Posts Tagged ‘Austrian School’

Carbon in the Monetary Unit: Alternatives to Fiat Currency

Sunday, April 5th, 2009

In an earlier piece, An Energy and Carbon Monetary Unit, I wondered if there might be a happy medium (so to speak) between the bubbly excesses of fiat currency and a perhaps distant but disturbing problem of interest payments under a gold standard.

Energy money can be considered on its own, but I’d like to introduce a “carbon” credit sub-plot, on the theory that an analysis of energy should be undertaken with all of its output, and tied to its negative externality so that true costs percolate into the light.  A related piece of theory is that over a long enough time frame we benefit if all stakeholders at every scale get to give their “answer” to our economic questions.

My fantasy is that if we could throw the issue into the monetary unit and force a cost judgement on everything, from mini wind turbines hand-knitted of hemp fiber at vegan communes, to whale blubber charcoal cured in spent reactor fuel baths by North Korean child labor, then we could all shut up for just five minutes (except for me; I’d spend ten of my five minutes on a request for exemption).

As an example of energy-pollution monetary interaction, if we determined that wind energy was as friendly as anything could be, then a wind energy unit would require the lowest additive pollution credit to bring it up to one monetary unit– one “energy-carbon dollar”.

Say you’re a farmer (you don’t have to say it out loud if you’re near someone who’ll think it’s weird). You’ve built a wind turbine.

Perhaps (since you’re a farmer), the government will let you use your wind energy on your farm without buying a carbon credit; perhaps (since they’re the government), not.  But if you want to convert your wind energy into money, then you’ll send it through the grid to your bank where they store it in their accumulators and you get, say $.90 for each $1.03 of energy– $.03 in the bank’s pocket, and it’s matched up with $.10 of pollution credit hypothetically required for clean wind, to create an energy-carbon dollar.

If you want, your energy-carbon dollar thus created could sit and wait for you in the bank as a demand deposit.  As is normal for a non-fiat, non-fractional reserve currency, you wouldn’t get interest (and don’t forget the 3% you just got charged for the bank’s administration, risk and loss).  Your money, by law (at last rational), would not be loaned out by the bank, since it’s waiting there for you to demand it.

If you prefer you could ask the bank to loan out your energy money as a term loan.  Then you would get paid interest, with a portion to the bank as intermediary, but you’d no longer have access to your money until the end of the term.  Only one person, the borrower, would be using the saved money until it’s returned to you, upon which only one person, you, would then have access.  (No credit money has been created “from thin air”, and no credit bubble can occur– Austrian School money and credit theory with energy and pollution credits jammed into that mold.)

There is money being created in the example, however the energy piece is created on the productive side of the economy, not the made up financial engineering side, and this energy piece is created from real savings, with a real practical use in future growth, or in a future crisis.

The pollution credit piece is not real savings, and is indeed forged from the fires of Mordor (as some readers may have long ago stopped screaming to their computer screens about out of exhaustion and stress laryngitis).  However, I’d like to invite you to please take a sip of water and look on the bright side. The government created pollution credit part is not real savings, but is “real taxation” for real use of resources, not credit from who knows what, when or who.  Also this money creation can’t occur unless it’s directly and objectively demanded by the market side of the equation.

There would be no Federal Reserve jamming as much credit into the pipe as they can based on a formula of: (Politics) – (What We Think We Can’t Possibly Get Away With) = (Money Supply).

Back to Mordor for a moment.

I’ve seen suggestions that government should issue currency with a deliberate predetermined decay (over and above inflationary decay), so that people can’t “hoard” savings.  In the U.S. this seems like a solution to the world’s biggest non-problem, at least up until now.  How this glib manipulation can be viewed as anything other than disgusting– folks who’ve gamed their way into a nice pension determined that the peasants should never find a way to get any rest of their own– that’s hard to fathom.

However, a practical reason for decay that economic actors can attempt to mitigate seems both qualitatively and quantitatively different– the wear to a gold coin, for example, or in this case, costs and imperfections to storage.  A key question is how cheap and how good energy storage can become, but that seems like a question worth working on anyway.

Would pollution credit, as essentially a tax embedded in money, make industry uncompetitive and drive out capital? That depends.  As a replacement for income tax, it could be the opposite.  (Also as a replacement for creating credit fueled financial whirlwinds and calling them GDP growth. )

Can we get there from here?

Well.  (And this may have a familiar upside-down ring to it, if you read Part I of this piece.)  I tend to be a pessimist.  I believe that if you always listen to the yeasayers, you end up doing stunningly stupid stuff, like building your society’s economy on the premise that credit can create wealth, as long as the credit is created faster than analysis can catch up (sort of a perpetual optimism machine).

The positive part of the pessimist’s credo is that at rock bottom, there may be some upside.  There wasn’t any reason to expect that a king would accept the Magna Carta, but with friendly assistance from societal breakdown, a desperate king did.

Monetary reform doesn’t get much traction– it takes power away from people who’d prefer not to give it up.  The energy in the monetary unit would tend to take some power; the carbon piece might give some back.  I think that what’s given back wouldn’t be as much as the “political class” might think.  Maybe a concept like carbon money could jump in to roll some political logs on the way to hard (or at least harder) money.

By Les Lafave

 Monetary and Banking Reform –

 Originally Published at Strike The Root, March 30, 2009

Bernanke Moves the Sun-Dried Fish (Fun With Austrian-Style Crusoe Economics)

Sunday, February 22nd, 2009

In this adventure of Robinson Crusoe, the writer is so bitter that he takes it out on innocent characters in his own imagination, meanly depriving Crusoe of tools, supplies and opportunity.

