The next big thing: A Monetary Inflation Brake


How should we design a new monetary tool that can cope with external shocks which might affect our economy in the Anthropocene?


The Tao of Finance initiative from the World Academy of Arts and Sciences proposes a Monetary Inflation Brake: a targeted,  upstream, resilient intervention that could save billions of dollars world wide.


Read more about the Tao of Finance at the WAAS website, or read the book ‘Financing Our Future: Unveiling a Parallel Digital Currency System to Fund the SDGs and the Common Good’.


Image Credit: Gopixa/Shutterstock





Hello, and welcome to ResearchPod. Today, we’re talking about a spin-off from the initiative of the World Academy of Art and Science called the ‘TAO of Finance’.


An international and interdisciplinary expert group, headed by Stefan Brunnhuber, tried to answer the question: How can we really finance the 17 UN-Sustainability-Development Goals within the next 15 years?


In this episode we  elaborate on the challenges of future external shocks that can affect price stability, like pandemics, climate change, land degradation, and species loss. Or in more technical terms:


How should a new monetary tool look that can cope with external shocks which might affect our economy in the Anthropocene, with an impact on the Consumer Price Index.


Life in the Anthropocene is different from earlier periods in history in many respects. Today, we have explored almost every remote place onEarth, are more personally interconnected than ever and yet have to live within planetary boundaries. In the near future, we can expect an acceleration in societal change and an increase both in planetary shocks (like climate change, species loss, land degradation or wars) and also in the uncertainties associated with this change.


These challenges cannot be addressed by individuals and separate firms alone, but instead require collective institutional bodies to step in as a safeguard. Furthermore, external shocks such as pandemics, climate change, biodiversity loss, and wars differ from  internal shocks (like banking crises, speculation bubbles, and failed states). They require not only different risk assessments, but also a new financial and monetary regime to manage, hedge, and fund them respectively. In particular when such external shocks affect the relative prices of goods and services in an economy, the financial and monetary sector becomes key.


Inflation is a thorny problem that remains little understood to this day. What is more, there are many different forms of inflation. Inflation in the price of imported food and energy is a  prominent and devastating one, because it affects low-income households first and foremost, and impacts the stability of the political system overall.


Price stability is defined as a monetary environment where the relative increase in prices does not enter into the day-to-day decision making processes of households or firms. In contrary, inflation (measured as the harmonised index of consumer prices, or HICP) is characterised by an environment where multiple vicious circles with various feedback loops reinforce each other in a price and wage spiral, which in turn becomes a factor in the decision making of households and firms.


Let’s assume that the price of imported energy soars by 100% in the Eurozone:


The EU, with a total GDP of 15 trillion Euros, imports fossil energy to the value of between 350 and 400 billion Euros per year. Doubling that figure due to the suggested price increase of imported energy amounts to 750 billion Euros.


If we assume a multiplier of 2.2 applied to the initial 350 billion euros, that equals a total bill of over 1100 billion Euros. This 1100 billion Euros is the amount of  money the Eurozone has to cover as direct costs only as a result of the hypothesised inflation increase.


Assuming that indirect costs (or negative social externalities), such as social upheaval, an increased income gap, bankruptcies, and     unemployment were to add extra costs of at least 6 to 7 times the initial bill of 350 billion Euros, these indirect costs would add at least another 2.1 to 2.5 trillion Euros. The full amount of such an inflation of energy prices due to an external shock, then, would come in at     roughly 3 trillion Euros in total.


It’s worth noting that complexity research has shown that there is a non-linear link between food and energy prices – ranging from social upheaval to wars, and even the collapse of states. Since 2000, food prices have been deregulated, allowing traders to bet against rising and falling commodities. Up to 80% of the commodity price has become speculative and does not reflect the real demand for that commodity. This leaves large numbers of people in lower-income or developing countries with unmanageable food prices.


In current numbers: A 1% increase in food prices in May 2022 translates into another 10 million people hitting the poverty line globally.


