Saturday, November 28, 2009

The problem of money

Given the global financial crisis, which is now looking worse due to Dubai, I think we can all agree that money is a problem. Specifically, is the particular way we choose to create money the best one? Since it's led to financial collapse, probably not. Internationally, money is a difficult and complex issue which I'll not get into here. Locally, things are a bit simpler. Many of the following ideas come from Geoff Davies' Economia, which I recommend to all interested readers. 

I think what would work well at a local level would be a currency which,

  • is a medium of exchange, not a store of value
  • is backed by a basket of commodities which decline in value over time

  • so that the currency itself declines in value over time

  • and which cannot be lent at interest

I'll explain below.

Money today has two functions, as a medium of exchange and as a store of value.

A medium of exchange is plainly necessary, so that we don't have to note down which part of a living cow we'll give when we slaughter it in June for this hoe we get in January. I can give my mate Joe an IOU, "Jim owes Bob one-twentieth the cow Betsy". If I only accept IOU from Bob, it's just an IOU. If Bob can give the IOU to someone else in payment of his own debts and I'll give that one-twentieth of a cow to that person instead, that IOU has functioned as a medium of exchange. Money is simply an IOU anyone will accept.

Getting people to accept your money is the most difficult part, as creators of local currencies have found. That's why people also try to make their medium of exchange a store of value. If Jim gives Bob an IOU, Mary may or may not accept it for Bob's debts; if Jim gives Bob a sack of wheat, well wheat has intrinsic value, so it can be a store of value as well as a medium of exchange.

This is why so many people instinctively look back at gold and silver with nostalgia, thinking that if the stuff has intrinsic value, people will accept it. Unfortunately gold and silver don't have intrinsic value, they're usually just pretty, and sometimes but not always useful. And we don't really have enough of them anyway. We only have about 160,000 tonnes of gold in the world, total - 0.024kg or less than one ounce of gold for each of the 6.7 billion people on Earth. Or if we consider silver, about 43 billion ounces have been produced ever, about 6 ounces each. The medieval silver penny had a bit over a gram of silver, so that 6 ounces would allow some 170 pennies. One gold ounce and 170 silver pennies in coin each year - not really enough for all the things we'd like to buy and sell, I'd say.  

Still, it's not clear that a paper or electronic store of value is necessary, as opposed to just putting it in real goods, or getting share of a business, etc. 

When money is a store of value, this encourages people to hoard it. This is especially true if they can lend it at interest; putting it in the bank is in effect lending it at interest to the bank, the bank then lends it at higher interest to credit card holders, mortgagers, etc. In this way wealth tends to concentrate into the hands of a few, and drain away from the many. Then when the wealthy few screw things up, it screws everyone up; whereas if wealth were more evenly distributed (not necessarily 1:1 for the top and bottom quartiles, but let's say 5:1 rather than 100:1), mistakes of the few would not ruin the many.

Having money as a store of value is thus inherently inflationary and creative of unemployment and poverty, since whether people hoard it at 0% interest, or lend it out at 5% interest, the total debt will always exceed the money supply. By definition, there's never enough money in the community to repay all its debts. The sudden realisation of this in the last quarter of 2008 was basically the cause of the US economic collapse.  But it also leads to other nasty things like environmental damage.

Let's say I own an acre of forest, and know I can take a cord of wood each year forever without damaging the forest. If money is not a store of value, how do I store my wealth? My wealth is in that forest - so I take care of it. But if money is a store of value, and if my debts exceed my income, I'll be tempted to cut two or ten cords of wood. Sure, that'll mean that in ten years I have no more forest - but if I don't repay my debts, I won't have the forest in ten years anyway. Thus, debt exceeding the money supply drives environmental damage. 

The solution then is to ensure that we have money which is a medium of exchange, but which is either not a store of value, or has a declining value over time.  Then we get a more reliable economy, and are less tempted to plunder the environment.  

