Economic Impact of Peak Oil Part 2: Our Current Situation
Posted by Gail the Actuary on September 25, 2007 - 9:45am
Topic: Economics/Finance
Tags: balance of payments, Bretton Woods, debt, economic growth, FDIC, productivity growth [list all tags]
This is the second of a three part series giving my view of the economic impact of peak oil.
Peak oil seems likely to make a huge change in our economic system--more than would be expected by a worldwide decline in oil production by a few percentage points a year. In Part 1, we looked at the contrast between economic systems before the industrial revolution and the current economic system. We also looked at economic studies that suggested that energy, and the more efficient use of energy, seem to be big contributors to the real economic growth that took place since the industrial revolution.
In this segment, we will look at some other changes affecting the economy besides the growth in the use of fossil fuels. We will look particularly at debt and how peak oil is likely to affect a financial system that is tied to debt. We will also look at some the stresses that the economy is currently under. Some of these stresses seem to stem from a failure of the United States to fully adapt to its own decline in oil supply since 1971; some of these stresses come from the fact that the world is finite, and we are reaching the earth's limits with respect to more than just oil.
1. Why is debt important to our economy today?
Debt, and the trust that makes debt work, is the glue that holds our economy together.
There is a very close relationship between debt and the supply of money. When a person borrows money from the bank, the loan actually increases the supply of money available. When more and more people take out mortgages and other types of debt, the people taking out the mortgages end up with more house then they would otherwise have. When homeowners refinance their homes and take the equity out, they get additional cash that they can spend on other things.
If we suddenly have a situation where there are many defaults on mortgages or other debt, we end up with a reverse of the above situation, so that there is in fact less and less money. If a bank takes possession of the house when a purchaser is behind on payments, and tries to sell the house to get its money back, the house is added to the large inventory of other unsold houses. This tends to bring the prices of houses down further, and tends to reduce the amount of equity other homeowners have in their homes.
Besides this role of debt, debt (in the form of bonds of various types) makes up a large share of the assets of insurance companies, pension funds, and banks. If there are suddenly many defaults on debt, most of the financial institutions in the country are at risk.
Debt is also a means of smoothing financial transactions. We use credit cards for personal purchases. Businesses make purchases from other businesses, and are often given some specified period to pay (say, 30 days or 60 days), before interest starts accruing. This is a form of debt. Because the US has a trade deficit, there is debt associated with purchases we make abroad. If we buy a car from overseas, on average, there are not enough exports to balance out our imports. Japan (or whoever is selling the car) ends up with more cash than it can use for imports. It often takes its excess dollars and buys US Treasury bonds--another form of debt.
2. How did we get to a situation where debt is so important to the economy? Weren't panics and crashes (like the bank failures during the depression) between 1800 and 1932 so disruptive to the economy that debt could only play a minor role?
During the time when panics and crashes were frequent, it was difficult to use debt widely, since defaults were a major problem. A number of changes were made over the years in an attempt to provide stability. The indirect result of these changes was to make greater use of debt possible. (Increased use of debt was also enabled by going off the gold standard in 1971, since the money supply was no longer tied to the amount of available gold.)
Factors which contributed to the stability of the system included:
• Establishment of the Federal Reserve System in 1913. This acts as a central bank, and tries to regulate monetary supply, primarily by adjusting interest rates.
• Establishment of the Federal Deposit Insurance Corporation in 1934. The FDIC insures deposits in banks and savings and loans up to a specified limit (now $100,000), to prevent runs on banks.
• Establishment of rules for international financial relations at the Bretton Woods Conference in 1944, including the establishment of the International Monetary Fund in 1945.
Another factor adding stability to the system was the economic growth that came through the growing use of fossil fuels.
3. Why would economic growth--pushed along by growing fossil fuel use--make the debt system more stable?
The reason that economic growth makes a debt system more stable is that we are dealing with a system in which a person (or company or government) borrows money at one date, and pays back that money plus interest at a later date. If the economy is growing rapidly, incomes tend to be rising, making the payback of loans, with interest, easier. A person who has taken out a home loan, or a loan for college expenses, will find that his higher income over time makes debt payments relatively affordable. Default rates tend to be low, so interest rates can be relatively low.
