Energy, Money & Gold

Off the keyboards of the Diner Rogue Economistas

Published on the Doomstead Diner on May 27, 2013

money_flowers

Discuss this article at the Economics Table inside the Diner

Once again the crew of Diner Rogue Economistas has been busy whacking away at Hyperinflation-Deflation and debating how Money acquires its value and its varying roles as a Currency medium and a Store of Wealth.

Can our Monetary problems be resolved by moving to Precious Metals for Money? The usual suspects reprise their roles in this endless debate. Feel free to drop on in the Diner and drop in your 2 cents on the subject. On the Diner, everybody is an EXPERT! :icon_mrgreen:

RE

From Monsta:

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Deflation is bad news for gold. Can’t get around that point you can only choose to ignore it.

Monsta, let us take a look at history and see where you are in error. The last great deflation in the 1930s called the Great Depression, just about everything went down in price with the EXCEPTION of the price of GOLD. It remained constant at the dollar price of 20 thus making it rise in value relative to other things at the time. It was then confiscated from the citizenry by FDR and the price of it almost doubled to 35 dollars by government decree, as a means to increase the money base, devalue the dollar, and pump us out of the Big D

Okay I will concede the point that gold did retain its nominal value even under a deflationary environment but at the end of the day the gold investor still lost out. As you highlighted the gold they possessed got confiscated by government decree. The government bought the gold at $20 an ounce and then used that gold to recapitalise the banks by revaluing gold at $35. The investor lost out and the banks got free money by this legal government backed form of looting. This is not much different to what we see happen in Cyprus. Sure Cyprus involved fiat currency but the dynamic is the same and must be seen as such. Revaluing gold to a higher value is the same as printing fiat currency. It steals wealth from the genuine investor (in gold this is the gold bug) and transfers the wealth to banks.

This brings me to the next point which I think is even more fundamental. There is no such thing asset as a risk free asset. Not even gold is risk free and can be unstable in terms of the wealth it can store for its holder. Gold maybe able to save you from hyperinflation but generally you lose out in deflation. And even if the deflation does not wipe you out (like in the case of the depression) there is always the risk of confiscation either by violent mobs or government/banks. To be sure, this is not a criticism solely directed at gold, this type of risk can apply to any asset class you pick. True some assets contain more risk than others and are therefore inferior but all assets contain some element of risk.

This is an important point to grasp because it demonstrates that we can never have complete control over our fate. We can maximise the probability of helping ourselves and minimising risk but we can never eliminate it entirely. We must always apply a degree of faith on everything we do. This should not to be seen as a bad thing; it is good to have faith with yourself and it is equally important if not more so to have faith in the intentions and actions of others. It is simply important to recognise faith and see it as such. One of the big problems I see with people and society in general is the need for control, the need to eliminate all risk. It is never possible and this desire to seek control can be very damaging and corrosive to society especially if you have a libertarian disposition. It is better to recognise that anything, even gold can be fallible and just have faith that we can work things out. Off course there is a place for thought and critical thinking in all this; all I say is there no certainties in life and not even gold can over rule this unpredictability of life.

To go back to the issue of gold there is another big issue and that is off scarcity. Gold is not held by many people and this is not simply the case of people having no faith in gold. Take me for example I have a modest wage and cannot dream of spending $1500 for an ounce of gold. I lack the financial means to get it. I am sure the same story can also be said for the vast majority of unemployed youth in the western world. This leaves only a small subset of the population who can afford gold and what’s more this gold that is so cherished is often hoarded by gold investors. This hoarding of wealth especially if done to an excessive degree is damaging to greater society as this wealth could have been invested in more productive means such as more sustainable living arrangements. I am not so well versed in the teachings of the Bible but it is my understanding that it is not morally right to hoard excessively and if one finds themselves in the fortunate position to have more wealth than they are able to find use for it is better to give this money to people in need. Obviously you do follow due diligence when handing this money so it reaches suitable candidates but provided the candidate is of good moral character then such investments will be rewarded in the future. I don’t think such things would be said if there wasn’t a grain of truth.

