Sunday, September 27, 2009

Energy As Currency: Cat Is Out Of The bag.



What follows is a response of mine to an article that I'm about to post over on one of my favorite blogs, The Oil Drum . I posted my response here, first, simply to ensure that I'm credited with my own work (indeed, I have an enormous amount of work into this idea). The time stamps should evidence that what follow is my post, my idea, and, incidentally, reveal my identity on the blogosphere as GreenPlease (you'll find me posting on The Oil Drum, GreenCarCongress, TreeHugger, e90post, and facebook under that name). The only difference in the posts will be that my TOD post will include a link to this post. Enough of marking my own territory. Here it goes:
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Is 'trust' subject to laws of thermodynamics?
What a great question, one that I plan on giving a lot of thought. Tons of thought. Possibly a thesis. Seriously, great question. In response to your questions:


1) Can you articulate a concerted policy response that would indeed lead to 'strong', 'sustainable', and 'balanced' growth?

I'm not going to go against the tide and say that "sustainable" and "growth" are compatible but I would say that we need to redefine "growth." Too many people view growth as using larger and larger amounts of resources (e.g. more wood, water, oil, land, etc.) and very few think of efficiency when they think about growth. If the entire world were to start using state-of-the-art LEDs tomorrow, we would use significantly fewer resources (coal and water primarily), though the end benefit to society (lighting) would remain the same. Would this not be growth in a sense? Unfortunately, this would not be seen as growth by most in the field of economics. This mindset has to change.


1a) If not, what sort of 'economic triage' policy would you recommend? Think bold.

