A Thermodynamic View of Money
by Reverse Engineer, Doomstead Diner
Discuss this article at the Economics Table inside the Diner
A while back, I tried to clarify the way Money works as a Proxy for Energy in the Money Valve series, in which I took a detailed look at how the various facets of our Industrial system conspire to turn Resources into Waste over time.
The whole bizness got pretty complicated even though I tried to keep it simple, stupid in the KISS principle. What I was trying to demonstrate is how money and energy are related, and how the flow is mediated by the monetary system.
We began with a fairly simple chart, to see how Money is allocated based on Energy.
The whole idea began to get a lot more complicated once I tried to identify the various sectors of the economy, how they interact, where the inputs are, and where the waste flows to. Even at a simple level, the network gets pretty complex.
While it is worthwhile to try to elucidate how all the factors interplay here in an Industrial type economy, in reality the basic issue is one of fundamental thermodynamics, which the classic Heat Engine graphic at the top of the article illustrates. In the classic Heat Engine, energy in the form of Heat flows downhill from Hot to Cold, and how big the gradient is between Hot and Cold determines the amount of work the Heat Engine can perform. For the Heat Engine to do WORK, there always has to be a HEAT SINK, a place for the waste heat to go on the way downhill.
As I have argued on numerous occasions, Money serves as a PROXY for the energy available in a given society, and because of that there is a PRECISE analogue to the Credit-Debt system of money we use to the available energy in a given society. All you have to do to see this is re-label the Thermodynamic Heat Engine to see how this works.
The analogy is so clear and so precise that I am quite certain Master of the Mint Sir Isaac Newton understood this relationship when they founded the Bank of England in 1692.
At the beginning in the theoretical example, a Heat Engine is very efficient, when there is a large difference between the temperature of the Heat Source and the Temperature of the Heat Sink. The greater the gradient here, the more Work the system is capable of performing, and the waste heat is only a small percentage of the total energy consumed by the machine. Over time however, as the Energy source which provides the Heat is consumed and the Waste created in the process becomes ever larger, the Gradient becomes ever less, and the machine becomes ever less capable of doing Work.
In the REAL example here of Industrial Civilization, back in the late 18th Century when the Fossil Fuel resources began to be exploited, there was a very large gradient between what was available for exploitation in terms of resources, and the total amount of WASTE accumulated to that point in time. The New World Continents of North & South America were virtually empty of people, as the diseases of Smallpox, Tuberculosis and Scarlet Fever decimated the Native populations, and compared to Europe and the Middle East, not near so much agriculturally intensive society either, though there was some going on prior to the Colonial Era.
Beginning with this era, it became possible to issue out EXTRAORDINARY amount of DEBT, if you were in a position of power with which to do that. There was seemingly ENDLESS resource available in the New World even BEFORE the discovery of Fossil Fuels and how to use them in Heat Engines. Once fossil fuels began to be exploited, it seemed like you could issue out ENDLESS debt on this one, because the Energy Source was so big. And so it came to pass, virtually endless Debt has been issued out on this resource base, which now is running a bit thin overall.
It hasn’t “run out”, nor will it likely ever really entirely dissapear, but what has DISAPPEARED here is the Energy GRADIENT between available resources and Waste produced, so the Engine of this sort of economy is no longer very efficient, and becomes less so every day. At this point, the Waste is not just filling Land Fills with Garbage, it is filling the Atmosphere also with CO2 and the oceans with plastic garbage, not to mention the Nuke Puke from Fukushima. All of this waste accumulating in the environment make the Engine less able to do Work, because the gradient is less capable of absorbing the Waste Heat.
In terms of how this is reflected in the Monetary System serving as Proxy for this, all the DEBT issued out since the beginning of the Industrial Revolution has to collect in a DEBT SINK. What is that sink? It is the expanding balance sheet of the Central Banks, most notably De Federal Reserve Bank of the FSoA, but also including numerous other CBs like the Peoples Bank of China (PBoC). The source of the Credit was the Global supply of fossil fuels, which still exist but the gradient between what is extractable and the waste produced in the burning of it no longer is there to do efficient work with.
On the Credit-Debt level, you see this problem in sharp relief. The folks with the power to issue Debt still have that power, and they continue to issue more and more of it every day. In the main, it is a few powerful Oligarchs who have the power to issue out debt, and they get the ball rolling on anything. They do not pay off the debts however, they are all transfered through various processes of bailouts and bankruptcies onto the balance sheet of the Public, at the Central Bank. This is how the “Privatization of Profit, Socialization of Debt” occurs.
You reach a point in this equilibrium however when the Debt level in the Debt Sink is equal to or greater than the Credit that can be issued out on the resource base of energy.
Why does the money stop flowing? Well, it doesn’t in it’s entirety at first, but the backflow of bankruptcies matches or equals the rate at which new credit/money is issued out. This is the stage we are at now. You can keep issuing out credit, but you don’t get any return from it because the backflow matches any amount of new credit you pitch out. There are not more resources the money can access without accumulating debt at an equal or greater rate. The money at this point has to be issued out at a ZIRP, because there is nothing to be sieved of the flow from Interest & Taxation.
The Boom-Bust cycle occurs in the early years of accessing an energy source because the “animal spirits” of the folks issuing credit take over and they issue more credit than the machine at that point is prepared to handle. You can only grow the money supply and credit as fast as the resource base that underpins the money is accessed. In fact the folks running the Central Banks learned this, and thus came up with the target inflation rate of around 2%, to match how fast new sources of fossil fuel energy were being found and exploited. The early 20th Century collapse of the Great Depression was an example of a Boom cycle where animal spirits amongst the creditors went wild, but the consumption ability was low at the time, there were not enough vectors through which to waste the energy. It all went Bust in 1929 at the end of the Roaring 20s, and the aftermath of that Bust is well recorded history overall.