The well-known examples of Worgl and the like show good evidence of this. Currency was issued, and had to be stamped each month to be valid currency, this stamp cost some fraction of the currency's value (one-tenth maybe, I forget how much). So your $100 paid you in January would be worth only $90 in February. This encouraged you to spend the lot today. 

Further back in history, the Egyptians had large granaries in which farmers were obliged to store their grain. When you brought in (say) 100lbs of grain, they'd give you a receipt for it, a clay tablet with "100lbs, January" stamped on it. Anyone who brought that tablet back to the granary could get grain in exchange. But because rats and damp and so on ruined the grain over time, if you brought it back in February, you'd only get 90lbs of grain for it, in March only 80lbs, and so on. So the grain tablets functioned as a medium of exchange which was a declining store of value - and people spent them quick, giving life to the rest of the economy.

It seems a crazy idea, but in fact inflation has the same effect. If I have $1,000 in cash in January 2008, I won't be able to buy as much with it in January 2009. My money declines in value over time. The difference is that while the Worgl stamps or the Egyptian clay tablets have a predictable decline in value, inflation is unpredictable. Which makes everyone nervous and leads to all sorts of financial shenanigans, as we saw with the subprime mortgages.

Obviously this combines very badly with lending at interest. If you can lend out $100 in January and have the right to demand that they give you $110 in February, then you make $20 profit, and again we have debt exceeding the money supply. So we'd have to ban lending at interest

This seems impossible to us in our debt-laden economy. How would banks function, how would houses be built? Yet Islamic banks manage it, and Jews through history have had many successful businesses in this way. Rather than lending $100,000 at 5% to a restaurant owner so she can double the size of her restaurant, the bank simply becomes a 50% shareholder in the restaurant, and gets a 50% share of the profits... and a 50% share in the losses. This makes banks very cautious about who they invest with, makes them look seriously and in detail at them.

Would this be a bad thing, for banks to become more cautious in their investments? Nobody would get rich overnight, but while missing out on the booms we'd miss out on the busts.

Locally then what we could have is a warehouse which takes in grain, timber, cloth and the like, things for daily life. In exchange for these goods which perish they give currency which declines in value over time.

This could also be an indirect tax system. If the goods actually rot away at the rate of (say) 4% each month, then the warehouse owners (the state) could have the currency depreciate at (say) 6% each month. The 2% difference is currency they issue to pay people in state service, being police, building roads, manning libraries and so on.

The currency could not (by law) be lent at interest. That combined with its depreciation would mean nobody hoards it, so it gets spent and encourages production of other non-perishable things. Because it's a declining store of value people would seek to store value in other things, like improving the land they own.

I think this would work very well locally. As for currency at a state, federal or international level, I don't know what would work best. But since I believe that peak oil will mean a reduction in the range of our lives, perhaps preventing even city states from working well (at least as large as they are today), this doesn't concern me a lot. Money exists because people trade, not the other way around.

Nukes are stupid

“Hey, we’ve got a problem with our energy.”

“What’s that?”

“Well, we’re relying on fossil fuels. We’re burning a finite resource, it’s not like iron or something that we can recycle, once we burn it, it’s gone.”

“Hey, I’ve got the solution!”


“Yeah! We’ll change to burning another finite resource!”


“Even better, this finite resource is really hard to burn well and safely, so we’ll need the best and most conscientious engineers and inspection regime ever just to make sure hundreds of thousands of people don’t get killed.”

“Awesome! But isn’t there a problem with waste, which no-one in the world has ever managed to permanently store safely?”

"There is that. But some people have plans for breeder reactors. These take ordinary depleted uranium and turn it into plutonium - they make new fuel! So we'd end up with at least one hundred times more fuel than we have now."

"But I thought that breeder reactors were unsafe and didn't produce very much fuel anyway?"

"That's all just greenie propaganda!"

"Not actual facts, then?"

"Okay it's facts, but the new designs will be safe and efficient, honest!"

"Won't there still be deadly waste, though?"

“Sure! But on the other hand, the waste from the burning process is also good to make weapons with, weapons which can kill millions in an instant. In an age of failing states, that’s just what we need!”