If there is no real growth (that is 0% economic growth), there will still be a few situations where loans make economic sense. These projects will have a good enough return that borrowed money can be used, and the return on the project will cover the interest on the loan. In general, the process will not work very well, however. Real incomes will not be rising fast enough to provide a cushion to make interest payments more affordable. Default rates will be quite high, so lenders will need to charge a higher interest rate to cover defaults. This will make loans affordable only in fairly rare circumstances.
If we get to a situation where there is long-term economic decline, rather than growth, debt becomes a losing battle. Default rates are likely to be very high, making required interest rates (to cover expected inflation, a "rent" payment on money, and expected defaults) extremely high. Virtually no project will have a high enough expected return to be financed by debt in such an environment.
4. Where do we stand now with respect to economic growth?
Wikipedia tells us that income per capita was essentially flat until the industrial revolution. Between 1790 and 1946, Economic History Services data shows that the US experienced long term economic growth. There were a lot of ups and downs, related to the bubbles, panics and crashes that were so much a problem in that era, however.
Since 1946, Economic History Services data shows that the US real growth has been about 3% per year. Year to year fluctuations have been smaller than prior to 1946, due to the changes described in Question 2 and the interventions of the Federal Reserve to maintain stability.
Going forward, it seems very probable that the US real growth rate will decline once world oil production begins to decline. From Part 1, we know that there is a close tie between energy use (and more productive use of energy) and economic growth. We also know from Part 1 Question 6 that productivity growth at this point is relatively small - only 1% or 2% per year, so that we are unlikely to make up a very big decline in supply by efficiency gains.
Surprisingly, a decline in US real growth rate may come even before peak oil. The issue is really one of how much oil is available to the US, through its own production and through imports. If something happens to reduce our imports, such as a drop in the value of the dollar, or greater competition for existing supply, we could find ourselves with less oil, even before the world reaches peak oil. If the decrease in oil supply is large enough that we cannot make up the shortfall by other means (increased coal or biofuels, for example), we could face declining real growth on a long term basis, even before peak oil.
5. Wouldn't declining economic growth cause problems in an economy that is as tied to debt as ours?
Yes! I It is likely to cause a lot of problems.
If no intervention is made, there are likely to be a huge number of defaults. This will lead to many insolvencies and deflation, most likely.
If steps are taken to guarantee the payment of loans, this may lead to hyper-inflation. We may still have our bank accounts and pension plans, but we will find that the funds in them will purchase much less than in the past.
It is possible that there will be such serious disruption that the monetary system as we know it disappears. We could temporarily end up with barter as the primary means of exchange. Presumably, an alternative monetary system would be developed fairly quickly, but it could still be quite different from what we have today.
New agreements with trading partners to facilitate inter-country trade would also be required. These new agreements could prove to be a more difficult problem than developing a new monetary system for use within the country.
6. Hasn't planning been done that considered the possibility that over the long term, economic growth may not really be possible?
No. Economic theory has grown up since the industrial revolution, during a period of long-term economic growth. Recent economic work has been done using data since World War II. No one has stopped to think that the analysis period data might not be typical of the situation over the long run.
Some examples of calculations that are distorted by looking at data from only periods of economic growth include the following:
• Pension calculations. Much higher contributions will be needed, it economic decline is expected.
• Loan calculations. A much higher margin for default is needed in interest rates, if a decline in economic growth is expected. Thus interest rates on loans will be higher.
• Projections of stock market values. An analysis that considers only periods of economic growth will show good prospects for stock market growth in the future. An analysis that considers the possibility of long-term economic decline will show declining values.
• Models used by quantitative analysts to price derivatives and sliced and diced bond funds. It is not clear that these models are very good in the best of circumstances. If one adds the major shifts caused by declining economic growth, rather than increasing economic growth, the models are likely to be hugely distorted.