The other danger to bear in mind with hoarding is gold hoarders often end up lending that gold to other people who lack gold. This borrowing inevitably leads to the generation of interest, which again is seen in bad light (actually forbidden) by the Bible, and it is this greed to gain more through lending that gives rise to fractional reserve banking and later great financialisation which is so damaging to society as agelbert has alluded to. On a final note it is this need for credit expansion that eventually leads to the scenario where there is not be enough gold to service the debts. The traditional solution (as in the 1930s and 70s) was to switch from gold to fiat currencies to extend and pretend that the country is not insolvent. It is the element of greed and the need to have more that primarily drives people to fiat and the eventual madness you see today. As we all know the Bible considers greed a bad sin and warns us of its problems. We are witnessing the results of following an economic policy where greed is good.

From Golden Oxen

Many valid points Monsta, my reason for buying Gold, I became a Doomster in my late teens; was solely as a way to hedge against what I felt was an inevitable inflation. It worked out well for me, but as you point out there are many pitfalls along the way and many in the future to have to deal with, and it is not just related to Gold investments. No investment is perfect and all are subject to risks both foreseen and unforeseen.

Keep in mind that in all my postings about Gold, I have never claimed it to be the perfect investment. My claim is and continues to be that it is real honest money, not perfection, and that fiat is a fraud forced upon the public by crooked banksters and paid off politicians. That is one of the few things in this world that I feel sure of and sincere in presenting to others.

usgold quarter eagle 1910

 

merchandise futurama monopoly 10 dollar bill richard nixon

From Agelbert

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The Dow Jones Industrial Average bears no resemblance to the first Dow average which was created more than 100 years ago.

Great article, GO. :emthup: As for the Dow, what would it be like if American Cotton Oil* was still on it? :icon_mrgreen:

* http://www.quasimodos.com/info/dowhistory.html

I think Monsta, RE, you and myself are on the same page in agreeing that no asset class is risk free.

From an INTRINSIC VALUE point of view, what would be the most perfect “standard” for a
monetary system?

It would have to be something really hard to manipulate; something defined scientifically with physics that could not be gamed.

I put my thinking cap on and came up with the Kilowatt Hour Standard!
Say what!? ???

Think about it; it’s a measure of ENERGY. It takes energy to get goods to market as well as to produce them. An ounce of gold would be worth X number of kwhs (which would, in a renewable energy economy, include the cost of bioremediating the gold mine :icon_sunny:).

It would be really hard for Big Ag to say it took more kwhs to grow food this year but, if they could prove it, that woulld justify sellling for more kwhs a bushel. Big Oil would be under the same restraint. :evil6:

How could the Fed print kwhs out of the clear blue sky? It couldn’t (it would have to lie of course :evil4:) .

In order to get energy, it has to be transformed from matter, do not pass go, do not collect two hundred. :icon_mrgreen:

See, I just won the Nobel Prize in the Renewable energy economy of the future KILOWATT HOUR STANDARD. ::) :icon_mrgreen:

NOBODY can deny that a KILOWATT HOUR (currently worth between 8 and 15 cents) does not have INTRINSIC VALUE. All living things need ENERGY to live. ;D

I welcome co-authors to my world changing economic thesis. I will be happy to have my friends from the diner share the Noble Nobel Prize with me. :icon_mrgreen:

Of course, I do expect ya’ll to flesh it out a little with some high falluting erudite economics speak so we can impress the eggheads. Ya gotta snow em’ with some supply and demand charts, projected increased market stability, prosperity and public confidence that the game ain’t rigged as a GDP multiplication factor. Get to work! :whip: :laughing7:

News Flash! Killowatt Hour Monetary Standard Takes the Financial World By Storm! New Era of comodity pricing based on bioremediation from mining to top soil repair costs for full energy production costs immune to speculation! Bernanke and Fed governors hiding in Argentina! :icon_mrgreen:

From RE

I put my thinking cap on and came up with the Kilowatt Hour Standard!

 

From RE
This is analogous to the Food Calorie Unit I mentioned was used in Feudal Japan, with the Koku representing the amount of rice necessary to feed a person for a year. Main difference is there are I think 1000 Energy Calories to an Food Calorie, this is just a terminology issue really, they are synonymous in terms of measuring Energy content.

