would be exploited if they took such things on faith. Neither side is the villain. The information structure is the villain, and information structures do not photograph well, which is part of why this is so rarely understood.

It is worth being honest about how far the proposed solution goes, because it does not go all the way. Precommitment in a democracy is always soft. A successor can repeal a statute; locks slow defection, they do not prevent it. The central bank precedent itself is more contested than its normalisation suggests, sharpened by the financial crisis and again by the inflation that followed the pandemic, and the objection that unelected institutions wield power with real and uneven distributional consequences is not answered by pointing out that the arrangement is popular. Extending precommitment from monetary policy, where a single clean mandate is plausible, to the overtly distributional terrain of structural reform is harder, not easier, and anyone who claims otherwise is selling something. The proposal buys the reformer time and raises the cost of the flinch. It does not deliver permanence, and it should not be sold as if it did.

The diagnostician’s only act

Which returns us, by a longer road than expected, to the leader we began with, and to the discouraging precision of the answer.

We can now specify the figure exactly. They need a large majority, not to force the reform through against opposition, but to buy time against their own side, to absorb the loss of the nervous third of their party when the polling collapses and still hold the line. They need the temperament to be hated for a full cycle without flinching at the year-two trough. They need the self-effacement to spend their peak capital on locks rather than on the building, legislating machinery that will outlast them and earn them nothing. They need to bind themselves so visibly and so structurally that no one can mistake them for the strongman whose every word they share. They need to do all of this while the public, rationally, distrusts them, and while no available evidence can vindicate them inside the window in which they hold office.

The specification is complete. It is also a specification of a person the political configuration is built not to produce. The same arithmetic that tells us what such a leader would have to do tells us why the system rewards the alternatives instead, the strongman who forces the reform and breaks the mechanism, or the softener who eases the gradient and is caught halfway, with the costs incurred and the benefits forfeited. The configuration wants a strongman. The reform needs a gardener. And at the moment of choosing, the two are indistinguishable, which means the configuration will reliably choose the one it can recognise, which is the wrong one.

This is the part the diagnostician finds it hardest to say, because it implicates the act of diagnosis itself. To write all of this down, carefully, is to demonstrate that the cure was never the difficult thing to identify. The mechanism is legible. The repair is specifiable. The sequence is designable, the locks are buildable, the precedent exists and is honoured. None of that was ever the obstacle. The obstacle is that the configuration which could deliver the cure requires a leader to win a majority in order to spend it making themselves unnecessary, to court the country’s hatred in proportion to their success, and to be unprovable in their own lifetime, and the political market does not select for that and cannot be made to.

Naming the leader who could hold the line is not the same as the line being held. The writing-down changes nothing about the configuration, it only describes it accurately, which is the one thing the diagnostician is actually able to do.

There is a temptation, at the end of an argument like this, to reach for a note of hope, some account of how the gardener might yet be found. The honest version withholds it. The gardener is not found. The gardener is described, in full and correct detail, by someone who can see precisely why the description will not be filled. That is not despair. It is the exact shape of the gap between knowing what to do and its being done, and mapping that gap with precision is the whole of what a diagnosis can offer. The cure was always the easy part. Knowing that is the hard part, and it is the only part the diagnostician gets to keep.

Subscribe now

Share

The Black Hole

Suppose a government wanted to do one thing. Not a clever thing; one thing. Raise GDP in the most British way. Never mind productivity, never mind wages, never mind whether a single person is better off by Friday than they were on Monday. Just the number. The headline. The figure that goes into the speech, onto the front page, and up the international league table.

Here is the recipe. The first ingredient is the important one, so hold onto it, you build nothing. Building is slow, expensive, and it irritates people who already own. So no new homes. Not one! Instead you reach for the levers that move the number without moving a single brick, and you pull them all at the same time…

Subscribe now

Share

Lever one: lend against everything

You raise the maximum mortgage to ninety-nine point nine nine percent of the price. Effectively no deposit. Then you let the banks hold almost nothing against the loans; you set the risk weight on a mortgage to zero and quietly step outside the international rulebook that says otherwise. Credit is now free to create and cheap to hold, and it has exactly one place to go.