7. I have heard that the US has been spending more than its real income in recent years. It seems like this will only make the problem of a future decline in real income worse. In what ways are we overspending?
There are several ways that we are spending more than our real income:
• We keep adding more and more debt (personal, business, and governmental). We use debt to finance our expenditures, with the idea that our income will be higher in the future, so we can afford to pay for our expenditures plus interest later. One example of this is refinancing home loans, and using the equity to pay for current purchases.
• The government has developed programs like Social Security and Medicare that promise payments in the future, that are only partially funded today.
• We defer maintenance on our infrastructure - roads, bridges, pipelines, and electric grid, for example.
• We are depleting our non-renewable resources. Besides oil, we are depleting our natural gas, so that declining production is expected in North America in a few years. We are also using water from our aquifers more quickly than it can be replenished, and we are depleting our soil by not returning enough organic matter to it.
• Debt payments are artificially low,
• We are importing more than we are exporting, resulting in a growing balance of payments deficit.
8. I'd like to know more about the last two points. Tell me first about the US Balance of Payments situation.
US oil production began to drop in 1971, and the US went off the gold standard the same year. Since then, the US has been importing increasing amounts of oil and other products. This increase in imports has not been balanced by an equivalent increase in exports, so our balance of payments is getting more and more lopsided.
Figure 1: US Balance of Payments, 1970 – 2006
What is happening is the US standard of living is increasingly being subsidized by the deteriorating balance of payments. In 2006, this deficit amounted to about $2,700 per US resident, or somewhat more than 10% of US per capita income. This deficit relates to a wide range of products --only about 15% of our imports are currently petroleum products.
US trading partners are becoming increasingly unhappy about this situation, partly because they realize that they are financing a lifestyle Americans cannot really afford. In addition, many trading partners are becoming aware that world oil production is likely to decline in the next few years. Peak oil is likely to result in declining real GDP and a much greater chance of default on debt. Our trading partners do not want to be caught with a lot of worthless debt.
9. What about the other point in Question 7, "Debt payments are artificially low"?
There are several reasons debt payments are artificially low:
• Foreign trading partners in recent years have been using the excess cash they received from the US purchase of imports to buy US debt. This has helped to keep interest rates artificially low. This issue is closely tied to the balance of payments situation above.
• Low interest rates set by the Federal Reserve have also tended to keep interest rates low.
• Some new debt products have artificially low teaser rates for the first few years they are effective.
• The charges required for defaults on loans have been calculated in a period of economic growth, so are artificially low.
• Underwriting of loans has often been very loose.
If payments on loans are artificially low, lenders will generally fare poorly. Such a situation is not sustainable--In the long term, debt payments (on all new loans and some existing loans) are likely to rise, resulting in market contraction and defaults.
10. Are there problems with the debt system, over and above the artificially low payments that may cause defaults in the future?
Yes. Confidence in the system is being severely tested. One of the basic characteristics of a debt-based finance system is that there must confidence in the system for it to continue to exist–-otherwise lenders will stop granting credit and the system will come to a screeching halt. For example:
• Debt products have been put together without adequate concern for protecting the lender. Home loans were made with initial teaser interest rates and little down payment. Commercial loans were made without proper covenants.
• Questionable loans were repackaged (after being sliced and diced) and resold around the world. These repackaged loans cannot be valued properly, partly because of the questionable nature of many of the underlying loans, and partly because the valuation system that was planned (using rating agencies and theoretical models) works very poorly in practice.
• Off-balance sheet financing of banks makes it impossible to assess a bank's true financial situation. Banks are becoming less willing to lend to each other, because they cannot tell what each other’s actual financial situation is. Banks lending to other banks are not protected by FDIC coverage, so they are concerned when there may be a risk of default.
11. What other issues are currently on the horizon?
The world is finite, and we are reaching its limits in many ways. Besides energy-related impacts discussed in Part 1, there are many others:
• There is increased competition for soil and fresh water. It is not easy to increase production of biofuels, because of competition with food production. Costs of food and other products tend to rise with scarcity, adding to the overall pressure on consumers, and pushing real economic growth downward.
