Anti-Inflation Bonds

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With a greater than 7% increase in the Consumer Price Index (CPI) and the Federal Reserve (FED) executing interest rate hikes, inflation expectations have become reality. People are quick to blame the FED’s quantitative easing policies, Congress’s country wide experiment with Modern Monetary Theory, and basic corporate greed, but the one thing most agree is that the underlying driver of inflation is supply side constraints, (aka not enough products to meet market demands). Based on this consensus the FED is starting to fight back inflation. The problem is that the FED’s toolset to fight supply side inflation can result in a recession that crushes consumers and restricts supply growth. What if there was an alternative tool that made consumers wealthier and stimulate supply growth?

For a quick refresh on ‘How Did We Get Here’ and the FED’s ‘Traditional Tools’ read on, or if you are already familiar with these, then please go ahead and jump to ‘Another Way’.


The Pandemic disrupted the ability of companies to produce enough goods and services to meet market demands. As businesses fell behind in production this created a bull whip effect along the supply chain that we expect to feel for years as the impacts reverberate up and down the chain. This gap in supply against demand results in Supply Side Inflation, because people are willing to pay more for what little products are available instead of going without. In our case this is even more challenging, because not only is supply reduced, but we also have increased demand, since people have lots of cash after achieving some of the highest savings rates in history during the Pandemic.

Now in an ideal world, inflated prices creates opportunities for higher profits which motivates businesses to expand production to close the gap between supply and demand. Unfortunately, since this is a temporary gap in supply induced by the Pandemic and not a long-term increase in market demand for products, businesses are hesitant to invest the millions of dollars required to increase production. When these classical market forces don’t work, prices will continue to inflate, so we must look to government agencies to execute policies to bring supply and demand back to equilibrium.


Since the US is a capitalist country the government traditionally does not force companies to build new factories or increase production of goods to cover excess demand. Instead, the Federal Reserve (FED) is tasked with keeping inflation at a reasonable level, by reducing the demand for products. To reduce demand the FED increases the cost of large purchases and drives businesses to reduce spending and lay-off employees.

The FED’s tools are executed through the banking system, so the quickest impact on consumer demand is to increase interest rates for loans. This increases the cost of the loan, thus deterring people from making large purchases like a house or car. When taking out a loan the main concern is your ability to make the monthly payment. By increasing the interest rate the cost of the loan, and therefore the monthly payment increases. This reduces the number of people demanding a new house or car as they can’t cover the monthly payments.

The other way the FED reduces demand is by making it harder for businesses to raise money reducing growth and eventually resulting in businesses laying off employees, thus reducing people’s ability to purchase products. This is obviously a very blunt and painful instrument with tons of negative externalities for the individuals impacted and on society at large, not to mention slowing down business is counter productive to increasing supply to meet demand.

This may be a bit of a shock to realize that the government would purposefully increases unemployment, but before pulling out pitchforks and torches keep in mind that this is to help the greater good. Rampant inflation negatively impacts everyone and hits low-income earners the hardest. The FED is walking a fine line trying to slow the economy without crippling it, but what if there was a way to reduce current demand while improving our future prospects?


The goal is to constrain spending until production is stabilized and supply can meet demand. What if instead of focusing on reducing demand through negative forces, we create an opportunity to soak up excess money in away that is beneficial for the consumer, does not strain supply chains, and incentivizes businesses to invest and grow.

To produce this magic product, we look to the Treasury to issue a special one-time ‘Anti-Inflation Bond’ that provides a very high yield over a short term of roughly 3 years. A highly motivating yield 2x yield will drive participation, soaking up excess cash in the system, resulting in a rapid reduction in short run demand.

In addition as a government bond this cash can be funneled to provide funding to support those most impacted by inflation, and to invest in improving supply chains. Of course, reducing demand will also give businesses time to stabilize production and ramp up inventories in preparation for the increase in spending which can be planned for by having the bond’s all mature around the same time. We could even make the maturity date a national holiday!

Some people may think bonds are boring, but by executing this tool as a bond we can leverage existing treasury infrastructure as opposed to spending money to build a new tool. This also may remind some people of IBond, but ‘Anti-Inflation Bonds’ fight inflation by incentivizing investment with a high fixed rate, while IBonds act more as a hedge against inflation with a variable rate based on inflation.

Some additional considerations for the program are to limit the amount an individual can invest, with an upper threshold that doesn’t cause a disruption to traditional investments (stock and bond market). Also, there should not be a minimum investment requirement, so that any citizen can participate no matter how little they have available. Finally, due to the outsized returns, this opportunity would only be available for citizens to participate and would not be tradable, since the government does not want to be overwhelmed with obligations to foreign countries and investors.

Of courseIt this is not a silver bullet by itself. The goal is to add a fast acting demand constraint tool to help combat supply side inflation alongside traditional levers such as interest rate hikes. There are many variables to execute this type of solution, such as what rate of return is enough to reduce demand without causing more inflation later, or what is a long enough term for production to stabilize. There are many other externalities that have not been thought of and need to be explored.

Start the discussion, what’s your opinion?



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Pierce Lloyd

Pierce Lloyd

Corporate by day, personal finance and economics by night.