To run this system, each year you need to account for how much energy/food is produced and stored, and only have in circulation the amount of money that corresponds to that production. This is the basis for a Resource Based Economy.

The problem with using PMs for this is they tend to get Hoarded and taking them Out of Circulation in lean years is quite difficult if not impossible. Even if there is less Food/Energy available, the PM holder still expects to buy the same amount of food with it. Obviously he cannot, since it is just not THERE to buy, so the price in PMs starts to rise, causing inflation of the organic kind in this situation. Anyone with few PMs gets priced out of the Food market and ends up starving.

So you need money which Expires each year, and then only issue enough New Money which corresponds to the actual production of the society. This will maintain stable prices, and is the principle behind Demmurrage Money. Problem here from the Hoarder’s point of view is you can’t Save any Money, it will expire at the end of the year. Of course, you could be Taxed out of excess each year also if production is thin, that would be one means of regulating the total available currency each year.

Demmurrage and RBE are not Ideal, but they do probably represent the best way to negotiate a transition off a Money based economy to a Gift Economy. Toby and I whacked at this one at great length on Reverse Engineering.

From Agelbert

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The problem with using PMs for this is they tend to get Hoarded and taking them Out of Circulation in lean years is quite difficult if not impossible. Even if there is less Food/Energy available, the PM holder still expects to buy the same amount of food with it. Obviously he cannot, since it is just not THERE to buy, so the price in PMs starts to rise, causing inflation of the organic kind in this situation. Anyone with few PMs gets priced out of the Food market and ends up starving.

AHEM! Hoarding is merely one of many dynamic variables of human behavior involving supply and demand. But, of course, if food is scare (lack of supply leading to more demand) the amount of gold or fertilizer or wampum you need to buy it will increase. It will still take the same number of kwhs to make said gold, fertilizer or wampum. The standard has not been altered by Fed cointerfeiting of a fiat, non-energy based currency.

Quote

So you need money which Expires each year, and then only issue enough New Money which corresponds to the actual production of the society. This will maintain stable prices, and is the principle behind Demmurrage Money. Problem here from the Hoarder’s point of view is you can’t Save any Money, it will expire at the end of the year. Of course, you could be Taxed out of excess each year also if production is thin, that would be one means of regulating the total available currency each year

.

You’re the Columbia brainiac, not me but it seems to me that energy cannot be created or destroyed, but only transformed from one form to another. Said various energy states possess different amounts of potential energy when you are talking about dropping rocks from a tower but here we are not talking about anything but what it takes to transform a seed to food or a mine ore vein to an ounce of gold. That COST in kwhs should remain fairly constant for the ore but will vary in the food, not from the required amount of energy, but in regard to supply and demand. IOW, a lack of supply would militate paying more kwhs for a bushel than those required to grow said bushel.

Quote

Demmurrage and RBE are not Ideal, but they do probably represent the best way to negotiate a transition off a Money based economy to a Gift Economy. Toby and I whacked at this one at great length on Reverse Engineering.

A Gift Economy is probably the most practical economy from the point of view of biosphere mimicry. When a ruminant grazes, it is both giving food in the form of urine and feces fertilizer to the grass while the grass is giving its own energy package. It’s a lot more complicated than that but it remains a closed system where the up cycle MUST equate to the down cycle.

Since entropy is a fact of life in our universe, we need the sun to keep goosing the cycle or we are all dead. We do the best we can to store the energy of the sun but we are only getting started in that area. The so-called “storage” of energy in hydrocarbons was always a one sided equation that didn’t account for the “non-gift” of excess CO2 on the “defecation” side.

Capitalism is naturally against an energy monetary standard because it is based on accumulation leading to price dictatorship, not maintaning a healthy balance. Capitalism is a hoarder’s wet dream because it serves to INCREASE the purchasing power of his hoard by artificially eliminating enough supply to create added demand. :emthdown:

This is the phenomenum that leads to bubbles where the hoarded item is suddenly flushed into the market and the price plumments.

Supply and demand, from the wiles of nature is a normal and expected part of an energy monetary standard that would NOT produce booms and busts or bubbles.

On the other hand, the capitalist hoarding and derivative speculation that produces ARTIFICIAL supply and demand is simply corruption, inefficiency and accelerated system entropy born of human greed.