• Many minerals are becoming harder and harder to extract, because the locations with high concentrations have been mined. The real cost of mining these minerals is rising, both because of the higher cost of fuel and because of the additional work required to extract these minerals.
• Climate change is becoming a serious issue. There is a significant possibility that climate change will disrupt food production in not many years. There is also a possibility of coastal flooding causing significant damage.
12. How would you sum up what we are seeing here?
We are facing a world that is already stressed - by a debt market that is not working well, by pressure on limited resources, and by climate change. In such a world, it does not take much of a change to disturb the debt system, and to cause serious problems with the world monetary system.
Peak oil, or even the squeeze preceding peak oil, is likely to result in a decline in real growth. Even a slowdown in growth might cause a problem at this point, given the existing problems in the system. This disruption of economic growth is likely to put pressure on the monetary system, because our monetary system is tied to debt, and debt is easily disrupted by declining economic growth.
The United States is particularly vulnerable to problems because we are living beyond our means and because we are already straining our debt-based system to its limits. There is a significant possibility of a discontinuity of some type--either deflation or rapid inflation. There is even a possibility that our monetary system will fail completely, and need to be replaced.
The long period of economic growth in the past 60 years has lulled analysts of many types into believing that the favorable patterns associated with economic growth will last forever. It is pretty clear that these favorable patterns are in fact temporary. Peak oil, or the squeeze preceding peak oil, is likely to result in a rapid change in the financial situation that may have more impact than the decline in oil production itself.
In Part 3, we will look at the changes that are likely to occur in the years ahead.
Pay off your debts, make practical preparations. Thereafter if you have any surplus savings left exchange them to the only real money: GOLD.
The fiat money systems are likely doomed at least to further depreciation year after year ahead.
RE the gold standard: IMO the US dollar's link to gold had long become a fiction by the time France 'called the bluff' and actually began demanding payment in gold. The pros and cons of a gold standard have been debated extensively on this list and elsewhere. I don't see a way that a gold standard can realistically work. But then, I don't see a way that the worlds current economic situation can work regardless of the commonly accepted monetary standard. We are in a bad fix.
OIL AND MONEY
Hello TODders,
As an economics neophyte you might ask:
1. What is "money"?
2. Where does it come from (how is it "created")?
3. Why does our culture need ever-growing supplies of money (and the goods/bads, services/disservices to back up that money)?
Similarly, a PO neophyte might ask:
1. What is "oil"?
2. Where does it come from (how is it "produced")?
3. Why does our culture need ever-growing supplies of of flowing oil (and the goods/bads, services/disservices dependent on that growing flow of oil )?
OIL and MONEY: How did we get on this accelerating treadmill and where is the button for stopping and getting off?
A good video http://video.google.com/videoplay?docid=-9050474362583451279&hl=en-CA
Paul Grignon's 47-minute animated presentation of "Money as Debt" tells in very simple and effective graphic terms what money is and how it ... all is being created. It is an entertaining way to get the message out. The Cowichan Citizens Coalition and its "Duncan Initiative" received high praise from those who previewed it. I recommend it as a painless but hard-hitting educational tool and encourage the widest distribution and use by all groups concerned with the present unsustainable monetary system in Canada and the United States.
It's a great video but the arguments at the end about why the system is unsustainable aren't correct. Look below for the reasoning as to why.
Rajiv,
The punch line near the end is that hardly anyone gives a second thought as to what money is or how it is created.
I think if we took a survey, as some of us do, of how many people ever give a second thought to what oil is, how it is created (formed and extracted) and why it might be an essential element of our very existence, the results would be very similar.
The "rational" human mind doesn't give it a second thought. Second thoughts hurt. Best to leave such painful thinking to the invisible smart people who are taking care of things --the care takers and crude givers. :-)
http://politics.reddit.com/info/2sxcg/comments
if you are so inclined to promote this piece around the web, we would appreciate it.
