Need an economist on money creation?

[Eclipse Now]

We're talking at cross purposes and seem to be having completely different conversations. You're talking about the history of the perception of the US dollar verses other currencies.

I'm talking about the future viability of any currency system in any nation that requires exponential economic growth on a finite planet. I'm talking about the fact that our money system loans money into existence with interest —*and therefore ALWAYS assumes that the future will be bigger and better than today —*otherwise all that interest means extra money that's got nothing backing it.

The tricky thing about exponential growth is that you don't see it till it's too late. Imagine human beings are in a bottle. We have plenty of sustainable growth medium in the bottle, but cannot use more outside the bottle. Say it takes a minute to 'double' the number of human beings in the bottle. The bottle is 'full' at midnight. At what point is the bottle 1/8 full? 1/4 full? 1/2 full? The answers?
1/8 full = 11:57
1/4 full = 11:58
1/2 full = 11:59
FULL = 12:00

Who, when they were looking around the 'bottle' of planet earth, would think there was a problem when 7/8th's of the planet's resources are still available?

What I'm trying to do is imagine an economic model that allows for when the earth is 'full' —*whenever that is. (I don't want to get off track and discuss when it will be 'full' —*but just the hypothesis).

When I quote the data below, I'm actually not interested in the state of the US economy —*but the exponential debt trends that it represents as a test case for fiat currencies with interest built into the system. Interest DEMANDs that the future be bigger than today. What happens when it simply physically can't?

* Money supply growth has gone parabolic. It took us from 1620 until 1974 to create the first $1 trillion of US money stock. Every road, factory, bridge, school, factory, and house built, every unit of economic transaction that ever took place over those first 350 years required the creation of $1 trillion in money stock. But it only took 10 months [edit: 2006 data] to create the most recent $1 trillion and I don't recall seeing an entire continent's worth of factories, schools or bridges built during that time. [Edit: that figure is now an astonishing 4.5 months as of March 2008]
* Household debt has doubled in only 6 years. Think about that for a minute.
* Total credit market debt (that's everything) was about $5 trillion in 1975, has increased by $5 trillion in just 2 years, and now stands at over $51 trillion.
* The wealth gap between the super-wealthy and everybody else is widening at a furious pace.

[Buffy]

Originally Posted by Eclipse Now

We're talking at cross purposes and seem to be having completely different conversations. You're talking about the history of the perception of the US dollar verses other currencies.

I'm talking about the future viability of any currency system in any nation that requires exponential economic growth on a finite planet.

No actually we're talking about the same thing, its really just an issue of understanding basic mathematics and the fact that the Malthusian view of "limited resources" has always been trumped by technological advances and changes in human behavior.

200 years ago, Thomas Malthus basically argued that population grows geometrically while food can only grow arithmetically, and therefore we were even back then on the brink of extinction.

Then the Industrial Revolution came along and had two effects: technology dramatically improved the productivity of food production, and the growth of a more complex society based on automation rather than raw labor meant that average family size dropped dramatically. Today in most Western countries there is *negative* population growth, and growth is only sustained through immigration from countries that are still only in their early phases of industrialization. India's population growth rates have begun to slow, and China with its one-child-per-family policy has almost instantaneously put the brakes on growth.

Today, no one talks about population outstripping food supply, but Malthusianism continues with new appeals to different sets of limited resources such as oil.

While of course it would be foolish to say that we can procreate like crazy and technology will always save us, there is still clearly a range of "smart growth" that's quite clearly sustainable unless by some miracle technological advancement stops in its tracks. Not that it never will: the Middle Ages were great proof of that, but Rome's fall was not due to the *inherent* nature of geometric progression, only due to foolish politicians letting the growth go out of balance with progress!

And that's the *correct* part of your argument: in the US today, rapid growth in debt is a concern, but *not* simply because its "geometric," its that it is not being *controlled* and *balanced*. This is why most rational economists recognize that overall GDP growth for most countries should remain at 2-4% per year: if they "overheat"--like China--there are horrific consequences down the road when resources--even easily "renewable" ones like labor lag demand.

But if you keep the demand and supply in balance, then all that debt makes it so much easier to fund the technological investment that gets you to more abundant resources and relieve the pressure.

The last point here is that its important *not to fear geometric growth*!