If this sounds invented, it is the shape of something we actually ran. For most of the last decade the state took a stake of up to twenty percent in a new-build home, forty percent in London, so that a buyer with a five percent deposit could borrow the rest and stand in the market as though the whole thing were already theirs. When economists went looking for what the money had done, the answer was unkind. In London and the other places where you cannot easily build, the scheme raised the price of new-build homes by more than the value of the subsidy itself, and produced no measurable extra construction; only in the cheaper, easier-to-build areas did it lift building at all. The gains, where there were gains, went to developer margins and to the people who owned the land. The buyers it was named for were handed a slightly larger loan and a slightly higher price. The trick is not hypothetical. We have the receipt.

Not to worry. The market is working.

Lever two: one house left to rent

Now everyone buys. With unlimited credit and no deposit, the entire stock is bid for and bought, until there is a single dwelling left for rent in the whole country. One. And its landlord, being the only landlord, charges what the last desperate tenant can bear. Call it ten thousand pounds a month.

This too is only the present with the volume turned up. Since 2008 the average UK private rents have risen 106% , median wages however have grown 60%, Inflation over the period grew 73.2%. The average private renter in England now spends about a third of their income on rent, in London it is closer to half. The people paying are squeezed to the line, and past it. The official answer is that this is simply the price the market has set, freely, and who are we to argue with a free market.

The next part is where the magic happens, so read it slowly. A large share of what we call GDP is a number nobody is ever paid, the rent homeowners are imagined to pay themselves for the privilege of living in their own houses. It is called imputed rent, and it is enormous. In 2021 the rent that British tenants actually handed over came to about £87 billion. The rent that homeowners were imagined to pay themselves came to £231 billion; getting on for three times larger, and not a penny of it real. That single invented line is roughly a tenth of the entire economy. As one economist put it, about a tenth of GDP is simply made up, in the plain sense that it does not exist in the real world.

How does the statistician decide what homeowners “pay” themselves? He looks at what real tenants pay for similar homes, and applies it across the lot.

So look what we have done. There is one tenant. He pays ten thousand a month. The statistician, doing his job exactly as written, takes that figure and applies it to every owner-occupied house in the land. Thirty million dwellings, times ten thousand a month, times twelve. The imputed rent line alone now comes to several trillion pounds. On its own it is larger than the entire economy was last year. Add the banks, whose balance sheets have swollen to the size of the housing stock and whose measured output rises mechanically with the lending, and the naive statistician sits down, checks his sums, and announces that British GDP is six point one trillion pounds. At least.

Nothing has been built. Nobody is better housed. But on paper, overnight, we doubled the economy.

A triumph. The figures speak for themselves.

Turn it up to 11

Push the dial all the way, purely as the cartoon limit; nobody is proposing this, it is the extreme that makes the mechanism visible. In the cartoon, every spare pound in the country is sucked into the asset the moment it is earned, because nothing else pays. Investment in anything that makes things dries up. The factories, starved of capital and customers, go quiet and then go cold. Unemployment, in the extreme, climbs hard, because the only booming sector is the one that produces no jobs and no goods, only prices.

And the official line never wavers, because the official line is reading the only instrument on the dashboard, and the instrument says up.

“Industry is restructuring. The housing market remains strong.”

The average house passes two million pounds. Bank balance sheets go to the moon. The broad money supply, M4, becomes a figure with too many digits to say aloud. By the headline measure of wealth, the British are now, on average, the richest people who have ever lived, by a margin that embarrasses every other nation on the chart.

The Financial Times runs the cover story on the “British economic miracle”, and we read it over breakfast and laugh, as one nation, at the poor foolish Germans and their grubby factory floors and their dull little engineering firms. Imagine still making things. They build the Mercedes, we simply buy them, with money borrowed against the spare bedroom. Who, honestly, is the clever one here?!

The eyes of the world are upon us, and they like what they see…

Lever three: let the money in

Foreign investors study the one asset on earth that has only ever gone up, and conclude, not unreasonably, that British property is the safest bet in the world. The money arrives by the container load. Sovereign wealth funds, pension giants, anyone with a balance sheet and a pulse, all of it routed into the last few square feet of British soil still nominally for sale.

A man near Scunthorpe owns an acre. It used to be a caravan park. He wakes one morning to a diplomatic delegation from Kuwait on his doorstep, in good suits, using the phrase “strategic investment.” They offer him one billion pounds for the field. He pauses, mostly out of politeness, and accepts. The national accounts record the transaction without comment. The number ticks up again.

“Inward investment at record levels. A vote of confidence in Britain.”

