Energy-Money Equilibrium II: The Modern Era and the Jenga Paradox

Discuss this article at the Economics Table of the Diner

In the first part of this series, I took a Big Picture view of how money comes to be created from the resource base of a society, in the beginning Food. In the Age of Oil, the money serves as a more direct Proxy for Energy in the form of Fossil Fuels. This because food production is subsidiary to energy production, since with copious avaialble energy copious food can be produced through the Industrialized food apparatus. In this part, we will look at the relationship as it evolved through to today between the Money and Energy, along with its Military component.

The conversion of money into a proxy for the energy markets came about through the mid-19th century with the monopolization of the Oil Industry by Standard Oil. With the vast amount of Oil under its control, in order to then be able to sell that Oil there needed to be a vast expansion of Credit issued to the population to buy this Oil. This is why the Oil Biz and the Banking Biz are so closely intertwined. Essentially, John D. Rockefeller of Standard Oil began increasing Dollar Credit available so that then people would have Money available to buy his Oil. The Oil at this time is priced very cheap relative to the credit price of the money, and the expansion of the Ponzi begins.

In the beginnning this was very chaotic, because it was happenning during the “Free Banking” era between the collapse of the 2nd Bank of the FSofA and the institution of Da Federal Reserve. During this period, Gold was also functioning as a resource based money, a holdover from the Ag Era when Gold in limited quantity could be used to represent total food available to a population. Many smaller banks popped up issuing credit on a fractional reserve basis of their Gold holdings, but inside a manipulated energy market, their bets often went bad causing repeated Bank Runs and periods of Depression, with little circulating money available to the population.

Da Federal Reserve was created as a means to more directly control the total outward flow of Credit in conjunction with the increasing supply of Oil coming online in the late 19th Century and early 20th Century FSofA. The most powerful Banks of the Era chartered Da Fed as a Central Bank which could control the creation of credit, which they could then use as a cheap source of funds to loan out at a higher rate of interest. This removed some of the chaos from the system, putting just a few very well positioned Pigmen in control of money creation and money flow. These folks are also the same ones in control of the Oil biz itself.

Besides the production of Cheap Food, the greatest usefulness of Oil and the Energy contained therein lays in the Mechanized War Machine. Once built, large Warships and Tanks can pretty much roll over any backwater civilization out there and then expand into their locations for the purpose of further resource extraction. Prime target for this right from the get-go were vast Oil Fields being discovered in MENA. A Rapid grab for Oil amongst Industrialized Nations of Europe began, basically with the Krauts and the Brits seeking to gain hegemony over the Oil fields of MENA, since unlike the FSofA they had little to none of it on their own land. This prior to discovery of North Sea Oil of course.

So, skirmishes down in MENA between the Brits and Krauts over who “owns” what territories down there eventually leads us to WWI, which the Krauts lose mainly because the Brits have the FSofA taking their back here. Many mistakes are made in the Treaty of Versailles, their is a brief period of Mania with the Roaring 20s back in the FSofA following this war, but it never really ends. Back in Krautland, they experience the Roaring 20s as basically a time of Roaring Hyperinflation. Even in the FSofA, while F. Scott Fitzgerald and the Great Gatsby are doing well cateloguing the lifestyle of the Rich & Famous in the Hamptons, back in the Heartland of the FSofA Farmland is rapidly losing its value as industrialized apparatus makes it possible to create copious amounts of food from much less land and labor. They have plenty of food to ship over to starving Krauts, but the Krauts have no working money to buy it with. WWII comences shortly thereafter, with the FSofA entering the fray when over on the Pacific side of this now Global battle over industrialization and Oil the Nips with their backs to the wall go Kamikaze on Pearl Harbor.

Both Wars are GREAT for the FSofA, in the sense they give plenty of Employment for J6P in the trenches and also further ramp up the power and influence of the Military. By the time WWII ends, the FSofA has an ENORMOUS industrial base it used to make things like Tanks and Planes and Bombs, but now in order for this stuff not to be complete malinvestment, the owners of said factories turn them to “peacetime” usage. The Tank factories start producing Carz, the Bomber Factories start producing 707 passenger Jets, and the Bomb Factories start producing Ag Fertilizer.