Here's a simple exercise: get a piece of graph paper and draw a graph of with the range on the x-axis going from 0 to 10. Now take a separate piece of graph paper and graph the same function but label the x-axis 0 to 100 in the same space as the first graph. Now lay one on top of each other. You'll note they're the same. And yet the *entire* first graph is that very flat section at the left end of the second graph.

Not so scary anymore I hope.

The point here is that you can get scared about debt growing at a geometric rate until you think about the fact that the economy is growing along at about the same rate. You should still punish the politicians who have a cavalier attitude about the relationship between the two, but it's really not as *inherently* scary as you make it sound.

Are there limits to the resources on the Earth? Sure, but you know what our technology is doing? In energy, we're heading straight toward getting the majority of our energy from the sun in one form or another (solar cells, solar heating, wind, tides, hydro, etc.). We're spending far more time recycling rather than mining resources. We're working on sustainable approaches to farming and (finally, just before the fish "run out") fishing.

And by industrializing the third world we're bringing population growth rates down to a level that even Malthus would think are sustainable!

I personally am very thankful for Malthus' effect on economics in showing the need for sensible growth, but at the same time, he has generated an unending stream of "Chicken Little's" who are forever predicting the end of the world as we know it.

Its never going to be easy, but if we're smart we might last as long as the dinosaurs.

Of course in 10 billion years we all get burned to a crisp when the Sun goes nova, so if you really *want* to be a pessimist, that's the ultimate answer.

Conservation may be a sign of personal virtue but it is not a sufficient basis for a sound, comprehensive energy policy,
Buffy

[Eclipse Now]

Thanks for that detailed reply, and there is much there that I agree with. In terms of the Malthusian argument itself, I've been following the 'peak oil' debate for 4 years now, before it became mainstream, so I'm quite aware of the oil = agricultural collapse = dieoff.com arguments.



I became so concerned about these matters a few years ago I started campaigning about it. This is no small feat when I actually come from a humanities background, not a technical background. I think the dieoff argument above is an extreme scenario only possible if we are REALLY stupid and nuke each other over oil. But the risks are there.

The overwhelming argument I've heard is that this is the lifetime of 'peak everything'. All concentrated metal ores, concentrated conventional fossil fuels and concentrated non-renewable resources vanish in the lifetimes of babies born today if we keep increasing them at today's rates of consumption. (Actually, some of these models assume concentrated iron ore bodies runs out at only 2% growth pa, and I think the world average today is 10%!)

This is all very interesting, and yet I'm also watching increasing deployment of renewable energy, using renewable materials, nano-tech on the way, etc. It's the ultimate race!

But the question was what to do when we DO 'fill the earth' whenever that is and whatever it looks like. Aren't we just postponing that question discussing a history of previous Malthusian prophecies? How are we going to structure our finances in a 'steady state' economy?

[Buffy]

Originally Posted by Eclipse Now

But the question was what to do when we DO 'fill the earth' whenever that is and whatever it looks like. Aren't we just postponing that question discussing a history of previous Malthusian prophecies?

Its certainly a race, but in my mind the question of what we do when we "fill the Earth" is moot.

The thing to realize about *any* of these resources is that we'll never actually "run out." We'll never suddenly wake up one morning and there's no oil. As I heard one economist try to explain it, you may have to scrape harder and harder to get the last drop of milk from your cereal bowl, but there will always be some there. You have to realize that its not "running out" that forces the change, its the steady--and usually *slow*--increase in the price of getting the resource that causes the development of alternatives.

Sure it may be fantastical--and obviously expensive--to talk about "mining" hydrogen from Jupiter, but its *not* a fantasy.

So my view is that its not about "what do we do when we run out of everything" its "what do we do to stay ahead of the resource depletion curve?"

In my mind "running out" is so far in the future that contemplating it is indeed counting the number of angels that dance on the head of a pin. Its certainly not going to happen in my lifetime and not my daughter's or her kids when they come along. Wasting time on figuring out the running out part just takes away from useful brain cycles spent figuring out what we do *now*, and that's *not* going to be easy...

Pollution is nothing but the resources we are not harvesting. We allow them to disperse because we've been ignorant of their value,
Buffy

[Eclipse Now]

Pollution is nothing but the resources we are not harvesting. We allow them to disperse because we've been ignorant of their value,

I agree with that one! Very "Cradle to Cradle" in the design sense.