You will NEVER get a squirrel to hoard “too many” acorns to affect supply and demand among his fellows because he only gathers a lot when they are plentiful for all (oaks do NOT put out acorns in the same quantities every year and some years don’t put out ANY acorns). In addition, the acorns will spoil eventually so a two or three year supply wouldn’t help Scrooge McSquirrel to lord it over his nut loving friends. :icon_mrgreen:

This dynamic quality of a food product, as opposed to a metal or some other finished product like a stainless steel pot, is important because, as you said, you can’t really “store” the energy because the food changes state and goes “bad” (not really, it’s just going to another cycle point in the biosphere loop but, of course, we can’t eat it so it’s “value” in kwhs is “lost” to the market).

I think that can be worked out and just as fruit in season costs less than fruit out of season, the “value” in kwhs would vary with the time of the year. :emthup::icon_sunny:

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Demurrage is the cost associated with owning or holding currency over a given period. It is sometimes referred to as a carrying cost of money. For commodity money such as gold, demurrage is the cost of storing and securing the gold. For paper currency, it takes the form of a periodic tax, such as a stamp tax, on currency holdings. Demurrage is sometimes cited as economically advantageous, usually in the context of complementary currency systems.

http://en.wikipedia.org/wiki/Demurrage_(currency)

Quote

Demurrage and RBE are not Ideal, but they do probably represent the best way to negotiate a transition off a Money based economy to a Gift Economy. Toby and I whacked at this one at great length on Reverse Engineering.

Maybe, maybe not. Demurrage is just anothe COST. ALL costs associated with currencies, goods and services can be defined in terms of kwhs whereas fiat currencies in a greater degree and commodity based currencies in a lesser degree are subject to the distortions of hoarding (i.e. artificial supply and demand), counterfeiting and general greed based corruption.

A standard based on kwhs, BTUs or joules wouuld also wipe out Soros type crooks that make money off of currency arbitrage speculation. :emthup: :icon_mrgreen:

Energy cannot be created or destroyed, but only transformed from one form to another. I say get an agreement from the SUN project members to a certain amount of kwhs instead of dollars and the amount will never have to be adjusted for inflation! :icon_mrgreen:

From Monsta666

AHEM! Hoarding is merely one of many dynamic variables of human behavior involving supply and demand. But, of course, if food is scare (lack of supply leading to more demand) the amount of gold or fertilizer or wampum you need to buy it will increase. It will still take the same number of kwhs to make saif gold, fertilizer or wampum. The standard has not been altered by Fed cointerfeiting of a fiat, non=energy based currency.

The issue with hoarding is that until the saved money is spent again it has left the money supply. If enough people do not spend money then the money supply will decrease significantly. This has the effect where the price of goods will fall as there is less money in circulation relative to the normal of goods available. Once this dynamic becomes established then there will be a tendency for people to save even more in the hopes that tomorrow’s price will be better (cheaper) than today.

This issue of excess saving then has the issue that if money is stored and not spent in sufficient amounts on direct consumption then the incentive to provide goods (such as solar panels) will be less because there is simply less money (due to a decline of today money supply). More important still a lack of money also means less investment spending so the solar panel businesses will not build on capacity or worse yet they will defer maintenance due to a lack of investment. This is a perennial issue of PM currencies but it can easily become a problem in this future money of kWh if it is not addressed.

To offer an example let us suppose we have 10,000 notes of 1 kwh tokens since the economy has an output of 10,000 kWh. On year one let us say only 9,000 of those kWh tokens were spent while all the remaining 1,000 tokens were saved for a “rainy day” (I am talking about saving on the notes not the solar energy here). The economy is still producing 10,000 kWh however but only 9,000 tokens has been spent by the individual members of society. Because of this lack of demand some of the output of the economy has not been utilised and it is this lack of demand that likely means that total energy output of the economy would drop to 9000 kWh, so it meets demand and the existing money supply of the economy. This is what is likely to happen if the saved money does not enter the economy. Furthermore as we see here a decline in energy output is likely to lead to a deterioration in the state of the economy; after all it has declined by 10% in real terms.

