The Inflation Reduction Act Is A Ruse With An Orwellian Name

Congress has passed the Inflation Reduction Act (IRA), a degraded version of the failed $4 trillion Build Back Better Act. According to Investopedia, the IRA authorizes $433 billion in new spending, but not to worry because it raises $725 billion in new revenues (taxes), for a profit (“deficit reduction”) of $292 billion. We can argue about the assumptions that produce these numbers, but there are more important considerations:

• Renaming the Build Back Better Act doesn’t change its purpose, which is to spend more money, albeit for debatably worthy causes. The ruse that spending reduces inflation is Orwellian doublespeak from a government that aspires to be totalitarian.
• $292 billion is chump change compared to the $16 trillion that has been printed in the past decade. A couple hundred $billion will not move the multi $trillion inflation needle in either direction.
• Midterm elections are on the horizon with the economy in shambles, so politics play a key role in spending that makes voters happy.

Since the amounts in question are trivial in relation to the spending that has occurred in the past decade, I’ll use the rest of this article to discuss the ramifications of profligate spending and will attempt to discredit its justifications. This can has been kicked to the end of the road.

The Beginning

It began in 2008 with a stock market crash accompanied by a recession. Congress decided to run an experiment that Japan had been running for years. Modern Monetary Theory (MMT) postulates that the owners of the money printing press can print all it wants, but it should stop when inflation roars.

MMT appeared to be a success. A recession was averted, and inflation was low, despite $5 trillion spent in Quantitative Easing (QE), much of it buoying up stock and bond prices. There has been asset price inflation, but that is not measured by the CPI.

The Middle

COVID brought another $6 trillion in spending. The US spent 25% of GDP, more than any other country, even Japan. So, $11 trillion so far — $5 for QE plus $6 for COVID.

No one questions this spending because it was simply required, but they should. No surprise, much of this $6 trillion was mis-spent on pork and fraudulent claims.

Now, the decade of the 2020s

Inflation is roaring at around 9%, fueled by both types of inflation. Current supply shortages and the Russian war create Demand-Pull inflation. This will subside as cargo ships are unloaded and people return to work. Maybe we’ll even return to energy independence someday.

Cost-Push inflation is the classic too many dollars chasing too few goods. This type of inflation will last a long time. Its taming requires taxes to suck excess money out of the economy. The Fed cannot control it; it is pretending.

But the spending hasn’t stopped. Infrastructure spending will reach $4 trillion and there’s another $ trillion in other spending to help Ukraine and other causes, so $16 trillion all in so far.

How money is printed

The printing presses are in fact a one-two partnership. First, the Treasury borrows money. In normal economic times there are plenty of buyers for these loans, but these are not normal times so the Federal Reserve buys Treasury bonds, swelling its balance sheet above $9 trillion. Make no mistake: bond prices are artificially high because they are being manipulated.

The $9 trillion is used for ZIRP, zero interest rate policy, which the Fed has said it will taper by allowing bonds to mature without replacement. Tapering is the unofficial interest rate raiser, in addition to official interest rate increases. Left unmanipulated bonds have historically yielded 3% above the rate of inflation, so 12% in a 9% inflationary environment.

Conclusion

MMT is an experiment of magnitude that has never been run before. Its endgame has been reached. Inflation is real and not transitory. What happens next will not be pretty and is not affected by the Inflation Reduction Act.