The Money Valve

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Published on the Doomstead Diner on May 25, 2014

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The Money Valve

money_spigot_1

Discuss this article at the Economics Table inside the Diner

Over the years here I have written numerous articles examining the nature of money and how it works.  A few of the articles are Da Fed: Central Banking According to RE,    Energy Money Equilibrium: The Value of Money in the Age of Oil,   Energy-Money Equilibrium II: The Modern Era and the Jenga Paradox,   Energy-Money Equilibrium III: The Future of Money in the End Game,   Theory of Everything I,    Theory of Everything II, Hyperinflation vs Deflation: Rebutting FOFOA   and many others.   Recently in observing the simultaneous collapse of the monetary system and the Energy extraction bizness, I had a bit of an epiphany in terms of being able to explain in a straightforward fashion why the Central Banking paradigm worked when there was vast and cheap energy available, and why it doesn’t work once the energy becomes more scarce and hard to extract.

Money serves as a Valve which controls the downhill flow of energy, which can do useful work as it flows downhill. This is basic Thermodynamics.

To envision how this looked at the beginning of the Industrial Revolution, you have a large stock of energy that is pent up, and there is a high pressure pipe feeding the Money Supply valve. The Valve Controller who is the Central Bank issuing Debt to access the Energy is at this point in complete control of the velocity of money and the economy. They have two places to issue debt to, Industry which utilizes the Energy to produce Products and Waste, and Consumers who Consume the Products and produce Waste also.

MoneyValve3

If the CB at this point issues out too much credit to Industry, but not enough to Consumers, the Economy “Overheats”, and you can get a crash resultant from this, which basically was the scenario leading into the Great Depression.

The CB can also issue too much credit to Consumers and not enough to Industry, in which case you get an inflationary spiral.

Neither scenario of course is very good for the folks issuing the Credit, they want to maintain an ideal balance between Credit offered to Industry and Credit offered to Consumers so they can continue to extract the energy, Industry produces the Goods and Waste and Consumers consume the Goods and produce Waste.  This is the underlying feature of Waste Based Economics.

As long as the Energy is coming out at high pressure, the Money Valve of the CB is in complete control of the Economy.

Now, what occurs when the Energy stock drops down to the point it is coming out at a lower pressure?

MoneyValve4

In this case, the Money Valve is much less functional. It still can distribute out Credit to both Industry and Consumers, but the amount it can issue in total is constrained by the Energy supply. In such a reductionary scenario, the CB tries to triage off credit to both sectors in order to maintain a steady, if smaller downhill flow.

The problem with this is that Industry functions at large scale and requires a ton of credit to keep operating. Industry also has first dibs on the credit, because of course the same people who issue out the credit also control the Industry. So in the next figure you see more of what is currently occurring, which is that Industry gets a larger portion of the Credit available, and the Consumer less of it.

MoneyValve5

The way this plays out in real life is that country after country of Consumers are triaged off the Credit Bandwagon, and lose access to the ability to buy the products of Industry. Read that places like Greece, Ukraine, Vietnam, Thailand and just about anywhere else there is currently ongoing Political Upheaval, Coup d’Etats, or Revolution.

Industry is still producing the goods though, even though more and more people are unable to afford them. This leads to the new effect of “Channel Stuffing”, which is where all the excess products being produced get sent to. This is essentially Waste, even though it is all brand spanking new stuff.

http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2014/05/cars%203.jpeg

Money-Spigot-3I did not bother to redraw the diagram when the Energy Stock falls below the point at which it can feed the Money Valve. This should be obvious, everything comes to a grinding halt. However, because total consumption gets smaller all the time, you have an asymptotic curve which develops, and it takes quite a while to actually fall completely below the point where no Credit can be issued at all. Before that happens though, the large scale industries dependent on gobs of credit to operate will begin to fail.

In truth, as long as you can grow food and have daily energy input from the Sun, you can continue to run some sort of monetary system that operates this way, but it is way smaller than the one we have been operating with since Fossil Fuel energy was accessed. You always need surplus energy relative to your population size to do this though, even at low levels. If there is not a downhill flow of energy to work with, there is no way to make a monetary system like this work.