“Sounds great! When can we start?”

“Well, first we must get official approval, and push the official approval over the protests of the public, for some reason those idiots are against it.”

“Can’t think why.”

I believe in democracy. That’s why I propose that people should get to vote on what power source they want in their backyard. Because in the end, whether it’s objectively a good or bad idea, if that’s what the people want then they should get it. For some reason, those in favour of nuclear and fossil fuels never support my idea for a vote.  I wonder why? 

Austria, 1978 – in a referendum the Austrians voted 50.5% against nuclear power. They had 1 reactor under construction, plans to finish it off were not set aside until after Chernobyl.

Sweden, 1980: 12 reactors, they voted to “keep the 12 reactors in operation, but to shut them down at a later date by taking into consideration the welfare of the country and its economic development and the supply and demand of power in Sweden.” They have closed down 2. Basically they built up other sources and found they enjoyed all that extra electricity (they now have about 25,000kWh per capita annually, twice the US and three times Germany or Denmark).

Italy, 1987 – in a referendum the people voted to abolish nuclear power in their country, closing the three power plants which had in any case been closed since Chernobyl. They’re still closed, but Italy does not scruple to buy nuclear-generated electricity from France.

Japan, Maki, 1996 – residents of the town voted 60% to refuse land for building a reactor. Plans to build it there were dropped.

Taiwan, Yenliao, 1994 – residents voted 96.2% against two reactors in their region. Plans to build them there were dropped.

Switzerland has had many referenda on nuclear energy, with all voting to keep it or not phase it out.

Thus, it can be fairly said that of all the countries and regions in the world where citizens have been given a choice about nuclear energy, only the Swiss have chosen to have it. All the others given a choice have rejected it. But most countries have never bothered to ask their citizens. I wonder why?

Sunday, November 15, 2009

Global Plans and Muddling Along, Part I

Over on, there's an article having a go at Scientific American's attempt at "A Path to Sustainable Energy by 2030".

Mostly SA's is the "if we just have a Global Grand Plan, it'll be alright" sort of stuff. Technically possible, politically unlikely - better I think to muddle along.

But TOD's response is even dumber, "oh dear, it's all too expensive and difficult, let's just keep on truckin'." This is common from TOD (the US one anyway), but the editors have stocks in fossil fuel companies, so they're most anxious that we should not leave oil before it leaves us. Go read both articles. I put a comment at TOD, but they tend to delete anti-doomer stuff, so I put up this here, too.

The authour is concerned about the following points:

Aircraft - indeed, hydrogen as proposed by SA is a nonsense for aircraft. However, very little in terms of essential goods are transported by air. No more Chilean cherries in New York winter, oh well.

Ships - indeed, they are powered with fossil fuels, how could we transport stuff? But consider the scale of the issue. Currently, some 34% of shipping tonnage worldwide is devoted to transporting oil [source, p.16]. 96% of oil is burned. SA's article proposes no more burning of oil, so some 33% of world shipping can be scrapped.

World coal trade was about 718Mt in 2003 [source, p2], at the same time as total world trade was 6,500Mt, so that coal was 11% of world seaborne trade by weight. Coal is all burned (even if sometimes liquefied first), and again SA proposes stopping this; so another 11% of world shipping could be scrapped.

I could go on, but the point is clear: just by no longer burning oil and coal, we could almost halve our global shipping, thus halving the demand for fuel for it. This does not eliminate the problem of how to fuel the ships, but certainly makes it easier to deal with.

Automobiles and trucks - how do we make them all electric, Gail asks, and how do we power them. These don't need to be built or fuelled at all. We have some recent inventions called "trains" and "trams", which are in many parts of the world entirely electric, and which can thus be powered by renewable energy.

Many supposed "problems" are like this. When you look at changing every single piece of infrastructure to some new power source, things look difficult. When instead you look at what the infrastructure is supposed to do, things look much easier. We don't need cars and trucks. We need to transport people and goods. Cars and trucks are simply one way of doing that, and an inefficient one at that; other more efficient ways exist.

