Tuesday, May 02, 2006

Peak oil and peak money?

Capital flight has begun. See it in the commodities boom. Real stuff is looking a lot more solid than virtual stuff these days. The US dollar index is falling. It is going down compared to other currencies, such as the Yen, the Pound, the Euro. But they are all losing purchasing power too, because of their own inflation.

The innovation of fiat currency only became possible because of the huge supplies of energy that became available in the 20th century. Paper money was tried many times before throughout history, but only in times of national emergency (like war) and it always resulted in depression afterwards. The rapid economic expansion of the 20th C was powered by cheap energy, and it made fiat currency possible. Both are historical anomalies.

The oil-driven economic expansion needed fiat currency. With gold backed currency, the huge sums of capital required in the industrial and information age economies would not have been available. This is because gold production could not be expanded as fast as the economy. Cheap energy and fiat money go together, and they will peak and decline together. We are clearly seeing this. Right now capital is so cheap they are practically giving it away. Interest rates for banks are negative. The interest banks pay on a loan, from the Fed, or from the Japanese central bank, is less than the real rate of inflation. And the central banks make this cheap cash available in vitually unlimited quantities.

The interest we suckers pay on a loan is far higher of course. No wonder banks have so much cash to lend. No wonder they pass out credit cards like sticks of bubble gum, and call us at dinner time asking if we would like a few grand to remodel our kitchens. This high pressure cash machine (that we call the global economy) works beautifully as it expands. Thus the Keynesian dictum that a central bank can, and must, inflate the money supply only as fast as the economy grows. But now the machine is running out of gas. The economy can no longer grow without a cheap energy supply. How the economists can think that the growth can go on forever baffles me.

Interest rates, in all currencies, are on a rising trend, as they try in vain to keep up with accelerating price inflation. High rates and high debt will make banking very unprofitable. In the coming depression it will be nearly impossible for anyone to get a loan for anything. Energy costs and food costs will rise at a hyperbolic rate. The oil will be gone. The money will be gone.

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