Our Money System and Oil Depletion; Are they Compatible?

MonteQuest · **Posted:** Fri Dec 31, 2004 11:53 am

nero wrote:

Quote:

When debt money is created, it is an interest bearing claim upon future production of the economy, thus it requires economic growth.

sigh, no response to my modifiied person A person B story? Simply asserting that debt based money requires growth isn't a very good argument. A couple of times now I've described a simple model economy to explain how this assumption isn't invalid and you have failed to come back each time to explain where you believe the model fails. And since this is a fundamental assumption of your question we are at something of an impass.

Then what is it a claim on, if not future economic growth? I e-mailed the FED this morning with the following questions:

Quote:

In our debt-based monetary system, all money in circulation comes in the form of a loan, less the interest. Where does the money come from to repay the interest on the loan if it is not lent as well somewhere in the system? Even government bonds, purchased by the FED, of which the proceeds the government spends into existence, has an interest attached. Have I missed something?

Finally, it would seem that our monetary system requires economic growth to sustain itself; other wise there would be an inability to repay principle and interest. What would happen to the system if we were suddenly unable to grow the economy due to a lack of available energy to meet demand, at any cost?

highlander · **Posted:** Fri Dec 31, 2004 11:53 am

Oh yes, as for me, I'll be cooking biodiesel

nero · **Posted:** Fri Dec 31, 2004 12:08 pm

Quote:

Then what is it a claim on, if not future economic growth?

I rather think this comes back to the "polite fiction" point again. They've got a huge claim on the Federal government for hundreds of billions of dollars in the form of treasury bonds. They, however, won't ever ask for the money back because A, the money supply (and therefore the economy) would collapse if the did and B when you've got the keys to a printing press, all money is pretty much funny money.

I'll be Interested to see what sort of response you get back from the them.

spot5050 · **Posted:** Fri Dec 31, 2004 12:12 pm

MonteQuest wrote:

Well. Since we have covered 7 pages of debate so far...
()
...Since neither capital nor labor can create energy, the next round of energy-shortage-induced stagflation will leave central bankers helpless, short of imperialistic adventures to garner more supply.

Yup that all sounded fairly logical to me.

I think we're more finely balanced now than we were in the '70s; The levels of debt, both private and public, are much higher. The implication being that there's less tollerence in the economy for it to absorb problems.

Thanks MQ, nice thread subject.

MonteQuest · **Posted:** Fri Dec 31, 2004 2:18 pm

nero wrote:

sigh, no response to my modifiied person A person B story? Simply asserting that debt based money requires growth isn't a very good argument. A couple of times now I've described a simple model economy to explain how this assumption isn't invalid and you have failed to come back each time to explain where you believe the model fails. And since this is a fundamental assumption of your question we are at something of an impass.

I didn't just assert it, I backed it with the obvious. If money only goes into the system in response to economic growth needs, then inversely if there is no growth, there is no increase in the money supply. But demand doesn't stop due to population growth, so there is not enough money to go around. Print more? With no growth to warrant it, you have massive inflation ala Weimar Germany.

As to your model, it is based upon the preposterous assertion that the way interest free money gets into the system is that the FED buys bonds from the government with no intention of ever collecting the interest or the principle, if I got you right. I would proffer that a more likely answer for the roll-over of debt is the lack of tax revenues to pay it off! Some unpaid debt is necessary, but $7.3 trillion? This also assumes that the government then is in the business of providing "interest payment monies" to the world by congressional appropriations that create the Federal budget. I have never seen a component of the Federal budget that allows for "free interest money" so people can pay their debts. It also assumes that as borrowing goes up, the government must spend more taxpayer money into the economy to cover the interest. Your position has so many holes in it, that it just didn't warrrant a refute, but you asked for one.

Concerned · **Joined:** Thu Sep 23, 2004 12:00 am **Posts:** 1608

Quote:

What do you actually mean by waste? I suppose losing some coins down the back of the couch would be possible wastage but somehow I don't think this is what you mean.

I propose that money is an abstractation of energy. Stored energy that allows you to command command energy to create more capital or stored energy.

The whole point of running a business is to create a profit i.e. increased capital essentially more stored energy.

Thats why I label your A and B plus our generous banker idealistic. Basically real world it ain't going to happen.

A business does not borrow money to maintain a steady state and redistribute back to workers. (Sounds like communism or some sort of socialist utopia)

You or I don't borrow money thinking cool here is this loan that I will never ever ever be able to pay back.

As our ability to produce energy on demand is curtailed our whole paradigm of capatilism and growth will be turned on it's head. While a steady state economy sounds alluring it's an illusion that wont be able to be sustained as the ability of people to do work (energy) is vastly reduced.

In my opinion there will be collapse and stabilization a kind of ratched down effect that Richard Heinberg describes.

johnmarkos · **Posted:** Fri Dec 31, 2004 6:38 pm

MonteQuest wrote:

I didn't just assert it, I backed it with the obvious. If money only goes into the system in response to economic growth needs, then inversely if there is no growth, there is no increase in the money supply. But demand doesn't stop due to population growth, so there is not enough money to go around. Print more? With no growth to warrant it, you have massive inflation ala Weimar Germany.