Every household is a paper millionaire.

Every household has about five pounds left on a Monzo card.

Then someone misses a mortgage payment.

If this sounds ridiculous, you are now seeing what I am seeing. A nonsense economy, fuelled by shenanigans, perpetuated by credit, sustained only by an unwavering belief that it was all as safe as houses.

Subscribe now

Share

Notes on the figures. The £87 billion of actual rent and £231 billion of imputed rent are the 2021 UK numbers (Richard Murphy, Tax Research UK, 14 February 2023, “10% of GDP is made up: it simply does not exist in the real world”); the imputed line had risen to roughly £275 billion by 2024 on the same source. The decade-long equity-loan scheme described in the past tense is Help to Buy, which ran from 2013 and closed to new applications on 31 October 2022 in England; buyers put down 5%, the state took a 20% equity stake (40% in London), and the buyer carried the rest on a mortgage. The finding that the money capitalised into prices rather than supply is from Carozzi, Hilber and Yu: in supply-constrained Greater London the scheme raised prices by more than the value of the subsidy itself and produced no measurable extra construction; only in less-constrained areas did it lift building. The UK dwelling stock is roughly 30 million. The £6.1 trillion is not a forecast; it is the deliberately naive arithmetic the thought experiment hands to a statistician applying one tenant’s rent across the whole stock, and is presented as such. Everything past the caravan park is, obviously, the cartoon limit and not a claim about Tuesday.

Every few weeks Britain has the same argument. One side says there are too many migrants. The other says migrants are blamed for problems they did not create. The argument fills newspapers, television studios, Parliament and most of the internet. Governments promise to bring the numbers down. Campaigners argue for treating people more humanely. Everyone…

Read more

A rentier economy in its late phase, left to itself, eats its own productive capacity.

The mechanism is by now familiar to anyone who has spent any time in my substack or TikTok. Capital concentrates in a class of asset with structurally inelastic supply: land, housing, infrastructure rights, the urban-development rents that follow them. The asset’s retu…

Read more

The Inventory

A young woman in Manchester pays her rent through OnlyFans. She is twenty-four, has a 2:1 in English from a respectable university, and earns more in a quiet month than her father did as a deputy headmaster. She finds the work tedious rather than traumatic, which is, in its own way, the worst part.

A young man in Bolton has not left his bedroom, except for cigarettes and the occasional GP appointment, in fourteen months. He plays a game on his phone in which he opens digital boxes that may or may not contain rare digital cards. He spent £340 on this game last month. He does not consider himself a gambler.

A thirty-one-year-old software engineer in Zürich, on a salary that would have bought his parents a four-bedroom house, lives in a shared flat with two strangers and takes a small amount of cocaine on Friday evenings. He is saving, in theory, for a deposit. He has been saving, in theory, for a deposit for eight years. The deposit required has, over the same period, risen faster than his savings.

A woman in Tokyo, thirty-seven, single, working as a department-store cosmetics consultant, has chosen (the word is doing some work here) not to marry and not to have children. She lives with her mother. Her mother lives with her mother. None of the three women own the flat they share.

A man in Shenzhen has decided to lie down. Tang ping, they call it. He works the minimum hours required to feed himself, refuses promotions, refuses to date, refuses to acquire anything. The state has identified him, and the several million who think as he does, as a threat to social harmony. He has identified the state as a threat to his time.

A teenager in Ohio has lost $11,000 on sports betting in eight months. He is nineteen. He has not yet lost more than this because he has not yet had more than this. He will, soon enough, have more, and then he will lose more. He believes, with the unfalsifiable conviction of the truly devout, that his system is almost working.

You have noticed these people. Everyone has noticed these people. They are the texture of contemporary life. They have, collectively, become the favourite subject of a particular kind of newspaper column, the kind that asks, in a tone of bewildered sorrow, or studied outrage, or sometimes both at once: what has happened to us?

The answer, dear reader, is mathematics.

Subscribe now

Share

A Brief Defence of the Word “Degeneracy”

I am going to use the word “degeneracy” throughout this essay, and I should explain why, because the word has a history, most of it unflattering and some of it murderous, and a reasonable person might prefer I use something else.

I am using it because it is the word the other side uses. It is the word your aunt uses when she shares the Telegraph column on Facebook. It is the word the silver-haired commentator uses on GB News between segments on the cost of fuel and the wickedness of cyclists. It is the word that floats, untethered to any particular speaker, around every dinner party at which someone over fifty-five surveys the world and finds it wanting.

