Posts Tagged ‘gold standard’

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 – themaestrosrep.org

 Originally Published at Strike The Root, March 30, 2009
 
 
 

An Energy and Carbon Monetary Unit: A Realistic Money to Replace Fiat Currency “Optimism”

Sunday, March 8th, 2009

Money is “a medium of exchange, a unit of account, and a store of value.”

However, absent from the view of Monetarists and Keynesians (and the “money” Wikipedia page), is an additional role for money, a role that’s given an important place by Austrian Business Cycle Theory. Money should be a measure of the aggregate of society’s savings– its future capacity for growth.  Unless someone tries to force it to tell lies, money, in its interaction with other goods, gives both the society as a whole and individual entrepreneurs a measure of the society’s ability to take on new projects (or not).

There’s a good reason why Monetarists/Keynesians won’t consider this.  A money that measures wouldn’t support their fantasies of what “monetary policy” is expected to accomplish.  To them, money needs to be a vehicle that government can manipulate to “stimulate” economic activity and create “optimism”.

Repeat that last sentence out loud once, and for most of us that’s enough to appreciate the fundamental dishonesty of the concept.  Still we could throw that out, stipulate to the erroneous “greater good”, and simply look at the effects after decades of manipulated money, credit and financial opinion– the “greater good” is itself in ruins.

The criminality (the Madoffs et al) is a red herring– only a fraction of the waste from a process that was natural and inevitable under artificial credit creation.  The Federal Reserve and the government got exactly what they asked for— if more and more credit is created, with more and more “stimulus” and “optimism” to get us all moving and spending, could there be any doubt that the average modern society will have no shortage of people willing to get “creative” in order to soak this up?  The exact path of the creativity is difficult to know in advance, but nothing will stop a party like that, other than the eventual clear vision by a critical mass of economic actors of the scary, unsustainable wasting of our limited resources.

Since it’s the normal and predictable side effects of fiat money credit creation, not spontaneous greed, random mistakes, or insufficient “stimulus”, that is the primary cause of these bubbly, wasteful financial disasters, what form of money could stop the cycle?

A gold standard ranks well on measurability– just flop it onto a scale and there it is– a measure.

And Monetarists generally don’t like gold, which you’d think would be a perfect recommendation.  However, while many Monetarists have used a need for monetary expansion as an excuse to be profligate morons, there’s a little kernel of real world worry at the twisted heart of the issue.  A gold monetary standard has an eventual problem– once the standard is generally established, the modern trend wouldn’t take more than a century or two before there’s a strain to find new sources of money, a strain that would continue ratcheting up until loans at interest become impossible. Someday, there would be “peak gold”.

It’s a distant flea of a problem compared to the immediate brontosaurus that Monetarists saddle us with daily.  However, a few centuries can pass surprisingly quickly (especially for the unborn, who have very little concept of time).

So we’re looking for a money that is non-static, but nevertheless a real measure of a society’s ability to create new goals and move forward, or conversely, would appropriately stall us out when we’re not ready.  We need a limitless limitation.

A few thousand years ago, a food backed currency– stored food, if absent the problem of spoilage– would have taken a good rough reckoning of a society’s future capacity.

Today we need to be able to do a lot more than eat in order to accomplish our work.  But I’d suggest that energy would be a good measure for today’s economies, since we need it in pretty much anything we do.  If we have sufficient energy stored to take on a project— it’s as safe as it can estimably be to take it on.  If not, then we know we’d get stuck with a half finished project and the waste and risk associated with that— we would have to wait.  (The way we needed to wait on “improving housing affordability”.)

We can also theorize that the payment of interest will never be a problem with an energy monetary unit.  Until we’re capable of building a “Dyson Sphere” enclosing the solar system, we won’t run out of energy potential (and who knows, even that might be a pit stop on the way to the stars?)

Is it a little odd to propose that we literally have money to burn?

Comparatively, no, it’s not.  How much stranger that for money we’ve chosen an unmeasurable paper standard. We measure anything and everything.  People have even tried to figure out if a human soul has weight, but for money, of all things, we’d rather pretend?  The one thing that we think we don’t need to measure is our savings versus our consumption– our stored capacity to use resources– our future on earth?  (If I didn’t know how inherently trustworthy government is, I’d suspect we were being manipulated or something.)

A currency that can be spent literally, or saved literally, is a chance to stop pretending that savings, or lack thereof, has nothing to do with our future.  A chance to uninduce the self-induced march of the bubbles.

Let’s go back to optimism for a moment.  As you can perhaps tell already, I’m not entirely a fan.

President Obama has “The Audacity of Hope”, but the implied rarity of hope in the political sphere is a little disingenuous.  The value of “optimism” is unquestioned in politics, especially if it’s yours.  You can pretty much imagine any president saying when criticized something like: “Look, any plan will be criticized, but I believe in optimism– you can’t always listen to the naysayers.”  (Maybe there’s a reason there’s always naysayers– maybe all the plans have sucked?  We are, after all, where we are, and didn’t get here overnight.  Every presidential plan is a central plan, with a clear theoretical basis for sucking.)

Optimism isn’t just the universal political habit of mind, but the most common in general.  Perhaps optimism deserves some of its boosterous reputation, but in the end as a mass state of mind, it can turn very quickly into an excuse for lazy thinking.  Money and economics in particular have been heuristically much too glib, and not to be too dramatic, it’s conceivable we could pay for it with our lives.

It isn’t only that we’ve managed to stupidly fool ourselves into underestimating the savings we need for our own not much more than day to day living, and then, what’s needed to have a future equal to or better than the past.  It’s not just that we’ve decided, out of nothing, that doing nothing is not an option, while spending trillions of dollars is a must.  (Mandatory trillions spent on something somewhere– we “know” it must be spent, but how, where, what– that we don’t know.)

To me there’s still much more, as long as we’re throwing our fiat currency habitual non-measurement of resources into the mix.  We also appear to be underestimating by many orders of magnitude the level of saving that we need to give us a near certainty of sustaining a human civilization indefinitely.

We’ve added a lot of dependencies in our modern system that haven’t even been tested by an historical sized natural disaster— a San Francisco earthquake, or a Krakatoa.  What about something many orders of magnitude bigger, which might have a very high probability over a period of a thousand years or so– the natural disasters that we know have happened in early or pre-history?  (If a thousand years seems like a long time, consider that that still gets a double digit percent chance that it would occur in the lifetime of yourself, your child, or your grandchild.)

These, along with potential manmade disasters (where perhaps rightly, many people would place even more emphasis), put us on the footing of “it’s a matter of when, not if”, a place that I’d contend we wouldn’t be if we had a hundred or so times our current savings.

(Say for example that most countries had started work on an energy currency system 50 years ago, had because of this perhaps developed more advanced energy accumulators, and now had the above type magnitude of real savings in energy.  Say further that tomorrow someone is able to prove that pollution caused global warming is real, with a best model estimate 90% certainty of ending modern civilization.  With that evidence, and those usable savings, then these countries would have potential to mothball most industry for a decade or more, working instead entirely on changing the outcome, rather than just waiting for a civilization ending catastrophe.)

A long, long time ago (in the title), I mentioned “carbon” in the monetary unit.

Now, I’ll carefully disappoint half the readers who were waiting for the good stuff, while providing (temporary) relief to the other half, who had probably been saying, “Carbon? Is this idiot one of those “cap and traders”?

To be continued in Part II…

By Les Lafave

Monetary and Banking Reform – themaestrosrep.org