The Inflation Reduction Act: Climate 'Reparations' and the Race to Debase

“In CBO’s projections, the deficit equals 5.8 percent of gross domestic product (GDP) in 2023, declines to 5.0 percent by 2027, and then grows in every year, reaching 10.0 percent of GDP in 2053.”

 US Congressional Budget Office, June 2023

Introduction

2023 marks a century since the Weimar Republic – as well as the monetary system on which it was based – collapsed, marking the end of a brutal period of hyperinflation and corresponding socio-economic dislocation.

The inflation was a consequence of the debasement of the existing currency – the Papiermark - which was introduced in 1914 to replace the gold mark (which in contrast reflected the sound money of the 19^th century). 

By the end of 1923 the Papiermark was worth 1 trillionth of its pre-war value (when measured against the US dollar).

As Adam Ferguson describes in his famous book When Money Dies, the root cause of the debasement was the attempt by the German government to keep the economy stimulated in order to fund the reparations which were imposed by the Allies at the end of the Great War.

Either way, on 15 November 1923 the Papiermark was officially replaced by the ‘Rentenmark’ (which subsequently morphed into the Deutschmark in 1948).

The Inflation Reduction Act

While ostensibly dubbed The Inflation Reduction Act, the US Government’s recent legislation is designed to both:

• Drive diffusion of renewable energy technologies

• While at the same time ‘onshoring’ related manufacturing, thereby reducing the current supply-chain dependence on China

While motivated as much by economics as ecology, it nonetheless comes at a time when the risk of climate change has made the jump from atmospheric models to the reality of socio-economic dislocation.

The irony of the program is that it will ultimately be inflationary because:

• It will contribute to the eye-watering deficits being recorded by the US Government

• It is classic fiat economic policy that will prevent the most economically efficient outcomes from emerging out of a free market based on a stable monetary system

A Monetary Analogy

Given the millions who died and the enormous damage that was done to the societies of France and its allies, the desire for reparations was understandable. 

But in terms of sound money there was a gap between what the German economy could realistically afford to pay, and the amount that was expected.

That the war also marked the beginning of the end of the gold standard (in order to fund the war efforts) only contributed to the hyperinflation that was to come.

A century apart there are echoes of 1923 in the IRA, which is an attempt to repay future generations for the damage that has been done to the environment as a consequence of the economic activity of the industrial age.

Conclusion

If the Inflation Reduction Act was the end of the story it would be of less import.

Instead it is just the tip of an iceberg that will emerge as the fiat monetary architecture collides with the need for rapid decarbonisation.

Had this process been started 40 years ago - when the alarm bells first started ringing - more economically efficient methods of abatement (such as a global carbon pricing mechanism) would have allowed for a smoother, longer-term transition.

(Just as the Allies might have received more of their reparations had Germany been allowed more time to repay).

But instead the process will trigger:

• Competition amongst countries for the scarce resources required for decarbonisation

• Funded to a large extent by currency debasement

While holding sound money will become even more important in this inflationary context, there can be no long-term advantage to Hodlers if we do not manage to put human civilisation on a more sustainable path.