The word is doing real work in our culture. It is the word that links, under a single moral category, every behaviour I described in the inventory above. The OnlyFans worker, the gacha addict, the cocaine-fuelled software engineer, the celibate office worker, the lying-flat refusenik, the teenage gambler. The word groups them. The word explains them. The word implicitly assigns them blame, and implicitly absolves the speaker of the obligation to look any further.

The word is wrong. But it is not stupid. It is grasping at a real pattern. Something is happening, something is unmistakably happening, and a person who has lived long enough to remember the world before the something can be forgiven for reaching for a word, any word, to name it.

My argument is that they have the pattern right and the cause wrong. My argument is that the behaviours they group together as “degeneracy” are indeed linked, and indeed share a common cause, and the common cause is not, as they suppose, a moral failure of the young, or the death of God, or the rise of TikTok, or the decline of marriage, or the welfare state, or the schools, or feminism, or the internet, or any of the other usual culprits.

The common cause is that the productive game stopped paying, and the people in question have correctly noticed.

This essay is about why. It is also, secondarily, about why the people who are most appalled by the behaviour are also, structurally, the people who caused it, and why their appalled-ness is itself a load-bearing element of the system that produced what appals them.

I am calling the phenomenon Conspicuous Despair, with apologies to Thorstein Veblen, who is not in a position to object.

Veblen, Inverted

Thorstein Veblen, writing in 1899, observed that the rich do not consume in order to live. They consume in order to be seen. His Theory of the Leisure Class is the founding document of what we now call status economics, and its central insight is that the consumption of the wealthy is conspicuously wasteful on purpose. The waste is the point. A useful expenditure could, in principle, be matched by anyone with sufficient income. A useless expenditure (a yacht that sits in harbour, a watch that tells the time no better than a £20 Casio, a horse that exists to be photographed beside) signals not merely wealth but wealth’s freedom from utility. The leisure class signals its position through the visible expenditure of resources on nothing.

This is a famous argument and you have heard it before. I bring it up because I want to point out the symmetry no one talks about.

If the leisure class signals its position by visible expenditure on nothing, by the conspicuous enactment of having transcended productive work, then what does the excluded class do? What does the class signal when it has also transcended productive work, but in the opposite direction: not by rising above it but by being shut out of it?

It signals through Conspicuous Despair. It enacts, visibly and publicly, its exclusion from the productive game. It does the things that would be unthinkable for a person with a stake in the future, because it has no stake in the future. The OnlyFans account, the sports-betting app, the ketamine on Tuesday, the bedroom one does not leave: these are not, primarily, hedonism. They are legible refusals. They are the way the propertyless class makes its position visible to itself and to others. They are the bottom-up mirror of the yacht.

Veblen’s leisure class wastes resources to prove it has more than it needs. The despairing class wastes itself to prove it has less than it requires.

The two phenomena are not coincidentally simultaneous. They are the same phenomenon viewed from opposite ends of the wealth distribution. A society in which both are flourishing is a society in which the productive middle has been hollowed out, and what remains at either end is the public performance of disengagement from production: gilded at the top, soiled at the bottom, structurally identical in the middle.

This, incidentally, is why every era of conspicuous luxury in human history has coincided with an era of conspicuous degradation at the bottom. Late Republican Rome had its Lucullan banquets and its bread doles, its Crassus and its Catiline. Late Qing China had its Summer Palace and its opium dens. The Belle Époque had its Faubourg Saint-Honoré and its absinthe. The Roaring Twenties had Gatsby and the Bowery. The eras rhyme because the dynamic rhymes. When a small class consolidates rents to a degree that excludes a large class from the productive economy, both classes stop producing, and both classes start performing.

We are in such an era. Everyone knows this. The disagreement is about who is performing what, and why.

Minsky, Applied to People

Hyman Minsky was an economist whose name is invoked, these days, mostly in financial-crisis post-mortems. His framework was developed to describe the behaviour of firms and banks across a credit cycle, and it goes like this. There are three stages.