What is significant in all this however is the fact that even if the hoarders decided to spend their money again since the size of the economy has shrank then the amount of kWh they could buy with this money would be less as you would have a situation of 10,000 kwh energy tokens chasing 9,000 kWh of real energy capacity in the economy. Therefore what 1 kWh token could buy would be less than the real amount and this inflation has been caused by a REAL scarcity of an energy resource in the economy and not because of an expansion of the money supply. If you notice the actual money supply has remained constant at 10,000 tokens.

This is always the issue with saving that is rarely acknowledged as saving is generally considered a virtue by society and not a vice (unlike excessive spending). Saving and hoarding creates significant problems as it decreases the purchasing power of money and generally undermines money’s ability to act as a medium of exchange. It is a very tricky issue, and I would say in an ideal world you would want money to fulfil both functions of being a medium of exchange AND a store of wealth. However if you make money easy to store then it becomes saved and this makes it harder to purchase real goods as the ease of saving will cause its purchasing power to decline; this undermines your money system from acting as a good medium of exchange.

In this sort of topic you must make some compromise between what you want your money to do. Is it more important that your money acts a means of acquiring goods/services or is it more important it acts as a store of wealth? If you wish to implement solutions to hoarding such as demurrage/currency resetting etc. as RE alludes then to me this suggests that people like RE are of the opinion that money should primarily function as a medium of exchange and NOT a store of wealth. I do agree that this is what the primary function of money should be (RE is free to bite me if I have misinterpreted what he is standing for). In any case though you need to make up your mind as to what money should really do. You cannot have it all.

The traditional capitalist solution to hoarding was to offer savers/hoarders an incentive in releasing this saved money and this came about by offering interest on the money they lent out from their accumulated savings. This act of lending creates even greater problems than that of hoarding as now you have a situation where you need to generate new energy tokens to meet the obligations of paying the interest payments. If enough money in circulation is generated through loans of this nature you will get the push towards a fractional reserve system and later exotic financial products which enable people to make those interest payments with greater ease but with the ultimate cost of making the eventual currency collapse more total. This issue of saving and the subsequent lending that comes from this initial savings is the reason why the Bible is so critical over the matter of saving and the ultimate folly this behaviour induces:

Quote from: Matthew 6:19–21

Do not lay up for yourselves treasures on earth, where moth and rust destroy and where thieves break in and steal, but lay up for yourselves treasures in heaven, where neither moth nor rust destroys and where thieves do not break in and steal. For where your treasure is, there your heart will be also.

In addition to the Bible saying such things I do know in Islam hoarding is frowned upon because it says excessive saving leads to a decline in purchasing power. As you see there are numerous schools of thought that advocate AGAINST hoarding and I would say this stems from the knowledge of what damage savings can do to society at large especially if that money is used to lend out to less fortunate members of society which has tended to happen on a historical basis. Two facts of human nature at work here; the need for security but taken to an excessive degree and the natural greed factor that people want something from nothing (this want of something for nothing most commonly manifests itself through interest from loans).

You’re the Columbia brainiac, not me but it seems to me that energy cannot be created or destroyed, but only transformed from one form to another. Said various energy states possess different amounts of potential energy when you are talking about dropping rocks from a tower but here we are not talking about anything but what it takes to transform a seed to food or a mine ore vein to an ounce of gold. That COST in kwhs should remain fairly constant for the ore but will vary in the food, not from the required amount of energy, but in regard to supply and demand. IOW, a lack of supply would militate paying more khws for a bushel than those required to grow said bushel.

The costs may remain the same but energy output in a given economy will fluctuate naturally from year to year. In one year you may have more sunlight than normal or you had a good harvest thus the total energy output of a given economy can expand or decline. If you want a money supply to represent the real wealth of an economy then you must find some mechanism were it adjusts to these yearly changes. Easiest way to do this is for the amount of tokens available in circulation to be reset or altered to reflect the true reality of the energetic output of the given economy. The total energy produced by the overall ecosystem maybe a constant but we are only accounting for the energy used in the human economy so the tokens need to reflect this total.