However, I have to disagree on the 'not running out' thing. I understand that cost increases around the peak and then decline of resources. What do you think will happen to the American economy when oil 'suddenly' costs $300 a barrel in about 5 years... rationing during 10? The crisis hits not at the end of a resource's lifespan, but about half way when the conventional 'easy' reserves run out and the rest of the resource is non-conventional, not as densely packed, concentrated, and easy to extract. The rate of extraction peaks. The oil/metal/mineral in question can no longer meet demand. Prices rise... substitution for new products occurs, use of the product scales back... and industries transform or die.

What about this, based on 2% growth in consumption run from USGS reserves data?

What will the world be like when we have run out of copper or steel? The average building today relies upon a great quantity of these resources for its construction. Faced with these facts, we can easily imagine a future in which industry has completely re-engineered its handling of material resources. After all, there seems to be no other choice.
1Brown, Lester, Plan B 2.0, New York: W. W. Norton, 2006. p. 109

Or read this New Scientist article.
We need to be careful distinguishing between 'reserves' and 'resources'.

Reserves are what is economically extractable with today's technology. Resources are all the 'stuff' that is there, but may not be extractable at a cheap enough price to meet the large volume of demand.

Mining hydrogen from Jupiter is not a reserve, it's a fantasy resource for now. I am talking about the end of all 'conventional reserves' of non-renewable minerals and metals —*and I'm afraid that unless a Star Trek 'Replicator' arrives in your daughter's lifetime, then it probably is going to happen. A similar idea is flow rates to meet demand. All the Tar Sands and unconventional oil sources in the world are not going to stop 'peak oil' because they simply cannot be extracted fast enough. I'm shocked and amazed that Canada can do 1 million barrels a day from Tar Sands... that's AMAZING! AND they are talking about scaling it up to maybe 3 MILLION barrels of oil a day by 2015! That's utterly GOBSMACKING! Wow!

But the problem is that world demand for is expected to increase by at least 1mbd / year after 2010. Even tar sands amazing growth will pale into insignificance compared to the rising demand from India and China and of course the west's 2% exponential growth rate. Alternative, non-conventional gluggy foul high sulfur oil is simply not going to flow as fast as the conventional stuff, nor will it sell for the same cheap price. The age of cheap oil is over — the age of sweet oil is turning sour. It's just a fact. It doesn't mean the end of the world, the end of humanity or even the dieoff graph above, but it does mean huge changes starting within the next decade or so. They could be overwhelmingly positive changes if the world got cracking in the right direction. I doubt it. Democracy is too short sighted. I've briefed politicians on the scientific credibility of peak oil —*it's now pretty much mainstream science in Australia and about 50% of Aussie geologists believe we are already at peak oil right now... and will see the permanent decline soon. But the politicians are simply terrified of the idea of even mentioning the 2 words 'peak oil'. Our ABC has run a number of specials on peak oil, I've spoken with politicians about this, I know that every politician in Australia has had the data explained to them by experts... but they do nothing.

Catalyst: Real Oil Crisis - ABC TV Science
Four Corners Broadband Edition: Peak Oil
Crude - the incredible journey of oil - Broadband edition - ABC Science

So, back to the question I forgot to include in my post above (but edited in afterwards).

How are we going to structure our finances in a 'steady state' economy?

[Buffy]

Three simple words: Follow The Money.

T.Boone Pickens is rich. And he's a smart guy (unlike a lot of politicians who were born with a silver oil well in their mouths!). And he doesn't want the world economy to melt down because even with all his dough, he's gonna have a rough ride.

So what's he doin'? PickensPlan that's what.

Can we do a massive conversion to non-oil in a decade? There are practical plans, maybe even plans you could consider modest, to do it possibly in my lifetime.

I bring up the Jupiter/Hydrogen source because while it may not be reasonable in the next hundred years, I'd say that given man's history in the last hundred it would be foolish to say it won't be done in the next 500!

We're arguing guesses here and I'd say we were in violent agreement.

I'd just always say that time spent assuming the worst case and no ability to do anything is time wasted!

You know, it's at times like this, when I'm stuck in a Vogon airlock with a man from Betelgeuse, about to die of asphyxiation in deep space, that I really wish I'd listened to what my mother told me when I was young,
Buffy

[Eclipse Now]

You know, it's at times like this, when I'm stuck in a Vogon airlock with a man from Betelgeuse, about to die of asphyxiation in deep space, that I really wish I'd listened to what my mother told me when I was young,

I've forgotten the quote.... all I can remember is something of the Vogon poetry. "Ode to a lump of green putty I found under my armpit one midsummer morning".