In the hedge stage, the borrower’s cash flows cover both interest and principal. Loans are conservative, debts are serviced, the system is stable. In the speculative stage, cash flows cover interest but not principal; debts must be rolled over rather than repaid, but the system is still functional so long as credit remains available. In the Ponzi stage, cash flows do not even cover interest; the borrower can only service debt by taking on more debt, or by selling assets into a rising market. Ponzi finance is sustainable only as long as the music plays. When it stops, at the famous Minsky Moment, the structure collapses.

Minsky was talking about balance sheets. I want to talk about households, and about lives.

Consider what it means to be a young adult in a developed economy, and consider it across the same three stages.

In the hedge stage of being alive (call it 1955 to roughly 1975 in the Anglosphere), a median wage covers the median life. You leave school, you get a job, you find a partner, you buy a house at three or four times your annual income, you have children, you save into a pension that your employer co-funds, and at the end you retire on something approaching your final salary. Cash flows cover principal. The future is, in the literal financial sense, affordable. The system is hedge-financed at the household level.

In the speculative stage (call it 1980 to roughly 2008), wages cover the running costs of a life but not the accumulation of the assets a life requires. You can pay your rent but you cannot accumulate a deposit at the rate house prices are rising. You can service your student loans but you cannot retire them. You take on more debt to bridge the gap. You roll your overdraft. You buy your house with a 95% mortgage at six times income because there is no other way to buy it. The system is functional so long as credit remains available and asset prices keep rising. You are speculatively financed. You are, in Minsky’s terms, depending on the music continuing.

In the Ponzi stage (call it now), wages do not cover even the running costs of the life that previous generations defined as normal. The deposit is unreachable; the family is unaffordable; the retirement is fictional; the career path that was supposed to deliver these things has been replaced by a sequence of contracts. The only way to access the reference standard of living is to acquire assets that rise faster than wages, which means either inheriting them, marrying them, or speculating into them. Productive labour, in the Ponzi stage, is a losing strategy by construction. You cannot save your way to the life your parents had, because the life your parents had is now priced in a currency (asset wealth) that wages do not convert into.

What does a rational agent do in the Ponzi stage?

She does not work harder at the losing strategy. That would be irrational. She pivots to strategies with the property that their upside actually reaches the reference threshold, even if their expected value is poor. She buys lottery tickets, metaphorical and literal. She speculates on crypto. She gambles on football. She starts an OnlyFans. She day-trades. She marries for money. She sells her eggs. She joins a multi-level marketing scheme. She bets her redundancy on a single hand at the roulette wheel of life because the steady strategy has a known terminal value below the threshold she needs to clear.

Or she does the opposite. She lies flat. She withdraws. She refuses to play a game she has correctly identified as unwinnable. She becomes a hikikomori in Tokyo, a tang ping refusenik in Shenzhen, a NEET in Manchester, a deaths-of-despair statistic in Ohio. Both responses, the manic and the depressive, the gambling and the giving up, are rational responses to the same underlying condition. They are the two ways a rational agent expresses the recognition that the productive game no longer pays.

This is the Ponzi stage of being alive. It is what your aunt calls degeneracy. It is what the framework calls mathematics.

The View From Shenzhen

The Anglo-American reader is in a poor position to see this clearly, because the Anglo-American culture war has loaded every relevant observation with a moralising charge. To see the structure cleanly, it helps to look at societies where the same mechanism is producing the same outcomes without the Anglo-American cultural overlay.

China is the cleanest case. In 2021, a young man named Luo Huazhong posted a manifesto on Baidu titled “Lying Flat Is Justice.” He had quit his job. He was living on minimal savings, eating two meals a day, doing nothing in particular. He argued that the productive demands of contemporary Chinese life (the 996 work culture, the impossible urban property market, the marriage market that demanded a flat in a tier-1 city as the price of entry, the parental expectations stacked on top of all of this) were not worth meeting. The rational response was to opt out. Tang ping. Lie flat.

The post went viral in a way that Chinese state media found alarming. Within weeks, the term had been censored, the discussion suppressed, and a Party line developed: lying flat was selfish, decadent, an abdication of social responsibility. The Global Times ran editorials. Xi Jinping made speeches about the importance of struggle. The young, it was suggested, had been spoiled by prosperity and seduced by Western influence into a lassitude unbecoming of the Chinese nation.

This explanation is interesting because it is structurally identical to the explanation a Telegraph columnist would offer for a British twenty-five-year-old who refused to take an unpaid internship in London. The cultural specifics differ; the diagnostic move is the same. The young have a character problem. The young are insufficiently struggling. The young need to be exhorted to virtue.