I believe this is the real issue here and not the amount of energy it takes to perform a given task although it can be noted the amount of energy to perform certain tasks would be dependent on the quality of resources used. For example it would take less energy to transform an ore containing 10% iron into 1 ton of solid iron than transforming a 1% ore of iron into 1 ton of solid iron. This can be extended to other fields such as farming where poor quality soils would yield less energy output than a soil of superior quality.

From RE

You’re the Columbia brainiac, not me but it seems to me that energy cannot be created or destroyed, but only transformed from one form to another.

Energy cannot be created or destroyed, but it can be Available or Unavailable for use by Homo Sapiens in any given year or on any given day. Easy example is on a Sunny Day your solar PV cells will produce copious power, on a Cloudy Day, not so much. On a Windy Day, your Windmills produce lots of power, on a still air day, ZERO. In a wet year, your fields produce a good crop, in a drought year, not so much. Etc.

If the Tokens (Money) you use for Energy are to retain a Constant Value, they have to represent the actual amount of Energy available in any given year (you obviously can’t change the Money Supply on a Daily Basis depending on whether it is Windy or not). Far as Homo Sapiens is concerned, the most important part of this is the Yearly Stored Energy in the form of the Food Harvest. In lean years to keep the Food Price constant, you have to take Money OUT of the Basement Safes of Hoarders, otherwise they will start digging into their Hoards of Gold Coins, driving up the price of food and pricing all the non-Hoarders out of the Food Market. Obviously, the typical Wage Earner cannot Hoard a whole lot of Gold Coins, you gotta be a Wealthy Old Hoarder to do that. So what happens here? Golden Oxen can buy Plenty-o-food even though it will more rapidly deplete his Hoard of Gold Coins, while WHD and LD, Strapping Young Bucks will STARVE because they never got a chance to pile up a big Hoard of Gold in the Basement Safe. This is not overall a good Survival Strategy for a Tribe, where Old Guys get plenty-o-food while the Young Guys and their Families STARVE.

The Saving Paradigm is overall disruptive to commerce, because the Saved Tokens come OUT from the Basement Safe at precisely the wrong time, when there is an overall LACK of what they are supposed to represent, which in all cases is actually some form of Energy. As I said early on here in this particular Episode of the Debate, Money=Energy, a concept GO still has difficulty grasping but is in fact the way it has always worked, just in Da Old Days prior to Industrialization, the Energy and its transmutation into Work were done through Human (Slave) and Animal Labor mostly. Coal & Oil and their Monopolization by a few people made them Rich Beyond All Measure, far more Wealthy than any Pharoah with thousands of Hebrew Slaves ever was. The Money they created and issued out as Debt to access the Resource they “Owned” and Monopolized is a measure of the Available Energy in the society. Long as Available Energy kept Increasing, they could keep issuing out more Money and meet the Debt Service required to keep them Rich in Perpetuity. As Available Energy now DECREASES, they cannot keep issuing out more Debt on it, they simply do not have it to sell. The cheap stuff is already wandering around in the Atmosphere as molecules of CO2. If they do keep issuing out more of it, all that occurs is it drives up the nominal price of the Energy, and they still cannot service the Debt. End of Game.

Changing the system over to Gold won’t change this dynamic, it won’t put anymore Cheap Oil into the ground. All it will do is allow Old Hoarders of Gold to buy what none of the Young Folks can afford anymore, which is Food to Live on. The only EXIT from this is for the Young Folks to LEAVE the Oil Economy and start Growing their Own Food, and when an Old Guy comes and offers them a Gold Coin for their Food, tell him to EAT HIS GOLD. :icon_mrgreen:

From JDWheeler42

In this sort of topic you must make some compromise between what you want your money to do. Is it more important that your money acts a means of acquiring goods/services or is it more important it acts as a store of wealth?

In the Austrian school of economics, they make the distinction between MONEY, a store of wealth, and CURRENCY, a medium of exchange, for just that reason. MONEY should be rare, easily recognizable, easily divisible, should not deteriorate, and should be fungible, i.e. each piece identical to every other. (Diamonds are the classic example of something that is not fungible, the value of each is wildly dependent on its own characteristics.) Gold does therefore make excellent MONEY. CURRENCY, on the other hand, you want to have just the right amount circulating so that prices are stable and productivity is not limited by the supply of CURRENCY. Gold is atrocious for CURRENCY.

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