All money is created as debt, as is easily understood after viewing Money as Debt. You're almost there but hesitant to say it, or so it seems. If we all pay off our debts, there's no more money. It is really that simple.
The first task of the Fed is to maintain the value of the US dollar. It has lost some 95% of its value since 1913, so that is definitely not working. Saying that the Fed "tries to regulate monetary supply" could mean anything, from overflowing the markets with debt-ridden funds, as in the past decade, to suddenly withdrawing lots of money, as it did in 1913, and, in my view, soon will again. For whom does the Fed work? The American people? It's a taboo question, but perhaps not a bad one.
You use terms like "real growth" and "real GDP" as if these are knowable. They are not. For all we know both may have been negative for years, a possible fact hidden by -exponentially- increasing money supplies, aka debt.
One thing you haven't touched upon is what Henry Liu called:
The rise of the non-bank financial system. That is, the debt instruments issued by institutions other than banks. These instruments have allowed the rise of the derivatives industry, which at their present estimated value (sic) of close to $500 trillion have the potential to bring down the entire existing global financial system.
Derivatives are far more important than homeowners defaulting on loans, both because of the much bigger numbers involved, and because underlying assets have been leveraged to a far higher extent. The world has never had anything remotely like them, which makes it hard to oversee, but all governments, banks, pension plans etc. are deeply invested in them, and that is scary.
It is tempting to try and see a link between peak oil and the economy, but it's not very clear so far in what I've read here. I doubt the causality of the link very much; the financial system is imploding on its own accord, in my view. Allowing the creation of 100-fold leverage on any asset one can think of is an insanity that could not even be balanced if we had 10 times as much oil as today.
One last thing: oil prices seem to be on the rise these days, but are they really, or are we fooling ourselves? For instance, did they rise in Euro's? Can't be much. Could that be why pump prices are still relatively low? Nobody addresses this, might by a US blinder kind of issue. The dollar just reached another all-time low vs the Euro.
I couldn't find a Euro chart offhand, but this one should be cause for pause when discussing oil prices:
Brent Spot/dollar commodity charts
- development last 3 month(s)
Thanks for saying it for me. The inflation that you blame on the fed is to an extent necessary; the prospect of cash depreciation is a goad to invest rather than hoard, and 3% is considered sufficient motivation. This keeps the cards on the table and moving. Compounded over time, we shouldn't have a loaf of bread or an hour of work be the same as 1910, but the reality has been not a smooth curve but a lumpy one. Nuther lump coming, but is it up or down?
We may see the fall of the non bank financial system, and much faster than its rise, as is common in the sawtooth world of such things.
P, I don't know where that idea comes from, but it's pretty wild. A quick look at exponential functions says it's doomed from the start. It simply forms the basis for a consumer society, I would think, and that's not going very well.
As long as people have not fulfilled their (basic) needs, they will spend in order to do so. When they have, why entice them to spend more? As all money is issued as debt, they will only get deeper into debt, so who benefits from that 3% inflation? Not the people.
It will bring down the banks as well, or at least I can't see how it couldn't. The entire system is neck-deep invested in derivatives.
Then there is the obvious connection to a growing population. Picture a village with a fixed number of people and you could conceive of a steady-state economy with no inflation. Keep adding people and this triggers all the other pressures to adopt 'inflationary' systems such as resource extraction and fiat money. Population expansion must, I believe, be seen as the fundamental driver behind expansionary economics.
No it's not. In periods with very low inflation or even deflation like around 1900 other mechanisms were used to achieve the same effect, for instance the Woergl stamp scrip. This currency was used to rejuvinate a small city and it worked by causing money to "rust" by forcing people who held the cash to pay to keep it valid.
This practically forced investment and usage of the money rather than hoarding, as people are wont to do when a currency is deflating. It had an amazing affect on the town, by all accounts.
These days inflation is used to achieve the same thing. Rather than sit on piles of cash waiting for them to get more valuable, people invest. They do this even if they don't realise it - by holding their money in savings accounts or pensions.