This is the reason that although they were not using Fossil Fuels, the Roman Empire’s monetary system eventually crashed. As the Empire expanded, it grew in population size, but produced ever less food per capita throughout the Empire, with ever more Waste involved in running an expanding Military and building ever more roads that needed to be maintained in order to move the food around and move the Military around. For the type of agrarian economy they were running, when the energy costs of maintaining it exceeded the ability of the land to produce the food necessary for everyone involved, the monetary system crashed. Of course this took a good deal longer in those years, because it was run at a lower level of throughput.

http://www.coinweek.com/wp-content/uploads/2013/08/kunker_autumn.jpgLike today, the Romans attempted to slow the decline through a gradual debasement of their money, substituting base metals for gold and silver in their coinage. However, making more Money available to the population did not in any way increase their ability to produce food or move it around, or pay for the Military required to maintain order through such a large system. Money is not a substitute for resource availability, whether done through the issuance of more Credit or through the issuance of more Coins. Maintaining the integrity of their currency with Silver and Gold coinage would not have saved the Romans either, they simply would have had less money in the system to work with and fewer resources at the same time. The military would have collapsed sooner with inability to pay the Legions with less coinage available.

I left out many things on these diagrams in order to simplify them. Not taken into account here is the fact that increasing levels of Waste in an economy generate their own costs. An easy example of that would be something like Fukushima, which now is costing Billions in order to try to clean up the mess, and probably can’t ever really be cleaned up even for Trillions.. Even without a disaster like that, you have decommissioning costs on older reactors.

Also not shown explicitly is the waste that comes in the form of carbon emissions into the atmosphere.  This has deleterious effects on the overall climate, resulting in more droughts, more destructive cyclonic storms, more powerful Tornadoes and so forth.  All of these are constantly doing damage to the overall infrastructure, power lines come down, homes are destroyed and so forth.  This is more waste in the system as you need to keep rebuilding the same things over and over again, constantly using up an ever decreasing and ever more expensive supply of stored energy.

Also not shown is how the interest charges applied to all the created money by the CBs escalate all the time due to the compounding of Interest, or how corruption endemic to the system ends up with huge portions of resource wealth being funnelled of into private hands rather than being equitably distributed, or how Goobermint waste and inefficiency also burn up gobs of energy and money. You can look at all those effects as Friction on the system, waste heat that is exhausted all throughout the processes.

http://atlanticbassmasters.com/wp-content/uploads/2013/12/fat_lady_sings.jpgThe outcome is pretty clear here, once the available per capita energy falls below a critical mass, this monetary system will fail. It remains hard to determine precisely what that critical mass is, particularly within the countries like the FsoA and Wall Street, the UK and the City of London and Germany and the Bundesbank are concerned. The likelihood is these places continue to provide credit to their own populations while triaging ever more peripheral countries off the Credit Bandwagon. This of course is analogous to the Roman Empire collapsing first at the Periphery, and working its way inward over a couple of centuries to Rome itself. In this case though, the collapse is unlikely to take centuries to play out, decades at best is more likely, and perhaps just a few years or even months. What there is of a monetary system now that functions globally is held together by Duct Tape and Bailing Wire,, or in this case Accounting Fraud and outright Theft, as in the case of John Corzine and MF Global.

Money and Energy are integrally related. Money serves as a means to distribute Surplus Energy, it does not Create Energy, nor can it equitably distribute an overall deficit of Energy per Capita. When this monetary system fails, which it is already well on its way toward doing, there will be no substitute, not Gold, not SDRs, not for a long time until there is a relative surplus again. Interim management will require overall shrinkage, more locally based economies, conservation and a lower standard of living for all.

The Free Lunch we got from the Age of Oil is OVAH. The Fat Lady has sung on that one.