MASSIVE LSPW (Large Scale Public Works) Projects are undertaken both in Europe in the form of the Marshall Plan and the FSoA in the form of the Interstate Highway System as a means to build out the Ponzi, employ vast numbers of workers in construction, which then becomes the basis for a subsidiary parasite economy of Small Bizness to develop as the Credit Money flows out copiously, along with the then copiously flowing Oil, not just from FSofA Oil fields, but also the newly aquired Saudi Fields and Iranian fields.

Along the way, from the 1950s into the early 1970s it begins to become obvious to folks like M. King Hubbert that real Oil Production rates and discoveries are falling and as a result energy prices go on a steady upward climb. The tie to the old Gold standard Ag economy is broken in 1971 when Tricky Dick closes the Gold Window and the economy goes All Fiat from that point.

This takes us into the Modern Era of many low level “mini-Wars” which continue to provide a rationale and purpose for a large Military, as well as the Bubble Creation period in consumer goods and services and Financial speculation which keeps Credit flowing Outward, Profits flowing Inward but in reality Zero to Negative real growth in the system. It becomes ever more Bloated in Global Population of Useless Eaters, and supplies of new Oil become ever harder to find and ever more expensive to develop.

The Crisis Point for the Fianancialism came first in the 1990s with the collapse of the Dot Com Bubble, but was given an Adrenaline Injection through the Sub-Prime RE Market, Credit Card Loans and Guaranteed Student Loans for Kollege. Outward flowing credit through these Markets kept the patient alive and kicking until 2008, when the Chickens came home to Roost on Lehman Brothers.

To salvage THIS problem, the Last Bubble began in earnest, the Sovereign Debt Bubble. In this iteration, all the non-performing assets are heaped onto the Tax base of Sovereign states, with the “expectation” that the populations of these countries will work as Debt Slaves into the generations of their Great Grandchildren in order to pay off ALL the malinvestment that began way back there in 1800s, with the building of the Railroads, a necessary infrastructure for extraction of Coal and Oil.

Issue is of course, in reality all that malinvestment can never be paid off, because the factories producing the Carz can’t sell them to impoverished people and the McMansions that require the people who live in them to HAVE a car in the Garage to drive to a Job that is no longer there also are Uninhabitable Malinvestement. What is left here to blow any Bubbles up on? Only War of course. In a massive debt default, War is the only way to declare Bankruptcy, and only the Winner actually can do that. The LOSER still has to pay off his debts. The Krauts got a bye on this one after WWII and as a result of the Marshall Plan used their Industrial Plant and Financialism to grow their way back to prosperity, of course all on the backs of the folks in MENA and their European brethren to the South, to whom them loaned copious amounts of money to buy their Mercedes and build Tourist Resorts on the Costa del Sur for German Pigmen to frolick on over the Summer.

I wrote the following in the first part of this series:

“As long as linearity can be maintained between the energy markets and the money supply, the system can continue to function, albeit in ever smaller “boutique” economies all the time. The linearity gets disrupted either by a local implison of a given credit market or by a local disruption of Oil supply of a threshold level magnitude. Uncelar how large that disruption has to be on an absolute value level to reach the threshold, but one suspects that either a Blockade of the Straights of Hormuz on the Energy Level or the credit collapse of a country the size of say Italy would be sufficient here to disturb the equilibrium too much and send the relative economics into a tailspin.”

With the Sovereign Debt Bubble in Europe now on its last legs, there just isn’t any bigger Debtor left upon which to shift the burden of debt accumulated since Industrialism began, mainly in the aftermath of the Civil War here in the FSofA. Though it began with the Steam Engine in the 1750s, the Agrarian Model was not completely supplanted by Industrialization until after the Civil War. So we are talking a good 150 years of debt overburden accumulated here. To wipe out this debt takes a World War that makes WWII look like a small skirmish in your backyard between your kids and their cousins. What the FORM of this war will take though remains to be seen.

