Energy-Money Equilibrium: The Value of Money in the Age of Oil

Discuss this post at the Economics Table in the Diner

Trying to figure out exactly how any Money achieves and holds its value is very difficult. In all but the most simple systems which are little more than Barter, you quickly develop a level of complexity that is confounding, mainly because it is always so self-referential. In this exercise, I’m going to try to elucidate the process used over the centuries to not just Create Money, which is primary, but also to Control Money once created. I have some basic ideas here, but I have no idea how this post will come out in the end. It’s a very difficult problem.

Starting Point: You can’t have Money without Surplus in Basic Needs, but neither is Surplus by itself sufficient. You also have to have control over at least One basic conduit of Wealth, which is in the Begining Food. Why is this so?

First look at a pre-Agricultural Hunter-Gatherer Society. Said society can be in Surplus, but they don’t need or use money, because each member of the society can take from the surplus as much as he or she needs. You may Barter things, but you do not need an intermediary of money to do that. Its a very simple system, but allows for virtually no Savings, and none are necessary as long as you always have and expect surplus. A small group of H-Gs in a large territory not competing with others are always in surplus. So no Money develops in such a society.

The Ag society though as soon as it develops REQUIRES money. First thing is, the Ag Society develops a Surplus even beyond that of the H-G society, so much so that the population begins to expand rapidly. The Ag system also works on a seasonal level where large amounts of Grain are collected up at harvest time and must be stored in Warehouses. Such intitial efforts are Communal, with a Tribe all working together on a Patch of land to farm it. To do so though, they must Claim Ownership over that land. This requires then the next level, a Military to protect and defend that land.

Its at this point you have the 3 most necessary elements involved for the beginning of a Monetary system. One is Ownership of the Land, at first Communal by the Tribe as a whole. Second is Storage of large quantities of Food in a Warehouse. 3rd is developing a Military group responsible for protecting both your land you grow on and the goods stored in the warehouse.

The Military component quckly becomes the most Dominant one, in the early stages led by the most powerful Warrior who all in the tribe respect and fear. This person become “King”. Call him Nimrod. The King then becomes the Symbol of the State, and all it “owns” and “produces” (really “controls” and “extracts”) belongs to him. The monetary system develops as a means for the King to distribute out surplus to his Loyal Subjects.

The money develops when the Counting begins in the Warehouse of Grain. Whatever is in there is represented in the Count by Credits, which can then be symbolized in a token. Only as many Tokens are produced as there is grain to cover them in redemption. Precious metal coinage works well for this in the beginning. All the precious metals the King has acquired by whatever means care coined up, and appropriately valued so that there are not more coins than Grian that can be redeemed. This is Hard Money in extremis. It has an absolute value measured in the Food it represents.

The King can now hand out the Tokens to his Military protectors and also pay the oversears of slaves or serfs who work the land and grow the food. These folks are not paid in coinage, they merely get a small portion of the food they produce for subsistence living.

Problems arise as the society grows. In the beginning, the surplus of food being produced exceeds the amount of precious metals available for coinage, so the food drops in price. A few things can happen here, one is that the King can stop paying out so much coinage to his Military and Overseer classes, raising the price of the food up again, allowing the King to keep more Precious metal in the treasury and more food in the warehouse. Everybody is still beign fed here, King has more in the Treasury, and besides that surplus in the grain warehouse grows. It keeps a pretty long while, but eventually will rot or simply become ridiculous to save any more of. Like putting up more than a few years of Preps, it gets ridiculous.

So you start to Trade the surplus with others who don’t produce so much food and expansion begins of the system. Peripheral areas pay in more Gold and Silver and also begin to produce other things besides food which the Money becomes useful for paying for.

At this point the system has become vastly more complex. The Tokens no longer represent an absolute amount of Grain in a warehouse, but rather the value of all Goods and Services being produced in this ever growing system. Bourses or Trading Markets develop which set relative values for everything being done in the society, which as it increases in size and velocity needs a rapidly increasing Money supply to handle. The Precious metal coinage does not increase at the same rate in most circumstances, so in order to have more “money” available, base metals are used to produce some coins, which pretty much can be produced at will. Money is getting softer during this period, but so long as Da Goobermint doesn’t go wild coining up the base metals, it doesn’t devalue while the system is expanding.

The trading system begins to undergo many stressors at this point. Regardless of whether there is some whether or plague related Famine or not, at times some folks in control of large swaths of land simply take them out of production, locally raising the cost of grain. This allows them to extract out more precious metals from the buyers, and this money goes into their Basement Safes. I’m sure you can see the analogue here with how Oil prices get manipulated by creating periodic “shortages”, even if there is plenty of Oil in the ground.

The “successful’ society utilizing Money has now reached the point where there is just a ton of Surplus in the society, so much so that there isn’t a whole lot of need for Workers or paying people much coinage and most of the PMs are sequestered away inthe Basement Safes of a few Pigmen. At this point though, some folks cannot even get hold of the few base metal coins to buy any food, though there is plenty in the warehouse. The society needs no more Serfs, nor does it even need more Artisans and Toolmakers. Only a few of the most successful of these are necessary for the King and his Oligarchy, so these New Professions start to see Unemployment also, along with Serfs. The economy slows to a crawl, basically because it produced too much surplus too quickly, and then developed an overburden of a population with no remunerative work available.