At the tipping point, high food and energy prices increase the probability for social unrest by up to 80%. We have to assume that the trend towards urbanisation will further exacerbate this development. By 2050, 2.5 billion people will have left their farmland in exchange for megacities all over the world. Instead of becoming self-sufficient farmers, these 2.5 billion people will depend on the international commodity markets to feed themselves.


Most, if not all, countries act downstream in such a scenario in order to tackle this price inflation. There are two cycles that reinforce each other – the first being between energy and food, as 79% of food production still depends on fossil energy. Anytime we produce wheat, for example, we need tractors, nitrate, and phosphate, which are generated through, and powered by, oil and gas. On top of this, 50% of all global grain is used to  produce meat. The more meat we eat, the more grain we need, and the higher the price will be.In numbers: rich OECD countries spend 15% of their income on food, whereas   less economically developed countries spent up to 40%.


For example, as of 2022 the EU requires 200 million tons of wheat to feed animals which end up as meat on our plates. Notably, Ukraine alone exports 57 million tons of wheat to the EU.


The second cycles refers to the energy  costs themselves. Once they hit an economy, they operate like a regressive value-added tax (VAT), affecting low income countries and low income households more than others.


Because our entire value chain still depends so heavily on fossil energy in one way or another, anytime we purchase anything, we increase the price of goods and services along that value chain.  These combined price and wage spirals are reinforced by the psychological expectation of future changes in the prices and act like catalysers that run through the entire economy, leading to further speculation over the value of goods, which finally is diluting the prices of almost all products even further.


Citizens cannot afford to fill their tanks or pay their rent, and have to spend substantially more on their daily food, and this is expected  to further increase in the near future. Governments then start to provide subsidies for lower-income households or tax breaks for companies, implement a price control on energy, increase the interest rate over the inflation rate and/or diversify their supply portfolio towards other less expensive importers. Finally they encourage citizens to consume less and increase energy efficiency through additional new research and technologies.


None of these traditional measures are wrong, but they are not always entirely effective. These measures often require a long term perspective, distort the price signal, are expensive overall, and requireadditionalregulatoryefforts. It is questionable whether they are actually able to achieve much.


We are simply kicking the can down the road, as the price of the imported energy has run through the entire economy already (via VAT and multiple  price-wage spirals), causing inflation. With such a downstream approach, we always remain behind the curve, where asymmetric external shocks cause ongoing supply shocks to the economy, multiple breakdowns of our established global value chains, and increase the instability of the overall system.


Such traditional measures in fact operate like a dump, where we clean up the mess after it has hit society. Instead, we should respond like a preventive rescue package. How can we do that?


One proposition is The Monetary Inflation Brake: a targeted,  upstream, resilient intervention that  operates cross-border and works by proxy.


Here, the Central Banks could come into play. In the ‘normal’ procedures we just mentioned, Central Banks risk simply printing money. However, instead of spending money on paying increased salaries and higher domestic food and energy prices downstream, a significantly smaller amount of money could be spent upstream. This could be spent in a targeted fashion to neutralise the additional costs upstream before they hit the economy. In our example mentioned before, of the 100% inflation increase in imported and food prices, this would be 350 billion euros.

As a specific example of this upstream approach in action:


The European Central Bank provides the additional 350 billion euros through Quantitative Easing first, and facilitates this amount of money via what is referred to as a Central Bank Currency Swap Agreement (CBCSA) second. In this case, the regulators provide additional liquidity for their own currency and swap it into USD in order to cover the additional  costs before the price increases hits the economy. Given that Central Banks are already the largest asset managers in the world, they can either write off and cancel out this purchase, or hold on to it and benefit from potential future revenue (seigniorage).


The balance sheet of the Central Bank would inflate by that number (nominally), but the domestic price index of the Eurozone would remain relatively stable. Assuming that all Central Banks are tasked with keeping inflation under control, such a procedure would remain within their legal mandate. At the same time, the conversion rate of the Euro to the USD would slightly depreciate on the international currency markets.