But the Chinese case strips away the cultural overlay and reveals the structure. Tang ping is not a Western import. China has no permissive sexual culture, no decadent welfare state, no woke universities, no TikTok-mediated nihilism imported from Brooklyn. China has, instead, a property market in which a flat in Shenzhen costs forty times the median annual salary, a marriage market in which men without flats are functionally unmarriageable, a work culture that demands twelve-hour days six days a week, and a one-child generation now expected to support four grandparents on its lone shoulders. The structural pressure is brutal and the behavioural response, lying down, is rational.

Japan made the same discovery thirty years earlier. The hikikomori phenomenon (young men, predominantly, who withdraw from social life entirely, sometimes for decades) emerged in the 1990s, after Japan’s asset bubble burst and the lifetime employment compact dissolved. The cultural commentary at the time, both Japanese and Western, framed it as a peculiarly Japanese pathology, something about shame and conformity and the pressure-cooker school system. This was wrong. It was a structural response to the closure of the productive ladder, and it has now appeared in every developed economy that has reproduced the same structural conditions.

Korea has produced its own variant: the sampo generation, then the opo generation, then the N-po generation, each successive label naming a longer list of the things young Koreans have given up: relationships, marriage, children, home ownership, careers, hope. The progression tracks, with eerie precision, the progressive unaffordability of the Korean reference standard of living.

The convergence across cultures is the evidence. East Asian Confucian-collectivist societies and Anglo-American liberal-individualist societies, with diametrically opposed cultural priors, are producing behaviourally convergent responses to structurally identical pressures. This is not a culture story. The culture story cannot explain the convergence. Only the structure story can.

The structure story is: when the productive game stops paying, agents stop playing it. They either pivot to lottery strategies or they withdraw entirely. The cultural particulars determine the form of the response (gacha gambling in Japan, sports betting in Britain, crypto in America, lying flat in China, OnlyFans in the Anglophone West, the manosphere everywhere) but the fact of the response is structural. It is what people do when they have correctly read the odds.

The Scapegoat

We come now to the most important part of the argument, which is also the most uncomfortable, because it implicates the reader (implicates, perhaps, the writer) in a structure of complicity that is easier to ignore than to confront.

Every late rentier society in history has responded to the behaviours of Conspicuous Despair in the same way: by locating their cause in the character of the despairing, rather than the structure that despairs them. This is not a coincidence. It is, structurally, the only available move for the propertied class, because the alternative explanations implicate the propertied class itself.

Late Republican Rome blamed the moral softness of the urban plebs while the latifundia consolidated the agricultural smallholdings that had been the basis of the Roman citizen-soldier. Tiberius Gracchus, who tried to point this out, was beaten to death with the legs of broken benches by his fellow senators. His brother Gaius, who tried again a decade later, was hunted down and killed on the Aventine. The senatorial class understood, with the clarity that self-interest provides, that the diagnosis was the problem, not the disease. To name the cause was to threaten the structure.

Late Qing China blamed the opium-smoking peasantry for the dynasty’s military weakness, while the gentry-bureaucratic class extracted ever-larger rents from the agricultural surplus, the imperial examination system calcified into a closed shop, and the Qing court spent the indemnity from the First Sino-Japanese War on the Empress Dowager’s Summer Palace.

Weimar Germany blamed the cabaret, the Jews, the cosmopolitans, the homosexuals, the modernists, anyone whose visible behaviour could be coded as cultural decadence, while the Junker landlords retained their estates, the industrial cartels reconsolidated their position, and the hyperinflation that wiped out the bourgeois middle class was followed by a deflation that wiped out what remained. The eventual political response targeted the visible decadents, not the structural rentiers, and the result was the catastrophe everyone knows.

The contemporary version of this move is the daily content of the British and American culture war. The behaviours of Conspicuous Despair (the OnlyFans, the gambling, the substance use, the failure to marry, the failure to reproduce, the failure to strive) are presented as the causes of decline, when they are in fact the symptoms. The cause is the rentier capture of the assets that constitute the reference standard of living: housing, principally, but also education, healthcare, and the credentialled pathways to professional employment.