What you see occuring here between Iran and the FSoA in the Blustering is mainly an attempt to keep the price of Oil propped up a while longer. Real demand for Oil is Cratering as the Konsumers run out of available credit to buy it with. Military posturing both increases Demand for Oil (how much Oil do you think both the Iranians and the FSofA consume in a Day of Wargames?), and it instills FEAR into the Market Place that what is left of the supply is soon to be CUT OFF.

Thing is here, blustering isn’t going to increase real demand for Oil from the Konsumer level, no matter how bellicose either side gets here, J6P STILL does not have money to buy this stuff at high prices. In fact at ANY price soon enough, but if they let it drop down to $2/gal for gas again you would get another Dead Cat Bounce in the economy.

At this price though, the Oil Companies/MIC cannot make a profit, nor can the Mullahs pay their bills. It is in the interest of neither side to see the price of Oil drop here. By seriously cutting production the Saudis could SLIGHTLY raise the price of Oil, but that would be made up for by Ruskies exporting more. The Saudis though need every Dollar they can get, so they are not going to lower production and sales. Sell less at a higher price maybe keeps you even, but only if somebody else doesn’t capture your market share. With declining real demand, only if ALL producers cut their production could you stay even.

So, blustering about War is the best means available to prop up the price in the Speculator market, but at the end of the line if the price is too high, it won’t move out of the storage facilities fast enough. At this point, blustering is not enough, you need a REAL War to suck up that excess Oil and to keep the FEAR level at a Fever Pitch.

It remains to be seen which side Flinches First, but once Fear Mongering stops working to keep the price up, REAL War becomes necessary. The Price cannot stay up indefinitely at high levels if the end Konsumer does not have money to pay for it. Either you go to War to REALLY restrict the supply, or you let the Price Collapse some. It could go either way here.

Certainly,a Price Collapse would be better for FSofA Konsumers and Industry. it would not be better for TBTF Banks and Oil Companies though. It would be horrific for Oil Producing countries dependent on the revenue from Oil to support their economies. Already weakened Regimes in Saudi Arabia and Iran would undoubtably collapse if Oil drops into the $60 or below range again. The Iranians being the most pressured here with Sanctions are the most likely to strike out if there is a collapse in Oil prices.

The scenario as a result that seems most likely is for the Posturing to continue for so long as it keeps the prices up, but when the Storage Facilities are full to the Brim and Overflowing, then the Price will collapse and the Iranians will strike out first.

The ensuing Melee is simply too complex to figure out. Reduced real Oil supplies will take many peripheral areas with current Credit issues off the map as far as any Oil delivery whatsoever is concerned. Greeks for instance won’t be able to buy even a DROP of Oil with the New Drachma. The FSofA likely would institute a Rationing system of some sort. Normal commerce would slow to a snail’s crawl. Unemployment would skyrocket.

At this point, the War in Iran is likely Small Potatoes, since you’ll get internal Civil Wars and rebellions occuring. This is a Jenga Puzzle Moment. Currently, the Oil Supply is diminishing SLOWER than the Demand is. A full on War with Iran would flip that equation, rapidly diminshing supply and redirecting what is available to the War Effort. The “Oil Shock” to the Industrialized societies here and in Europe would be beyond belief, a very rapid change you cannot massage with monetary policy. There is simply no predicting how it goes after that.

Money and Fossil Fuel Energy became Synonymous as the Industrial Revolution took hold. The same people who took control of the Oil supply also took control of the money supply, and matched them up in a time of great Surplus of this resource. With no apparent rescue of any other form of energy sufficient to take its place, either Renewable or Nuke based, the Value of Money remains dependent on the availability of fossil fuels and their distribution and utility in the society. The distribution will shrink, and the utility will shrink as less is available to waste. The money supply of any money that actually works to buy stuff will shrink with this. In theory, this could take a long time, but is unlikely to do so because of the Jenga Paradox. At the moment, Iran appears to be the Jenga Piece of the Puzzle, that when it gets pulled will collapse the Tower of Babel. Ironic of course, since Babylon was situated in present day Iraq, just a few miles from the site of Baghdad. What Goes Around, comes Around.

RE

Discuss this article at the Economics Table of the Diner

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