I don't see how there is not enough money to go around. That is, in an imaginary economy started off by a $100 loan and with a 10% fractional reserve and a 5% average interest rate, you have $1000 in the economy, total. $900 of that is in loans so the interest on that money is ~$45 (depending on compounding). This does not sound like a crushing debt burden. In fact, there's plenty of money in the economy to pay back some of the principal. No need to grow.

Am I missing something?

MonteQuest · **Posted:** Fri Dec 31, 2004 6:52 pm

johnmarkos wrote:

MonteQuest wrote:

I didn't just assert it, I backed it with the obvious. If money only goes into the system in response to economic growth needs, then inversely if there is no growth, there is no increase in the money supply. But demand doesn't stop due to population growth, so there is not enough money to go around. Print more? With no growth to warrant it, you have massive inflation ala Weimar Germany.

I don't see how there is not enough money to go around. That is, in an imaginary economy started off by a $100 loan and with a 10% fractional reserve and a 5% average interest rate, you have $1000 in the economy, total. $900 of that is in loans so the interest on that money is ~$45 (depending on compounding). This does not sound like a crushing debt burden. In fact, there's plenty of money in the economy to pay back some of the principal. No need to grow.

Am I missing something?

Yes, alot. Look back to the Depression, goods and services were readily available , but no one had any money. Why? Not enough to go around. The money supply changes; it shrinks when growth slows, and increases when growth rises. Controlling the balance is the hard part. If growth stopped via peak oil, the money supply would dry up, and there would be competition for the remainder. With no energy to meet demand and grow out of it, it all comes tumbling down.

Quote:

If all the bank loans were paid, no one could have a bank deposit, and there would not be a dollar of coin or currency in circulation. This is a staggering thought. We are completely dependent on the commercial banks. Someone has to borrow every dollar we have in circulation, cash, or credit. If the banks create ample synthetic money we are prosperous; if not, we starve. We are absolutely without a permanent money system. When one gets a complete grasp of the picture, the tragic absurdity of our hopeless situation is almost incredible -- but there it is.â€”Robert Hemphill, Credit Manager of the Federal Reserve Bank in Atlanta, Ga.

Concerned · **Joined:** Thu Sep 23, 2004 12:00 am **Posts:** 1608

Quote:

I don't see how there is not enough money to go around. That is, in an imaginary economy started off by a $100 loan and with a 10% fractional reserve and a 5% average interest rate, you have $1000 in the economy, total. $900 of that is in loans so the interest on that money is ~$45 (depending on compounding). This does not sound like a crushing debt burden. In fact, there's plenty of money in the economy to pay back some of the principal. No need to grow.

Am I missing something?

No not at all as long as you remember the key ingredient being in an imaginary economy.

When you start to see money as stored energy the capacity to do work and then integrate this with the concept of reduced access to energy then you start getting an idea of how serious the problem of debt based money will become.

But certainly in some quixotic model where you and me keep swapping a $20 bill every year and I pretend never to want my money back and you pretend you'll keep working forever and not be able to pay me back and on top of that you don't take into account energy then sure that will go in forever.

MonteQuest · **Posted:** Fri Dec 31, 2004 7:11 pm

Concerned wrote:

I propose that money is an abstractation of energy. Stored energy that allows you to command command energy to create more capital or stored energy.

I read one proposal a while back that follows your thinking. Energy, as the most basic input to all economic activities, should be supplied from outside the free market arena and at a fixed price. In other words, we assign to money an exit value, a value that is only valid at the point where money exits the economy in exchange for energy entering the economy. This will allow an application of a market related value to money between point of issue and point of exit. The proposal stated that for this reason, energy, as a guaranteed exchange value for money, could stabilize the economy around its function of sustaining life.

johnmarkos · **Posted:** Fri Dec 31, 2004 7:19 pm

MonteQuest wrote:

Yes, alot. Look back to the Depression, goods and services were readily available , but no one had any money. Why? Not enough to go around. The money supply changes; it shrinks when growth slows, and increases when growth rises. Controlling the balance is the hard part. If growth stopped via peak oil, the money supply would dry up, and there would be competition for the remainder. With no energy to meet demand and grow out of it, it all comes tumbling down.

I agree with you that the economy is dependent on growth and that peak oil will likely cause a major economic crisis. Also, I agree that the U.S. is in debt up to its ears. Actually, the only issue regarding peak oil and economics that I disagree with you on is a minor little structural/theoretical issue that doesn't have much bearing on what's actually going to happen. Peace.

A lot of what we call economic growth is actually bogus. For example, over the past thirty years, the price of housing, a necessity, has gone up far faster than the inflation rate. This increase alone probably sucks up most of the per capita GDP improvement that has occurred over that period. In addition, the discrepancy between rich and poor is widening so that even though the mean income increases, the median stays put over time. Things get worse for the bottom half. Finally, the price of plastic junk has actually gone *down* over time, so we're flooded with the stuff.