Social Discontent rises here amongst the Poor, at which point it becomes necessary to “Give Away” the surplus to these folks or face a Revolution. Except soon as you do start “giving it away”, the Money loses further meaning. Why work as a Soldier and put your life onthe line for a few coins when Bread and Circuses are beign provided to the masses to keep them quiet and entertained? The Roman period of Bread & Circuses has the direct analogue of the Great Society program through to just recently.

Eventually, regardless of actual production or extraction ability of food outta da ground or Oil under da ground, production of both begins to fall because there is no money flowing around the market which will buy it. Now you really DO get your Revolts, which really do require you to start increasing the size of the Army and handing out money from the Treasury, until the Treasury is bankrupt of PMs. Now, there are Gold coins inthe hands of the Soldiers, but there is little being produced to buy with those Gold coins. At this point, you reach the end of the line for this iteration of a cycle, and not until the Wars and internal conflicts get resolved can you begin a rebuilding process to do the same thing over again.

The whole process here has occurred countless number of times since Nimrod, and for so long as there always was a real Surplus in the environment, the only thing that caused the famine and scarcity problem was the collapse of the monetary system.

This iteration is different than those were. The repeated expansions and collapses culminated with the discovery and exploitation of fossil fuel resource, which put the entire globe into such great Surplus that it rapidly expanded in population numbers consuming this last great resource base. Upon its collapse, what is left out there isn’t enough to expand on again after just the typical wars knocking down Biblical numbers of around 25% of the population.

The monetary system doesn’t really collapse from Scarcity normally, it collapses from too much Surplus and hoarding of currency. Periodically though due to overextension and resource depletion in specific locations along with the vicissitudes of Nature, real scarcity does rear its head, which causes a collapse from the opposite direction. In this case, money may be circulating in the economic system, but it is a shortage of goods rather than a shortage of money which produces the disruption. The end result isn’t much different since you still end up with a situation where extant money won’t buy goods, but the causative factors are different.

The Period we are working into now is a synergy of both problems, on the Global Scale. On the one hand, there is a consolidation of Money going on removing much of it from real circulation through the Banking System; while at the SAME time resources are depleting on a global level. As long as these two parameters move in tandem, you get a shrinkage, but not a collapse. You only get a collapse when on the gross level BOTH fail, and that has yet to occur. When it does occur though, its a lot worse than one or the other of the other types of collapse.

In this last iteration of the cycle, rather than Food in Warehouses serving as the underlying basis of Money, the Thermodynamic Energy of Fossil Fuels underpinned the money. This by extension through the Industrial Food Apparatus includes Food, but food is only part of the total production of the society. Over time, food becomes arbitraged out of value, since all it does is support “Useless Eaters”. Rather than produce more food, the monetary system serves to encourage the production of more Fuel, to perpetuate itself. Thus you get your Ethanol production for Carz reather than Corn for Peoples.

This is a Dynamic Shrinkage Model, basically serving to reduce population while at the same time conserving resource, which very well might be a planned methodology and could work assuming the circulating money and available energy resource decline in near parallel terms. The problem it suffers is one of instability all along the way. Because the monetary system serves as a proxy for value for many OTHER things besides just fossil fuel energy, malinvestment through the system can collapse the monetary system too fast to maintain a stable equilibrium with the collapsing energy supplies. Obvious example for this problem is the collapsing McMansion Market, but it extends into Carz, Factories and many other “Assets”. Unless those assets can be halted from complete collapse in value, the money supply can’t be shrunk at the steady rate necessary to pace out to energy supply shrinkage. You then run into the old problem of plenty of resource available relative to the population, but insufficeint working money to distribute said resource.

This of course is why we see the process occuring of the CBs pushing out Credit to keep the energy market from locking up completely. They are just trying to keep pace with the real shrinkage, but not issue so much credit as to render the currencies dependent on the credit markets to completely lose value either. Its a system under great stress here on a daily basis.

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.

Money and Oil are EQUIVALENTS in the current society, mainly as defined by the Dollar as the most popularly accepted Proxy for Oil. To keep the overall system running at any level, even a small Boutique level, a parity must be maintained between the currency and the available energy. To do that, a vast portion of the population has to be cut off from Credit to buy the Oil, but not so fast that the money loses its value or so fast as the Oil depletes in its availabilty at reasonable EROEI. its a Tightrope that has to be walked very carefully.

So far, our Illuminati Masters have walked the Wire very well. I do not discount the possibility they can walk the wire to the Other Side and maintain the equilibrium all the way through the spin down. This is POSSIBLE. IMHO though, it is Unlikely. Much like catching a Raindrop on a Knife Edge and controlling how the water splits up, the level of instability here is simply too great. One side or the other of the Energy-Money Equation will exceed controllable parameters, and then you get a Cascade Failure. Whe that occurs, all Bets are OFF. There is no maintaining a Core in such a situation, there IS no “core”.

I cannot say this one is “Coming Soon to a Theatre Near You.” I can only say to you IMHO that it IS Coming and will come inevitably, just as even the biggest Mountains inexorably are washed into the Sea. You must not despair here and think all is lost, with the outcomes Inevitable and Written in Stone. They are not. You just have to be patient and WAIT for the Failure of the Conduits, for when they do fail in earnest, it will be a different ballgame altogether. Fail they will. I GUARANTEE it.


Discuss this post at the Economics Table in the Diner


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