Seven hundredths of a second after Crusoe thinks, “I wonder if I could rescue some supplies from the ship?” it sinks almost instantaneously with a perverse Champagne cork popping sound, into a trench a thousand fathoms deep.

Fish leap and play daily in Crusoe’s sight, but too far off for hand fishing.  The giant dwarf coconuts are five hundred feet tall, but with mini-nuts that take ten minutes each to crack and yield one calorie.  The island’s unique tortoises can outrun him.

Scrounging for enough food to starve over years instead of days is an exhausting grind.  Crusoe can only dream of capital projects.  There appear to be sources for tool making, but always a little too far from food sources to consider risking.

The problem that Crusoe has, as delineated by many Austrian School economists, is that he must have savings in order to produce tools (higher order capital goods).  Without savings of food he has to continue as he is, hand gathering for subsistence.  Crusoe plans, estimates and saves a few scraps.

Then Friday shows up.  The two divide the subsistence chores and start to do a little better.

They work out a detailed plan– by the standards of the island, it’s a massive capital project.  It involves building tools, and tools for building tools, in assembly line fashion.  The savings needed for them to complete their capital project according to their estimate– a thirty day supply of food.

Crusoe has been maintaining a rather ambitious food storage cave. He shows this to Friday.  It contains some pathetic food scraps of surplus over subsistence– the space carefully organized for the bounty that never comes.

Friday, now with considerable excitement about the thirty day plan, examines the potential of the space.  After all this waiting Crusoe is also catching emerging economy fever, and so as difficult as communication is for them anyway, they’re both hasty, and tragically fail to understand each other.

Friday thinks that Crusuoe is showing a food storage cave prepared for Friday to store Friday’s surplus.  Crusoe had only intended to convey that Friday should prepare a similar larder.

The two men dive into the tasks of hand gathering food, sometimes working together, sometimes apart, in accordance with the master plan.  When they work together, Crusue makes sure to leave half the production outside the food storage cave for Friday to move to his own larder.  Friday is a little puzzled by the extra work that Crusoe keeps leaving for him, but doesn’t wish to confront his friend, and so simply moves the food into the same cave later.

When Crusoe’s tally indicates that he has thirty days supply, he asks Friday what help he needs with finishing his supply, and is amazed at Friday’s indication that everything’s finished.  Both men are so elated that the savings plan went better than they’d dared to imagine, that they even expand the tool building plan.  They dive in with a near delirium of hope and ambition.

They’re so excited and work so hard over the following days, that their savings are almost depleted before they realize the error.

The more they look at it, the more sobering the disaster begins to appear.

Without adequate saving to deal with all of the plan’s dependencies, it has turned into a trap.  None of the tools on their assembly line are more than half completed.

A lot of the early production went to make fresh vine lashings.  These lashings need to be in place on the constructed item within a few weeks at most, or they become useless.

A half completed fish weir will wash away without ever endangering a fish.  They become despondent as they look at the same picture everywhere– it looks like some aggressively inattentive kids have been playing– half dug pits, trampled brush, scattered rocks, chopped trees.

How could they have been so foolish?

As a matter of fact it’s pretty easy.  Crusoe and Friday have just engaged in an accidental experiment with fractional reserve banking, absent the banks.  Perhaps (since most central bankers have magic powers), Ben Bernanke was even there, sneaking in to rearrange the supply cave to make it look like the savings were abundant for a little longer so as to protect the illusion of growth.  Regardless, Crusoe and Friday both perceived that the same savings were available for their particular use.  The illusion lasted until they realized their mistake, and then their economy crashed.

As Crusoe and Friday try to re-capture their subsistence methods, there’ll be further depressing damage assessment as they see how much of the low hanging fruit, in some cases literally, they’ve stripped away.  The assumption had been that the completed capital projects would more than make up for any lack of care and husbandry during early stages (something we duplicate in real life bubble economies).  For Crusoe and Friday, it may be a more serious issue than just wasteful projects– the upcoming time of malnourishment may kill them before they can regain their footing.  (From that perspective we can also see that the quicker the crash came to their economic boom, the better off they would have been.)

Of course they note a radical difference in work energy from the period of boundless hope, to that of seemingly bottomless despair.  But noticing it won’t entirely cure it. (Rather similar to the way it’s useless for some idiot financial analyst on TV to decry that consumers are turning their pessimism into a self-fulfilling prophecy by failing to spend and/or borrow.)

Both “Crusoe Economics” and identification of the bubble inducing problem of credit expansion are traditions of Austrian Business Cycle Theory.  I’ve borrowed particularly from economist Jesús Huerta de Soto for the above Crusoe and credit adventure.

But since I’ve personally found a sarcasm engendered catharsis to roll back the bitter tide for perhaps even as much as a full day, it’s at this point, while Crusoe and Friday have their heads in their hands, that a disoriented whale beaches next to them, and before they can recover from their astonishment, a lightening bolt knocks over and flames a dead palm, creating an impromptu barbecue pit.  (In the roots of the flaming palm, the two discover more than their collective weights in plump, wild sweet potatoes, with a scattering of wild herbs.)

Great rejoicing.

A barbecued whale for our sliding economy, however, absent an intervention from an advanced alien culture, would seem to have a problem of scale.  Too many credit bubbles have been layered on top of each other.  There’s nothing Fed Chairman Bernanke can do, with money or fish, to hide the waste anymore.  Credit expansion from fractional reserves– credit money out of “thin air”– must always leave us high and dry (and whaleless) at some point, but as perverse as it may seem, the sooner the better.

By Les Lafave

Abolish The Federal Reserve –