Oh, and another thing: much of what is considered an increase in productivity is actually vapor. This is because increases in things like computer chip speed are used to manipulate the productivity numbers. A modern pentium 4 computer running at 3 Ghz is actually considered more valuable (for the purposes of productivity calculations) than an old 386 machine. The new machine actually runs slower because it is clogged up with bloated Windows software, viruses, and spyware.

But I digress.

MonteQuest · **Posted:** Fri Dec 31, 2004 7:30 pm

Prudent Bear believes growth is necessary to service the debt burden.

Money Created 'Out of Thin Air'

Quote:

For the past decade, most money has been created through private sector borrowing and spending. However, the day is fast approaching when the private sectorâ€™s new borrowing will not create enough new money to keep servicing the already massive level of old debt. If one examines individual incomes and corporate cash flows, you will realize the U.S. economic system can not service the mountain of private debt that has already been created at higher nominal interest rates. This watershed year could turn into a cliff side waterfall unless money growth keeps increasing to encourage the growth in personal and corporate incomes.

http://www.prudentbear.com/archive_comm ... _idx=34679

MonteQuest · **Posted:** Fri Dec 31, 2004 7:49 pm

johnmarkos wrote:

I don't see how there is not enough money to go around. That is, in an imaginary economy started off by a $100 loan and with a 10% fractional reserve and a 5% average interest rate, you have $1000 in the economy, total. $900 of that is in loans so the interest on that money is ~$45 (depending on compounding). This does not sound like a crushing debt burden. In fact, there's plenty of money in the economy to pay back some of the principal. No need to grow.

Am I missing something?

HOW MONEY IS REMOVED FROM CIRCULATION
When a debt is repaid, the dollars that the loan created out of thin air, all cease to exist. They are cancelled out. They were merely ledger entries. That money is no longer in circulation for anyone to use. Other loans create more currency by the same process to replace it, and so on. All debt repayments reduce the money in circulation by that amount.

As people pay off their debts, they are in fact drying up the amount of money flowing around in circulation. This creates a shortage of money and thus everyone in society must have less of it. The only way to replace currency in the present global economy is to take out another loan. This is why governments now â€œborrow their way out of debtâ€

MonteQuest · **Posted:** Fri Dec 31, 2004 8:29 pm

Financial Sense believes the debt-based system must expand.

THE "CARRY TRADE" ECONOMY

Quote:

This debt-based system (credit-based economy) must constantly expand or else the whole system will eventually implode. That is why the money supply is constantly expanding. It also explains the persistent rise in prices in the United States. In a system that is based entirely on credit, a contraction of credit is the central bankerâ€™s worst nightmare. When the quantity of moneyâ€”or in this case, creditâ€”falls, then the quantity theory tells us that demand for goods must also fall. Falling demand means declining revenues for businesses and less income for workers. As revenues and income fall, the ability of business and individuals to service debts also declines. This leads to declining asset values, which serve as collateral value supporting that debt. The reduction in the ability to repay debt reduces the income and assets of banks. If it persists, it could eventually lead to bank failures.

http://www.financialsense.com/stormwatc ... /0804.html

MonteQuest · **Posted:** Fri Dec 31, 2004 8:46 pm

And a little something from the United Kingdom:

Redefining Prosperity by John Jopling, for Feasta, the Foundation for the Economics of Sustainability

Quote:

The real reason why governments regard growth as desirable is that, with a debt-based money system, if the economy does not grow, it collapses. This is something all politicians are naturally and rightly extremely keen to avoid. Growth is an absolute imperative imposed on governments by the nature of the current money system. Thus it is in the nature of the money system, not the choice of government, that growth must be maintained.

Quote:

"It is not widely known that almost all the money we use comes into existence, not by governments creating it, but as a result of a bank agreeing to make a loan to a customer at interest. Only about 3% - the notes and coins - is government-made. The other 97% comes into existence as a debt owed by a customer to a bank. The effect of this is that our economies have to grow in order to avoid financial collapse. The debt-money system is thus the driving force behind the economy. The risk of collapse forces governments to give priority to strategies that serve the money growth imperative; and in turn, these strategies produce the unjust and unsustainable form of globalisation that we have today."

http://www.sustecweb.co.uk/past/sustec12-1/page_3.htm

Curing global crises: Letâ€™s treat the disease not the symptoms

Quote:

In other words, under a business-as-usual scenario, there is a real chance that the level of global economic activity will contract in step with the decline in oil and gas supplies. Constant contraction and depression could be the norm. Even the oil producers would not do well out of this because their output would be sold in depression conditions for a lot of the time,. There might be no way that the free market could break out of this cycle once it started because the peak oil price â€“ the level that tipped the world into depression - might not be high enough or maintained for long enough to encourage investment in renewable energy sources. Then, once the depression had begun, oil would be cheap again and the market would provide no incentive to countries to reduce dependence on the fuel, at least on a significant scale. The world could descend, cycle by cycle, into chaos and misery, unable to help itself.

http://www.feasta.org/events/debtconf/s ... .htm#intro

Our Money System and Oil Depletion; Are they Compatible?

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