The following is the boldest policy I've got (I'm an economist mind you): move the entire world to an energy denominated currency (either the kw/h or btu) I've been working on this idea for a little over two years now and have compiled quite a thesis to back it. Guess this is as good of a time as any to let the cat out of the bag. The summary of the ideas/pros/cons follows: Society would instantly be more aware of how important energy is in day to day life. Hopefully/possibly they will act more responsibly accordingly. Information is such an important aspect of economics. People's ability to choose correctly is largely dependent on them having the correct information. Our current fiat currency system accompanied by government subsidies masks the true costs of goods and results in poor choices. -The intrinsic interest rate would be negative This is due to entropy. People's currency would thus literally "disappear" over time. Huge consequences ensue: --Spending driven recessions would be a thing of the past. Economists have been dancing around this idea for years. Krugman frequently cites the idea of a negative interest rate in his work (going back to the early 80s) as a cure-all for spending driven recessions. --Inflation and deflation would cease to exist in the aggregate: market forces would still allow for inflation and deflation in localized instances (such as a "hot" product) but the nature of an energy currency, that it is finite, would cause deflation to materialize elsewhere in the economy. Inflation and deflation would balance each other out. --Our monetary system would fall in line with the real economy. If we are less productive (for whatever reason), less money is available. If we are more productive, more money is available. Further, carrying costs would be realized. The Austrians seem to believe that money should have a constant value. The fallacy in this idea is the concept of carrying costs. Imagine we live in a two person economy: you and me. Let's say you grow carrots and let's say I have a piece of currency that allows me to purchase your carrots (a call). If I don't buy your carrots the first year your carrots rot and you have to grow new carrots the next year and incur a cost in the process. My "austrian" money has not depreciated, however and I incur no additional cost for you to grow said carrots. Constant value money puts an undue burden on producers. An energy currency, with its intrinsic negative interest rate, would account for your carrying cost. As your carrots rot so does my money. --A negative interest rate on currency would cause people to invest in flows instead of stocks. That is, they would try to own producing goods (solar panels, farmland, etc.) rather than hoard money in hopes it will accumulate greater money (CDs, bonds, etc.) --Many would argue that inflation already does this with fiat currency but fluctuations in currency markets and monetary policy don't always allow the negative value mechanism to work. Recent cases of wealth destruction, such as the credit bubble, cause currency to appreciate (fewer claims on the same number of physical goods) give people the idea that currency can appreciate in value, thus giving them incentive to bet (hoard) currency instead of using it to buy/produce a producing asset. Pricing would be more efficient With appropriate information, people would better be able to price goods. Transport and holding costs would be contextually apparent and rational decisions would be more likely. In the long term, everyone would benefit (no guarantees everyone lives to see the long term but we can't be all things to all people here). The importance of efficiency in resource utilization would become apparent The idea of utility would be clear. A more efficient engine would be seen as an economic gain We would be able to price environmental goods The value of water and oxygen would become apparent. To this end, we could effectively price the value of wetlands that filter water, the value of the water itself, the value of trees (need oxygen to burn stuff).... the list goes on. As a side note here, water itself would be priced in terms of energy. Highly saline/contaminated water would have a high energy cost as it would have to be filtered, as would distant or deep water as it would have to be transported. Clean surface waters would be cheap and thus of a comparative value in the market place. Example: growing carrots in Saudi Arabia vs. Michigan. In SA, water has a cost of say 100,000btu/m^3, whereas in Michigan it has a cost of only 1,000btu/m^3. If we assume that all the carrots grown get sold and that SA carrots are not sold at a loss, then the Michigan carrots will reap an economic benefit of at least 99,000btu/however many carrots are grown with a cubic meter of water. We would be able to measure our growth relative to our environmental impact I'm getting a little bit tire here so I'm going to just start lumping stuff together. Our economic condition could be measured by 1. raw output 2. efficiency in utilization 3. impact on the environment. I have details on these measures in my thesis Many of the classical ideas of economics would re-emerge No point in expounding on this but I will say that, in my opinion, many of the classical ideas regarding economics have better logic behind them and are more in touch with the real world Countries would not be able to manipulate their currency to gain an advantage Instead they would only be able to institute policies that would allow them to expand their productive base or become more efficient in using said base. I've designed and modeled (technically, I'm modeling) a transitionary framework. This is not trivial work but it appears if the right countries picked up the flame a universal energy currency would spread quickly enough. The importance of resource utilization would become instantly apparent At least a few TOD readers have had the thought "my gosh, Saudi Arabia would become even more disproportionately wealthy for no real reason" by now. At first glance, an energy currency seems to benefit energy rich countries (which it does to a point) but this energy is essentially just a savings, a stock, not a flow. What matters in the quality of our lives is flows. The actual quality of life of Saudis would not change immediately due to an energy currency (likewise for most countries). Saudi Arabia could very well increase their flow rate of oil and gas, burn more of it to produce "work" but if this work doesn't somehow better their citizens lives (by providing lighting, climate control, water, food, etc) then their resource utilization will be low and their resulting measured economic well being would also be low. In order to better themselves, SA would have to ship its oil/gas to a region with fertile land which would ship back food. Think gains due to specialization and trade here. Entropy and enthalapy would become immediately important think quality vs. quantity Fractional reserve banking would come to an endYay!!! I don't think I need to explain why this is such a great thing. I've come up with some counter arguments that indicate that fractional reserve banking would still be possible though they are too complex and too esoteric for here (plus, I'm getting really tired). FWIW, my initial models indicate that a bank practicing fractional reserve banking with an energy currency would quickly become insolvent. Economics (and finance as an associated branch) would finally have a link to the other sciences Many of the other sciences can communicate and share ideas because of shared and fixed units of measure. Economics, up until now, has not had this. In my opinion, the biggest problem plaguing economics at the moment is the problem of measuring. There is a great deal of literature about the importance of measuring in science and the consensus is that improvements in the ability to measure result in step changes in the capabilities of science. I hope this proves to be the case in economics. For years I've kept one of Einstein's quotes in the back of my head "Not everything that can be counted counts, and not everything that counts can be counted." Brain is fried, I know I'm missing 2-3 points here. There's a lot more to this (165 pages and counting :D ), such as transition mechanisms, currency issuance, but this isn't the right venue. I'm just trying to convey the general concept. Nate, it appears you seem to be thinking along the same lines as me regarding our current monetary system. If you think that some of my work on this idea is worthy of a guest post, I'd be honored (not to get a big head, just saying). If you want to contact me directly (this applies to any of you as well) try one of my emails:
- cornelius x carroll at yahoo dot com (this is the one I check most frequently) or -ccarroll at rollins dot edu P.S. Nate, note that much of the $400-700trillion of debt you cite is in the form of derivatives. Inherently, most (>90% off the top of my head) cannot actually enter the economy in order to claim a physical good. This is because most options (calls/puts) expire worthless, and most credit default swaps cancel out (and simply tie the entire financial system together/create systemic risk, think AIG). Also don't forget that some debt can also cancel out (theoretically, two banks could issue debt and use the resulting currency to purchase said debt). This does not instantly cancel out, however, as the debt has a time value. The result is a build in M3, though in reality this money cannot enter the system to purchase physical goods. This is one of the reasons that the Fed stopped publishing M3 data (not to mention it was pretty darn convenient for them to stop when they did). What is important are the flows (interest rates) as they determine the amount of money that can actually enter the system to purchase goods. The Austrians/gold bugs totally miss these points though I give them credit for at least acknowledging that our current fiat currency system is bunk.

17 comments:

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