Money is certainly an interesting phenomenon. It has never had a very good relation to the actual real economy — the production and consumption of physical goods — nonetheless it is essential for the economy to operate. When Jimmy Stewart asks his guardian angel in “It’s a Wonderful Life”, if he has any money, the angel chortles, “We don’t need money in heaven.” Mr. Stewart, just rescued from a suicide attempt instigated by bankruptcy, indignantly replies, “Well, it sure comes in handy down here Bub!” And so it does, but that doesn’t stop money from being a rather queer phenomenon.
I just finished reading an excellent history on Spain in the early 17th century. Spain was in decline, the economy no longer sustainable, but it still had twice a year shipments of silver from New Spain — Mexico and Peru. The Spaniards could rely on the shipments of silver so they could continue their military misadventures and sustain the parasitic lifestyles of the aristocracy, who by this point had pretty much destroyed the Spanish economy. The book, Count-Duke Olivares: The Statesman in an Age of Decline states, “Seventeenth-century Castile was a rentier society, with people at many social levels drawing a substantial portion of their income from rentas, in the form of annuities on state bonds and individual or corporate bonds.” Sound familiar? As the real Spanish economy declined, the annual boatloads of silver from New Spain became increasingly essential to propping-up the rentier economy, even though the silver itself provided no real wealth to the economy. Sort of like our financial system and unfortunately our entire economy, without the Fed dumping boatloads of money into the system at this point, the whole thing would collapse. But, make no mistake, this continued dumping of money distorts the real economy.
An unhealthy financial system becomes increasingly useless as a measure for the real economy. One must increasingly look to real goods, particularly to natural resources, and I’m not referring to the valueless metals gold and silver, to measure the true health of the economy. For modernity, there is one resource far more valuable than all the others — oil. It is not coincidental that you can trace the beginning of the transformation of the American economy from one of physical production to rentier at approximately the time domestic American oil production peaked in 1970, followed closely by the oil shocks of the 1970s. The American economy was irrevocably changed.
Cheap oil, not money, be it the dollar, yuan, yen or euro, is the foundation of modern life. The most astounding fact of recent American life is how for three decades, we’ve done everything we can to avoid the issue, thus increasingly harming the American and the entire global economy. Paul Schwartz of The Council of Foreign Relations has a good post(tx jesse) on the oil numbers and China, simply, they don’t work. For years, I’ve been using the simple fact that if three-quarters of the Chinese used oil on the same per capita basis as Americans, and Americans continued doing the same, there would be no oil for anyone else — no one! The nut of Mr. Schwartz piece is,
If China’s recent economic growth pace continues, it will surpass South Korea’s current per capita GDP shortly after 2020 – meaning that the world may be forced onto alternative energy sources much sooner than it realizes.
No may be about it, though it is for this exact reason Chinese per capita economic growth rate will not be able to continue its pace, call it the Oil Yoke. As soon as global economic growth reaches a certain rate, the price of oil is going to choke it right back down. This gives truth to the biggest lie of corporate globalization, that the world could live like Americans, well not even Americans can live like Americans anymore. But that’s OK, we can live better, but it in the short-run certainly doesn’t help the Chinese, whose centrally controlled economy went full force in building a cheap oil infrastructure, only to belatedly find out cheap oil doesn’t exist anymore.
When we talk about reform, whether it’s financial, political, or industrial, it all starts at one place, with energy. America has reached peak-energy consumption, and no amount of money the Fed pumps in the system is going to change that. We have both the necessity and tremendous opportunity to restructure the American economy based on renewable energy sources and even more imperative, design it to use a lot less energy than we use today. We have both the knowledge and capability, we lack the will. Having reached peak energy consumption, creating an economy based on renewables and design efficiency will not be adding new wealth, but distributing existing wealth, and that is going to require hardheaded political and financial reform. We could do a lot worse than starting by tying money to energy.
Cross-posted from Money, oil, and reform
Archein