This is substantially less than what the US Federal Bank spent in September 2019, when the repo markets crashed overnight. At that time, they injected a series short-term loans into the system, of a total of 1.5 trillion USD. At its peak, this worked out as 1 million USD per second.


The next step would be that a domestic public development bank (like the European Investment Bank or EIB) could facilitate these transactions on an executive level, targeting the  two dozen companies in the EU that are importing the energy cross-border and by proxy. This would provide a stable price index for the EU’s citizens downstream. In consequence, the euro would depreciate against the      US dollar. This eventually would stimulate the domestic export industry. Such a wise and targeted green quantitative easing, then, operates in an anti-cyclical and anti-inflationary manner. Done in the right way, such a mechanism  would work like a monetary inflation brake for the domestic economy as a whole.


Notably, there have been only four periods during the last 250 years where economies experienced a negative real interest rate: during the First and Second World Wars, during the oil crisis of the 1970s and in the years since 2010. Could it be that we have to adjust our monetary policy to these serial new events?


In short, the Central Bank money facilitates a green state bond and operates like a pass-through and roll-over liability or asset upstream. It would eventually encourage indirect investments within the EU towards a greener future.


We can take this intervention one step further. Since the 17th century, there have been over 750 currencies used globally, 20% of which are still in use. All of them have depreciated over time, without exception. A wise monetary policy, adjusted to the needs of the Anthropocene, has the potential to at least partially mitigate the curse of imported inflation.


As fossil energy is the largest inflator on the planet, we can apply such a mechanism to shift our fossil economy from a brown to a greener economy.


This provides a monetary ‘no     regrets’ approach that we should consider, in light of all the challenges ahead, in order to absorb the anticipated future shocks and risks. We should not be scared to think big.


Traditional fiscal policy (namely taxation, conventional credit lines, subsidies, and charity) remains inefficient, slow, and expensive when seeking to cope with asymmetric shocks. This Monetary Inflation Brake (MIB), as described  here, would stabilise the Price index and stimulate the domestic economy in an anti-cyclical manner.


In numbers, such an MIB would prevent a 3 trillion euro bill by paying a 350 billion euro bill, which would simultaneously stimulate our export industry, and cause a bounce-back effect for the energy exporter itself. The energy exporter now has additional euros with a lower face value and has to pay more for goods and services from the Eurozone, conditioned in green investments, only.


Designed like  this, the MIB operates like a real rescue package and not like a dump. The MIB remains within the Central Bank mandate of inflation-proof measures and provides a strong geopolitical monetary instrument in times of increasing systemic uncertainty. And last but not least, such an MIB would remain within the given legal framework of the General EU treatise.


The MIB is not a panacea for everything, and in fact it can only be used over a 1-2 year period to transform our society towards a green market place. That said, it is a powerful first tier, emergency monetary tool to protect an economy from speculative or politically motivated imported price inflation, and to allow us to transit towards a greener future. Eventually it can act as one tool in the toolbox for building towards a common EU energy policy.


A final note: this calculation is valid not only for imported food and energy prices, but for any sort of external asymmetric shock that might hit an economy and is expected to have an impact on the price index that can (partly) be neutralised.

The Monetary Inflation Break won’t end inflation, but would help countries to regain control over imported inflation. It is cheaper, faster and more resilient by a factor of 10 than the traditional approach. In other words, it can help to maximise monetary tools to fight upcoming asymmetric shocks, and minimise direct and indirect costs for our society as a whole on the course towards a greener future.

To read more about the initiatives of the World Academy of Art and Sciences, visit their website, linked in this episode’s description, or read the book Financing Our Future, available online and through all good book stores.


That’s all for this episode – thanks for listening, and stay subscribed to Researchpod for more of the latest science. See you again soon.

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