RE

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Welshman
Welshman

Good read RE,

I on the same page with you, I have read a few articles on “Channel Stuffing” and it seems self-defeating in the long run. I don’t have a time line for the crash, but you are spot on, the free lunch from oil is OVAH.

llpoh
llpoh

RE is a scum of the earth Communist, but sadly in this case he actually got it right. 🙁

Hope at Zero Kelvin
Hope at Zero Kelvin

This is a bunch of bullshit. We could solve the whole problem if there weren;t so many Mexicans in he waiting room of my clinic!

Welshman
Welshman

lloph,

RE is a communist, but he is one of my favorite ones. I even find I like Putin these days, as he tells like it is.

Francis Marion

You lost me at climate change.

First we had “Global Warming”. This has been more or less debunked as the climate is far more complex globally than this. So now we have “Climate Change”. Well…. got news for you. The climate has been “Changing” since the beginning of time. It has never been static or ideal or consistent at any point in history. We used to just call it “The Weather”. Farmers had good years, they had bad years they had drought, they had floods and they even had abundance. Earthquakes, landslides and volcanos have been killing people for as long as we have been around and there is increasing evidence that coastal civilizations were wiped out thousands of years ago at the end of the last ice age as sea levels rose. This was a global phenomena. Difficult to chalk this up to “excess carbon” no?

The economy too is more complex than we give it credit for. As resources become more scarce how we use them changes (slowly sometimes yes but change does come). Looking for a new company vehicle the other day and I can buy a truck or SUV to haul freight that gets 40+ miles to the gallon.

This is not to diminish the threat of deteriorating infrastructure (a true and dangerous problem) but the science of fear that has erupted on the web these days of imminent collapse because we are at “peak oil” or “peak civilization” or “peak everything” is somewhat misleading. Resource scarcity – not enough food, not enough water, not enough energy – in my mind is a tool used by the same people screwing with our money supply to corral and control the masses. There are plenty of all but they are mostly controlled by the elite through draconian laws, regulations and organizations. There are always solutions to shortages of “things” found in nature – alternatives in either production, procurement or usage. But when you strangle peoples ability to adapt or find solutions (when you corral their ability to think creatively) with these tools then you manufacture victims. Fear is a powerful tool indeed – this combined with the use of force designed to constrain and punish innovation creates a crisis. We – not the planet and a lack of resources – are the authors of our own demise.

Fix the system and encourage freedom once again and many of our problems can and will be solved.

Peace and Wisdom all.

impermanence
impermanence

There are many, many reasons that systems fail, but I believe energy is not going to be a primary one. All matter IS energy, so the idea that we will be running out of energy [or even usable energy] anytime soon seems like a stretch.

Welshman
Welshman

impermanence,

We will not run out of energy anytime soon, but we are running out of cheap energy and it is now here. The massive California Monterey Shale zone is now only 4% recoverable, due to costs and the technology needed to recover the oil. The age of oil is going to be in earth’s time line like a fart in the wind.

ottomatik
ottomatik

RE
Thanks for the post, I thought the Credit Energy Distribution concept and illustration to be pertinent and helpful. Global warming is an undeniable fact of this planet, its clear the earth has been warming since the last ice age. I think the term detracts from the real problem and that is the multitudes of pollution, which you touch on nicely(fukishima et. al.) Cheap energy has allowed massive environmental alteration(destruction). It seems our options going forward to replace the high btu carbon stuff are Renewables and nuclear. The renewables seem to be the better choice, as we just bore witness to the heinous downside of nuclear, fucked up Pacific, no biggie, huh.
Lets say a miracle photovoltaic panel is developed, a miracle unit, converting sun energy into copious amounts of dc power, cheap. What then? Will it serve to unlock our enlightened potential and clean this place up? Or with unlimited energy budget will we really get down to fucking this place up for good?
Anyways your article did indeed provide me with an ah ha moment, bringing a lot of macro financial mechanics into greater clarity. Thank you.

Llpoh
Llpoh

That was not me.

These days when I make fun of RE I just count the number of plugs he gives himself in the first paragraph and then post it.

I am sure his theory re fossil fuels has some merit. Cost and scarcity of energy is going to be a major issue going forward.

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