Farm machinery, etc - electric versions of these exist already as anyone can discover in five minutes with google.

Mining and manufacturing - are largely electric anyway. It's only when going for marginal ores that a lot of fossil fuels are used, eg in open-cut lowgrade mines. Of course, absent fossil fuels, our demand for things like iron ore will drop - electric (not electronic) things tend not to break down as quickly as fossil fuel-powered things.

"We'd have to build lots of stuff!" - we build lots of stuff anyway. So it's just a matter of building different stuff. In 2006, the world produced a bit under 50 million cars.

If we can produce 50 million internal combustion engine cars I don't see why we can't produce (say) 2 million electric train engines and 10 million electric cars.

Likewise, we are already building more coal-fired and gas-fired power stations. China alone is building one or two new coal-fired power stations each week. If they can do that, they can whack up wind turbines or solar thermal stations or whatever.

We build lots of stuff already. The only question is what we build: more stuff that burns fossil fuels, or more stuff that doesn't.

"We need to figure out how to do this, we need a plan" - a century or two ago we had this thing called the Industrial Revolution. People harnessed wind and water, then wood and coal, and finally gas and oil, and used its energy to build things. Nobody figured out any Grand World Plan To Burn Stuff. They just went ahead and did it and muddled along.

I don't see why we were able to just stumble along through an Industrial Revolution, but an Ecotechnic Revolution is supposed to require careful planning. I suppose because some people are rather anxious that we should not stop burning stuff, their stock in fossil fuel companies might drop too low.

"So how will we pay for all of the new equipment?" - the same way we pay for 50 million new cars, hundreds of new coal-fired power stations, and billions of plastic widgets every year. As noted above, we're buying all this ecotechnic stuff instead of this burning stuff, not as well as it. We already spend a fortune on stuff, the only question is what we'll spend on in future.

"But if we stop burning stuff, my Valiant won't be worth anything in 2028!" - Gail is worried about assets which would no longer have value. Well, so what? Electric typewriters, brick-sized mobile phones with satchel batteries, valve radios and buggy whips ain't worth much nowadays, too. Things become obsolete, that's life in a technological society.

"Will I get compensation for this loss of value?" - no, why should you? When we brought in personal computers, did anybody compensate the typing pool? When we brought in cars, did anyone compensate buggy whip makers? When we brought in transistors, did anyone compensate the valve glass factories? Again, things become obsolete, that's life.

"Too many rare minerals are needed!" - name them, and tell us why they're needed.

"What about all the power lines?" - yes, we couldn't possibly have a system where power lines criss-cross the country. Wait, what?

"When the power goes out, we're in trouble!" - how is this a change from today?

"Operating the system will require a huge amount of international co-operation, because the transmission system will cross country lines." - Of course, that's impossible. That's why the Danes never sold wind power to Sweden and Germany, and the Swedes never sold hydroelectric power to the Danes, nor Germany nuclear power to Denmark.

Good thing countries never buy vital goods and services from each-other. Imagine if the US were to rely on other countries for most of its energy? However would it cope?

"All of the high tech manufacturing will require considerable international co-operation and trade." - this is a bad and new thing?

"The system clearly can't continue forever. It could be stopped by a lack of rare minerals, or international disputes, or lack of adequate international trade." - It's not clear whether Gail is talking about the proposed ecotechnic system, or the current fossil fuel one.

North Korea shows us what happens when countries try to go it entirely alone. All worthwhile systems require some international co-operation, people honouring contracts, that sort of thing. Big deal. Adjust.

"Instead of the high tech approach advocated by Scientific American, we may want to find solutions that can be done locally, with local materials." - see now this at last is a piece of good sense. However, the two are not incompatible. We can have some international high-tech, and some localisation of stuff.

We will have no problem transporting people and supplying them with goods and services sufficient for a very good quality of life without burning fossil fuels. We may have problems persuading them to stop burning fossil fuels.