It's widely accepted that a small amount of inflation "greases the wheels".
Why entice them to spend more? Perhaps because people spending money is how things get done? If everybody bought only the minimum they needed to survive and hoarded the rest our civilisation would grind to a halt. Nothing new would be created, infrastructure would decay, our society would become a pathetic joke.
You want money to circulate, you want investment. What you don't want is too much new money entering the system because that can cause nasty feedback loops.
Also, whilst it's true that the money system is based in "debt" that's not necessarily a bad thing. The word has many negative connotations, but having money be issued via bank loans has both pros and cons when weighed against alternatives (like full reserve banking or Ripple-style mutual credit systems).
Why entice them to spend more? Perhaps because people spending money is how things get done? If everybody bought only the minimum they needed to survive and hoarded the rest our civilisation would grind to a halt. Nothing new would be created, infrastructure would decay, our society would become a pathetic joke.
Sounds like a prescription for exactly what we need. (although, I do believe our society is already a pathetic joke for holding on to growth as one of its core values)
Anyone touting inflation as a good thing doesn't understand exponential functions.
Inflation does one thing only: it depreciates the value of your assets, while debasing the value of your currency.
And you wish to make the point that that is a positive thing, and our civilization would even grind to a halt without it.
That may be true for a civilization based on American Idol, McMansions and Cheese Doodles, but why would we wish to save or maintain that? Aren't the limits sufficiently clear yet? How much longer will it take?
Of course. if what you have loses value all the time, and what you need gets more expensive at the same time, you will have to go and work and dig holes and what not, in order to make up for that loss, and you'll get mighty active, but that’s good for who exacttly? For you? Who do you think collects as profit what you are losing?
The early 1900's are not a case pro inflation, they were a time where an inflation based economy was showing the same cracks that we see around us now. Fight the evils of inflation with more of the same. Real promising.
.
Inflation ultimately can only destroy societies. And my, look around you.
Inflation reduces the value of currency, which makes sustainable investments more compelling.
Consider a forest that I own. If there is no inflation ... if there is deflation, in fact ... then it's in my best interest to clear cut the forest straight away. I'll get a lot of money up front and that money will become more valuable year after year! But if there is some mild inflation, then it's in my best interest to run the forest sustainably, because I get a guaranteed income each year (the price of wood will rise along with the price of everything else to match the increase in money supply). In other words I invested and produced value rather than hoarding currency and eliminating value.
You're right that inflation can destroy societies - just like deflation can, if allowed to get out of control. Your position on the early 1900s don't make any sense - the Great Depression was a time of deflation, not inflation.
I believe that ilargi was referring to
You seem to be fixated on 1929. Before 1929 but still very much a part of the early 1900s (part of that same 20th century), we saw numerous financial events that demonstrated the hazards and folly of inflation.
"The greatest shortcoming of the human race is our inability to understand the exponential function." -- Dr. Albert Bartlett
Into the Grey Zone
While I understand the point Mike was making, it does provide a valuable counterpoint: The way in which this forest is *considered* is from a purely economic standpoint, and that's the tragic rub of our whole economic way of life -- EVERYTHING is reduced to its pure economic value regardless of any other value ethic!
IMHO this all encompassing capitalist economic meme is our ruination as a species. We need a land ethic that supports our basic communal ecologically based survival needs first and foremost. In other words, the forest is valuable as an intact healthy ecosystem that supports our life and all the other living things that contribute to the same! As soon as we diminish this land ethic valuation and substitute it with an economic one we devalue and diminish our own survivability.
Hence the lesson we are soon to learn as a species: Nature does not make economic compromises with anyone!
1. What is economy but the mathmatical analysis of scarcity of resources?
2. Why are you considering an entire math science to be "bad" just because humans used it to understand better how to destroy Earth? Economy isn't bad and that's the issue we face. The problem is that it worked too well, not too bad.