This misattribution is not, in most cases, conscious. The Telegraph columnist who writes that the young are insufficiently resilient is not, I imagine, deliberately concealing the role of the planning system in his readership’s housing wealth. He is operating within an ideological framework in which his readership’s housing wealth is simply a fact of the world, like gravity or the weather, and the only remaining variable available to explain the behavioural patterns he observes is the character of the people exhibiting them. This is what Mark Fisher called capitalist realism: the structural causes have become invisible, and so only personal causes remain available for description. Every systemic problem is re-described as a personal failing because the system itself has dropped out of cognition.

The migration debate is the cleanest contemporary parallel. Migrants do not cause housing scarcity; planning regimes, land banking, and the financialisation of housing cause housing scarcity. But migration is visible, individuals are identifiable, and the structural causes are abstract and politically untouchable. So the visible symptom is named as the cause, the abstract cause goes unnamed, and the resulting policy debate is conducted entirely within a frame that cannot, by construction, fix the underlying problem. The “degeneracy” debate is the same move. The young are visible. The behaviours are identifiable. The structural causes are abstract and implicate the readership’s own balance sheet. So the symptom is named as the cause.

This is the rentier class’s most reliable rhetorical move, and it has worked, with minor variations, for every rentier class in recorded history. It works because it is useful. It works because it directs political energy at the powerless rather than the powerful. It works because the alternative, admitting that the structure is the cause, would require the propertied class to give up rents it does not wish to give up.

It is, in short, a cop-out. It is the same intellectual move as blaming the migrants. It is what a society does when it cannot bear to look at what is actually happening to it.

What This Essay Is Not

I should pause here to say some things this essay is not arguing, because the argument is incendiary enough that careless readers will assume the worst version of it.

I am not arguing that problem gambling is harmless. Problem gambling destroys lives, families, and futures, and the British state’s regulatory capture by the gambling industry (the shirts, the adverts, the apps, the in-play markets) is a national disgrace.

I am not arguing that OnlyFans is liberating. The OnlyFans economy is brutally unequal, exploitative at the median, and produces long-tail psychological consequences that the platform has every incentive to obscure.

I am not arguing that drug use is fine, that nihilism is healthy, that lying in bed for fourteen months is a defensible life strategy, or that the manosphere is a misunderstood social movement. The behaviours of Conspicuous Despair are, in many cases, genuinely corrosive. The despairing class is not having a good time. That is, after all, the point.

What I am arguing is that moralising about these behaviours while preserving the structure that produces them is either stupid or dishonest, and usually both. The behaviours are symptoms. The symptoms are bad. Addressing the symptoms without addressing the disease is what doctors call palliative care, and it is what a serious civilisation reserves for conditions it has given up on curing.

We have not given up on curing this condition. We have merely been told, by people who benefit from the condition, that the condition is incurable, or that it is not a condition at all, or that it is a condition of the patient’s own making. None of these claims is true. The condition is structural. The structure is the rentier capture of the assets that constitute a viable life. The cure is to break the capture.

The Minsky Moment, Politically

Minsky’s framework, applied to balance sheets, predicts that the Ponzi stage ends in a crash. The music stops; the assets cannot be sold into a rising market because the market is no longer rising; the cash flows that never covered the debts now cannot even pretend to; and the structure collapses.

Applied to households and to lives, the framework predicts something slightly different. The household sector does not, exactly, collapse; people continue to exist, to eat, to sleep, to move through their days. What collapses is not the household itself but its consent to the system that produced its position. The Ponzi stage of being alive ends, politically, in a withdrawal of legitimacy.

This is what every late rentier society eventually produces, and it is the part of the cycle we are, I think, now entering. The behaviours of Conspicuous Despair are not, in themselves, politically dangerous. A generation that gambles, fornicates, takes drugs, refuses to marry, and lies in bed is not, by virtue of these activities, going to overthrow anything. The political danger comes at the next step, when the behavioural recognition that the game is rigged becomes a political recognition that the game is rigged, and the political recognition organises itself into a demand that the game be changed.

This is what the Gracchi were, in Rome. It is what the radical Reformation was, in Northern Europe. It is what 1848 was, what 1917 was, what the various inter-war movements were. It is what populism, in its current Anglo-American forms, is: an inchoate, ill-directed, frequently malignant version of the same recognition. The populist instinct that the system is rigged is, in its raw form, correct. The populist instinct’s diagnosis of who has rigged it (usually some combination of migrants, minorities, and cultural elites) is wrong, in the specific and load-bearing way that all rentier-protective ideologies are wrong: it names the visible rather than the structural, the powerless rather than the powerful.