The situation we have now IS DIFFERENT THIS TIME, it’s not that the credit has been issued out too fast to access the resource base, it’s that the resource base relative to the debt level is too depleted to offer a return on investment. Certainly you could in theory issue out another say $100B in Credit to energy companies to drill the Arctic Ocean, but you’ll never get BACK the $100B PLUS INTEREST from the population at large to pay off on this investment. The Debt Sink of the Consumer is already full up here, on all levels from personal debt to Goobermint debt signed for in his name by his “elected” representatives. Da Goobermint is NOT handing out free money to consumers to buy the oil as it hands out free money to extractors to drill, and they likely never will. What they are doing in just about all economies across the globe is strangling the amount of credit the population at large has available to buy the energy, while they close up shop and stop the CapEx required to exploit any sources of energy that are still left here.
You can see this in action already in the Bakken and other neighborhoods where high CapEx is necessary to drill and develop the energy source, rig counts are already down there. Royal Dutch Shell and the other majors are already backing off from further investment, and Geopolitically you see the collapse of agreements between countries like Russia which still has some energy resource to exploit and the multi-national companies that provide the expertiese and equipment to do the drilling, like Halliburton and Baker-Hughes, recently merged as they consolidate downward here. These service companies to the Energy Industry are the ones getting hit first and hardest, but the whole industry will collapse in a cascade fashion here.
Once you grasp that Money is not a THING in itself, but just a PROXY FOR ENERGY, you should also grasp that it does not MATTER what the currency used is made from, Paper, Gold, Cowrie, Shells or Digibits. Issuing out more digibits to buy energy that is not being extracted does not allow you to buy more energy. You cannot issue out more Gold (because of course what Gold is left in the ground takes ever more Energy to extract), so all converting to a PM based monetary system does is deflate the economy, the gold becomes less valuable with respect to the resource available as well, not to mention not very available for people to use because it is so centralized overall. In the final stages of the game, no matter HOW MUCH “money” you have of any type, it simply does not buy the resources you want to buy with it, they just are not there to BUY!
Because we depend on money to lubricate and run the global system of trade we have developed, it remains possible to an extent for the folks running the credit creation biz to funnel credit out to some places and not others, and in so doing triage off the economy whole sectors of the globe now. Southern and Eastern Europe is being so triaged off as we speak, with our friends in Greece at the forefront of this, in a constant state of Bailout and Political Crisis, but NONE of the Bailouts to date have done a goddamn thing to relieve the misery of the Greek population, all they have done is keep the Bankstering System in Greece and Europe as a whole floating another day. At this point as far as the majority of the population in Greece is concerned, there simply is no benefit whatsoever to remain inside the system. They want to Opt Out.
Greece is the Canary in the Coal Mine here, and the same effect is going to move through all the economies of the banking system as the Credit that is issued out to consumers to buy energy is triaged off here. The last places to experience this will be the centers of credit creation, in the City of London and Wall Street, but the speed at which it works its way inward increases daily here, you absolutely can track this progress on a monthly if not daily basis now.
Eventually, the Credit issued out is worthless, the currency is worthless there just is nothing left to BUY with it. That is why the Roman currency collapsed, not because they diluted the Gold in the Coins with Base Metals, but because there simply was not stuff to BUY with that currency once they reached the Limits to Growth of that type of economy, mainly agriculturally based to provide energy to the society.
Has such a thing occurred before? Indubitably, it has, it most certainly occurred at the end of the Babylonian Empire in the earliest years of the Ag Economy. From Revelation 18:
10 Standing afar off for the fear of her torment, saying, Alas, alas that great city Babylon, that mighty city! for in one hour is thy judgment come.
11 And the merchants of the earth shall weep and mourn over her; for no man buyeth their merchandise any more:
12 The merchandise of gold, and silver, and precious stones, and of pearls, and fine linen, and purple, and silk, and scarlet, and all thyine wood, and all manner vessels of ivory, and all manner vessels of most precious wood, and of brass, and iron, and marble,
13 And cinnamon, and odours, and ointments, and frankincense, and wine, and oil, and fine flour, and wheat, and beasts, and sheep, and horses, and chariots, and slaves, and souls of men.
At a certain point in the Collapse of a Civilization, it ALL goes WORTHLESS. Not just the Fiat Paper, not just the Gold, but even the SOULS of MEN. The life of a Slave is Worth LESS than it costs to keep the Slave alive, so the slave is disposed of. When the Souls of Men become worthless, just how much value do you think remains in an Ounce of Gold? Answer, not a whole lot there.
Money is a mathematical artifice that represents the total energy available to a society at any given time. You cannot create more energy by issuing out more credit. For the Roman Empire, which took Millenia to grow, it took Centuries for their economy based on Agriculture as their source of Energy to Collapse. For the Industrial Society which developed over just a few Centuries, it will Collapse in a matter of decades at the most, and possibly more rapidly than that as the monetary system which mediates the flow of energy itself collapse.
There is no stopping this process, the only thing that remains somewhat possible is to slow it down some, and to REVERSE ENGINEER to some older technologies that are less energy intensive on the way downslope. That is not possible however on the grand scale here, the network as a whole is too dependent on the energy to continue functioning, so until the network collapses, there will be no changes made. When the network does collapse, the change will come rapidly indeed.