3. Isn't morality only a traditional-based "economy" of things? We all have learned by moral that we should be in more of a harmony with the environment (the greens), but isn't that a purely economical stance of sustainable existence? Aren't you confusing "Economy" with "PR using economical terms to rape the Earth"?
I'm not against what you're saying. I'm against the way you're saying it. The program you present (get the ecological issues back to politics, aka society, from the economics) has some problems, but essentially I agree with it. Society should decide what is best for the ecossystem first, and only thereafter what is best for particular economies.
But this kind of thought will be referred to as "communist" or "extreme left nugget thinking", and so I wouldn't bet on it.
I'm sorry but I do not accept your definition of "economy" as a "mathematical analysis of scarcity of resources." I do believe this is way too narrow a definition of what should constitute a healthy and life sustaining *economy* and our understanding of it.
Secondly, I did specify the particular economic analysis system I was referring too: "all encompassing capitalistic" one. Your suggestion that I was inferring all economic (or math based) analysis "bad" is a misguided interpretation of your own making.
However, as to your suggestion that such an economy as you conceive it, as a mathematical abstraction, "worked too well, not too bad" in *destroying the earth* only serves to prove my point!
Without an ecological ethic (or however else one wants to call it) to guide us, all our scientific and mathematical genius can not save us from continually doing harm via these lofty methodological abstractions -- they need to be grounded in earth based limits and our acceptance of them. In short we need to accept that we aren't demi-gods over this earthly creation but mere caretakers, and very ignorant and fallible ones at that.
Finally, I don't care what anyone may think to negatively label such thoughts as representing. We don't have as much choice in this matter as we pretend we think we do and/or will have. The way we are going about accounting the economy of the world is without a doubt leading us to ruin. Ultimately, earthly reality and the very real limitations that rules the natural world here and within ourselves will prevail over our ecologically unhinged abstract economic conceits.
Whether we make amends before our civilized destruction is complete is *the bet* we are wagering and it is the only one none of us can predict with certainty, but make no mistake we are betting against ourselves daily with our unethical economy as is!
Thus my assertion stands: Nature does not make economic compromises with anyone!
Mike Hearne:
If the Woergl stamp script worked so well, then why wasn't it revived during the Great Depression at least in Woergl? Why are there no more examples of this system working in the years after this one experiment?
When I'm looking at an idea for an oil well one of the first things I look for is evidence that other people or companies are doing a similar type of prospect.Its confirmation that my idea isn't too outlandish. And its the same with other ideas, I don't mind being fairly original but if I'm too original its not a very good sign. Bob Ebersole
Bob,
Democratic forms of government were invented by the Greeks several hundred year before Christ. After a relatively brief period of experimentation these forms of government disappeared from the world for over a thousand years. Did this disappearance constitute 'proof' that democracy was a bad idea?
And, by the way, the Woergl was deliberately suppressed at the request of the Austrian central bank. The case was fought up to the Austrian supreme court which ruled in favor of the central bank. What a surprise.
Roger
Peak oil guarantees that any debt based system that depends on infinite growth is doomed. So by itself, peak oil guarantees our current monetary system, even without the non-bank financial system, is doomed.
Our current system has so many deficiencies that it seems to be doomed, with or without peak oil. I agree that the non-bank financial system is a big part of the problem. It seems like the whole system will collapse fairly soon. Any push from oil prices, or the drop of the dollar, or knowledge of peak oil, will only help it along.
When I started trying to tackle this subject, I found myself with too big a topic to handle. I divided the subject up into three posts, but even these got long. I stayed away from the non-bank financial system because I needed to contain the topic somewhat. Perhaps I can do another post later with some other issues. In this post, I do mention off-balance sheet financing of banks as one issue.
That´s why i maintain that GOLD is the only real money in existence. It ain´t debtbased and can´t be printed out of thin air. Sure you can´t go and buy milk for a gold piece, but its a sure thing for wealth preservation of ones hardearned savings.