PS: I happen to love the Pickens plan as it gives the USA a bit more time to adapt to the shock of peak oil... but don't forget North American natural gas has already pretty much peaked. If you adopted the Pickens plan with a "war time economy" emergency budget, it's still not sustainable. You'll get some years of transport out of gas, but not a lot.

I guess I'm looking for a renewable civilisation running on renewable energy using renewable materials. Maybe nano-tech holds the keys. We'll see. Interesting times hey?

[Buffy]

Originally Posted by Eclipse Now

We'll see. Interesting times hey?

You can say that again!

Oh, no. That's just perfectly normal paranoia. Everyone in the universe has that,
Buffy

[Eclipse Now]

I think the market meltdown is beginning to illustrate my point about this being an unsustainable economic model.

Yes the "car" was being driven badly by Bush running 2 wars, and America having to import oil and most consumer goods didn't help their account deficit. However, what I'm talking about is the economic model being destined to fail.

The "Car" isn't just being driven badly, it has a fundamental design flaw and will crash. There are no "brakes" —*the economy has to go forward until it crashes into the ecological life support and resource limits of this planet. And every indication says it will happen in the next 20 years, starting with oil, then with runaway global warming, peak metals, etc.

Why oh why isn't there a sustainability index to GDP growth? When are we going to hear the phrase, "Oh no, the American economy grew at 2% last year, and we will have to adjust this by XYZ strategy to get back to last July's sustainable consumption index".

I heartily recommend Dr Chris Martenson's "Crash course" for anyone concerned about why the economy is so close to collapse. He is also going to release a "Creative Commons" DVD of his "Crash course" which will be copyable. The worst is yet to come!

The Crash Course | Chris Martenson

[HydrogenBond]

The economy is a sine wave. The appearance of this current "collapse" is merely the downward part of the cycle. This collapse in the stock market appears to be connected to a readjustment in the subjective wealth created beyond the real value in terms of equal worth of physical resources.

For example, the gasoline prices in the US were $1.50/ gallon higher two months ago. This change was not proportional to changes in supply and demand for gasoline, with both supply and demand roughly steady. The inflated and deflated prices do not reflect the physical or real volume. It is more of a subjective value added. This current economic adjustment is getting rid of the subjective fluff so it is better in proportion to physical reality.

Speculation or future's trading bets on the perception of the future rather than the tangible reality. If everyone wishes to make believe more value than what is real, we can make wealth, without there needing to be any physical reality backing. The past so many years inflated the subjective wealth index, now it is adjusting back to reality proportions.

For example, if a bunch of people buy a given stock the price of the stock will go up. The company doesn't have to change anything in terms of physical value, in the short term, to be valued subjectively higher. The subjectivity of the speculation is making magic wealth. The push toward retirement savings created a lot of money to inflate the value of all the investments due to demand.

The collapse of the housing market worked with this subjective affect. Banks were speculating on the housing futures. Banks don't loan money to lose money. They were speculating an inflated housing value market. Even if my house costed me X, and I added no additional real resources, it was suppose to be worth Y, for y-x=Z wealth without resources to back it up. The magic Z value, could then be used to refinance. This allows the homeowner to make magic money. The banks were increasing demand for housing with all the easy loans, inflating value across the board.

The banks were then suppose to get their magic money back with more guarantee of less default since people will fight for the extra magic Z. But the magic money didn't pan out, with the housing market draining the magic accounts. Now house values are closer to reality resources and banks have less magic money to loan. This came out of the retirement, magic. What we have now is a more realistic connection to actual resource value away from enhanced subjectivity.

I am not saying this is good but it reflects the reality of subjectivity. The Great depression also used magic money but it was done differently. We can't do that anymore. The system got creative and figure out new ways to make magic money wealth. It exceeded the safe amount requiring a reality check. The next up cycle of the economy will make more magic money.

Part of the problem is making magic money has become an art form. Every middle man that touches resource A adds cost or value to that resource, without the amount of the physical resources having to increase in direct proportion to the wealth created. I start with a yard of cloth. To inflate that with subjective value I can add a small piece of cloth with a designer label and now the subjective value inflated to double with only 5% more cloth. This subjectivity is being hit the hardest, with people having less magic money to buy product high in magic value. The downside of the economic sine wave appears to be a reality check in terms of physical resources. The up cycle will add new worth.