But the instinct is correct. And the instinct, even when wrongly diagnosed, eventually finds its target. Every rentier class in history has, at some point, discovered this. The discovery is generally unpleasant for the rentier class.

The question facing developed societies now is whether the recognition can be channelled into a structural reform (a meaningful redistribution of the assets that constitute a viable life, principally through some combination of land value taxation, planning liberalisation, asset recycling, and the dismantling of the credentialled rentier professions) or whether it will be channelled, as it has been so many times before, into a scapegoating politics that protects the rentiers by directing the recognition at someone else.

The honest answer is that both are possible, that the second is more likely on current trajectories, and that the first is the only one that addresses the underlying condition.

Coda: The View From Below

I want to end with the observation that the people doing the behaviours I have described are not stupid. They are not depraved. They are not lazy. They are not, in any meaningful sense, worse than their grandparents were.

They are reading the odds.

The OnlyFans worker in Manchester has correctly identified that her degree, in the labour market she actually faces, is worth less than her capacity to sell access to herself online. The teenage gambler in Ohio has correctly identified that the expected value of his wage labour, compounded across his working life, will not deliver the standard of living his parents had, and that only a sequence of high-variance bets has any chance, however slim, of closing the gap. The lying-flat refusenik in Shenzhen has correctly identified that the marginal hour of additional labour, given the rate at which Shenzhen property prices outpace Shenzhen wages, has a negative expected return on his happiness, his time, and his future. The hikikomori in Tokyo has correctly identified that the social roles available to him are not worth the price of admission.

These are not moral failures. These are not character defects. These are correct calculations, performed by ordinary people, about the structure of incentives they actually face. The fact that the calculations produce behaviours their grandparents find appalling is not evidence that the calculators are appalling. It is evidence that the structure has changed.

Your grandparents lived in a hedge-financed world. They could afford to be virtuous, in the conventional sense, because virtue paid. The young live in a Ponzi-financed world. They cannot afford to be virtuous in the conventional sense, because virtue does not pay, and the only strategies that have any chance of clearing the threshold their grandparents took for granted are strategies their grandparents would not recognise as strategies at all.

When your grandparents look at the young and see degeneracy, what they are seeing is the behavioural footprint of a structural condition they have not yet learned to see. The behaviours are real. The condition is real. The connection between the two is real. What is not real is the moral framing that lets the older generation blame the younger one for the consequences of a system the older generation, in most cases unwittingly, built and benefited from.

Degeneracy is a symptom. The disease is rent.

We will not cure the symptom by moralising at it. We will cure it, if we cure it at all, by curing the disease.

The alternative is that we continue, in the manner of every rentier civilisation before us, to perform our Conspicuous Despair until the Minsky Moment arrives, and then we will find out, as Rome found out, as the Qing found out, as Weimar found out, what the politics of structural recognition looks like, when it finally arrives, no longer asking but demanding.

I would rather we got to it before that. But that, I suppose, is what every essay like this one has ever said.

The Rentier Blackhole - a social singularity of guaranteed depravity

For more depressing content that accurately diagnoses the gaps in our current understanding of Economics, come along for the all to grim ride.

I will eventually give you some small hope, in the form of the most hilarious patch to this problem which weirdly fixes capitalism back to the purist intentions of Adam Smith and David Ricardo, including why if Marx was alive today, he wouldn’t start a revolution, he would start a long vol long property - short banks cyclical macro strategy hedge fund….no really.

Subscribe now

Share

Black holes do not consume matter quietly. When a star or a gas cloud falls into one, the material spirals inward through a disc, flattened, compressed, accelerated. The infalling matter superheats. Friction inside the disc produces radiation so intense that the regions immediately around the black hole, including the accretion disc and the relativistic…

Read more

Part I: The Puzzle

The efficient markets hypothesis works on every asset class except one. This is a piece about the exception, and what happens when an economy lets it run.

Consider a set of observations that should not be possible simultaneously. British capital is, by international standards, expensive. Sterling borrowing costs sit comfortably above th…

Read more

The Real Median Saver

Sarah is thirty. She lives in the South East of England. She earns close to the national median, rents a flat with her partner, and has been saving for a deposit for three years. She has ten thousand pounds put away. She puts four hundred more in every month. The home she wants a median first-time-buyer property for the region, cost…

Read more