Gold is ‘real money’ only in the presence of a healthy economic system in which relatively wealthy people exist who want to deck themselves out in gold trinkets. If everyone is worried about where their next meal is coming from or how they are going to keep warm this winter a whole warehouse full of gold will not be of much use to you.
Couldn't one say that about any good, be it a precious metal, mineral, commodity, or a chicken? They aren't debt-based and can't be printed out of thin air either.
What I'm nervous about is your use of the word "only". I would argue that there is a large basket of stuff that can be used to efficiently store value, and that picking a single one isn't wise.
Couldn't one say that about any good, be it a precious metal, mineral, commodity, or a chicken? They aren't debt-based and can't be printed out of thin air either.
Unlike other commodities, gold is not perishable, does not rust or corrode and takes very little space to store. 500 gold coins - which can easily fit in a small briefcase - can buy you a decent house in most parts of the US.
Also, gold has a 5000 year history as a store of value. I would argue that silver is also "money", but not as much as gold.
Of course. And that's the reason for my use of the word "efficient".
Diamonds would also qualify and have far better value density than gold. Many currencies would do the trick. I'm actually fond of land as a store of value.
In case it wasn't clear, my point was not that one shouldn't buy gold, but rather buy a diversified basket of assets to cover yourself no matter what happens.
Gold is a universal currency. I know I spend a lot of time in Asia. And yes you can but a litre of milk with gold. In fact gold is the prefered currency especially in Chinese communities. You can buy and wear standard weigh gold earings / sleepers in any pierce-able point on your body. The minimum is about 5g. They will even give you change. This is handy to know as you can buy or have made a large amount of these if you are traveling from say Thailand to China via indochina just as an example. It is also common in Central asia to use a chain you can cut links out of. I have done this in Tashkent.
Diamonds are no good as money. How do you value it? A goldcoin as a Krugerrand is recognised by almost everyone around the world, and are smaller more convinient pieces of value than diamonds.
My stupid opinion..........
For the average Joe Blow.
In the not too distant future, your labour and health will be your biggest asset.
Wealth eventually will be seen in land barons.
Livestock, farmland and the ability to defend it, will be all that matters.
Big land barons will be like the monarchs of old.
The worth of gold will be determined by how well it can keep you alive, if a gold coin can't buy your next meal then I would say it was worthless.
Initially labour will be very, very cheap. There will be enormous competition to provide it.
The inevitable crash in populations, will be the only pressure relief.
Paying for and providing security may be a growing trend.
The big problem with diamonds is that the price is far, far higher than their cost of fabrication. If the De Beers cartel falls apart, the price of diamonds will quickly fall to around the price of fabrication. Even in a world with scare fossil fuels, I'm sure diamonds can be manufactured for less than 1/10th the current market price.
I learned about the value of diamonds when I went to sell my mother's jewelry after she died, to help fund the estate (needed to raise money to pay bills). Furs older than three years old are worthless. You can't give them away. No one wants them. Furs older than one year, but newer than three years old have a value of about 1/25 of their retail price.
Costume jewelry is worthless, about $5.00 per pound.
"Gold-filled" anything is worthless. 18K to 22K gold is worth the melt value, anything less than 18K is worthless.
Diamonds are worth 1/10 of the retail value, if they are big enough (>1/10 carat). My mother's wedding ring, with an insurance valuation of $4250, brought $430.00. I checked this value on Ebay, and this is the general state of the market. Diamonds bought at retail are *NO* store of value. Diamonds at wholesale may be valuable, but unless you're one of the diamond traders, you aren't going to get a diamond for the true wholesale value.
Steuben glass is worth 1/10 of retail value. And so on. Mass-marketed collectibles are worthless (but check prices on Ebay, some of that stuff has deceptively high prices). Usually anything stamped "Made in China" is worthless. Silverware is worth the melt value. Make sure it's sterling, silverplate is worth the melt value of the copper which comprises most of it, unless of course it's more than 150 years old and has recognizable hallmarks from a recognized UK or Irish silversmith (same for silverware).
Stainless steel "silverware" is worthless