The supply of money in an energy-scarce world

“Money has no value unless it can be exchanged for goods and services. These cannot be supplied without the use of some form of energy.”

“Consequently, if less energy is available in future, the existing stock of money can either lose its value gradually (through inflation). Or if inflation is resisted, [the existing stock of money] can be drastically reduced by the collapse of the banking system that created it.

“Many over-indebted countries face this choice at present — they cannot preserve both their banking systems and their currency’s value. To prevent this conflict in future, money needs to be issued in new, non-debt ways.”

— Adapted from Richard Douthwaite’s essay, a chapter in the book ‘Fleeing Vesuvius’.

Earlier this week, writing in the FT, George Magnus (‘the man who predicted the sub-prime crisis’) said almost the same thing.

He wrote:

“…global markets have some anomalies to iron out… Just over 16 barrels of oil can be bought with an ounce of gold, compared to a 50 year range between 9 and 30 with an average of 15.”

All well and good, but then his analysis continues:

“Gold is not overvalued on this basis.”

An alternative, ‘Vesuvian’, analysis would say that as gold has risen in value, so the value of oil has risen in lock step.

In an energy-scarce world, energy is value.

Magnus continues:

“The weathervane of global growth, the Australian dollar, is as strong as that of the flight-to-safety represented by the Swiss franc… One of these is irrational.”

So long as these countries’ businesses and economies depend on oil, perhaps both are irrational.

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