The financial markets and our monetary system

This blog is about energy and Peak Oil, and yet recently I have been tempted to address the financial markets, which is directly tied to Peak Oil, even though most people do not understand the link.

The link is pretty simple: money, in the form of paper and coins (fiat money or IOU), or digits in a computer that represent an amount in a bank account - money has no intrinsic value. Money is nothing more than a symbol; used to put a value on resources and goods. The monetary system is a good way that humans came up that allows them to trade goods and services. Without our monetary system we'd have to rely on the barter system since there's no other good system that we are aware of. Now, our monetary system has many flaws, which provide for a great discussion - but we will save this discussion for another time. For now, let's just say that money is a symbol that represents the values of resources. If there are no resources, then money means nothing. As a way to illustrate, let's just say that we have water scarcity in the world, that is, there simply is no drinking water. A person with billions of dollars in the bank or under their mattress cannot buy clean water because there isn't any. In that case, money it does not matter what the price of water is since no amount of money can buy something that does not exist.
Because resources are directly linked to money, I'd like to write and focus a little more on the financial market and our monetary system. You see, almost everyone and all mainstream news have been referring to this recession as a "financial crisis", as if money and greed is what are at the root of the problem. While that is the case, it's the whole picture! People who understand Peak Oil knew that a financial crisis would be inevitable when the production of oil does peak worldwide. In the a1970's the US oil production peaked and as a "solution" the US started importing oil from other countries. But when oil peaks worlwide, it's unlikely we can import oil from another planet. And we're not discovering new oil fields of real sifnificance.

This link between money and resources is so easy to understand, and yet most people are completely unaware of it. As a matter of fact, most people don't even understand where money comes from! In the video Money as Debt, the author interviewed a variety of people on the street, which illustrated that the majority of people in the world simply do not understand where money comes from.

A couple of weeks ago I was in the office of an organization, and noticed a desk with cookies and snacks for sale. There was no one selling it; instead there was a price tag on each item and a jar for people to leave the correct amount of money. I looked closely at the jar, which had a sign on it. The sign said "CASH ONLY, NO IOUs!" Now, I am assuming here that by "IOU" the person who wrote that sign was referring to personal checks. And yet this illustrates the ignorance of so many people about money - since cash is IOU!

Cash is IOU as in "I am not giving you any goods in return for this cookie, and instead I am giving you fiat money, which is just paper that we have all agreed you can trade for real goods at your convenience. So this system works because we have all agreed that our fiat money (which is just paper and coins) have value, yet we know that the paper itself has no intrinsic value. We'll take a more in-depth look at this, but just remember that if the paper in your wallet had not power to purchase anything, then the real value of it would be to keep a fire in your fireplace going, or to wipe your butt if you had not toilet paper.

The US Dollar has been the world's currency for decades now. There are many reasons for this, including the Petrodollar system, but for the sake of simplicity let's address the main one. The US dollar has been the world's currency because of the faith that people have in the strength of the US economy.

I grew up in Brazil where we experienced hyper-inflation in the 1980's and 1990's. In Brazil there was what people called "political and economic instability" whereas the US economy was seen as "something stable built on concrete". At the time, the US Dollar was literally as good as gold, in the sense that people did not want to hold Brazilian currency (which would quickly lose value) and so to put their savings into something that would retain value, Brazilians would either buy gold or US Dollars. That is how strong the US Dollar was viewed, which represented a strong economy.

This "political and economic instability" of Brazil helps illustrate as the main reason why the Brazilian currency was never the world's currency. Why would a country accept fiat money that could be worth something one day, and perhaps the next day be as good as toilet paper? Countries make deals in US Dollars because of their faith in the strength of the US economy. I.e., Japan might sell cars to Brazil and get paid in US Dollars, and if the Brazilian economy were to collapse (due to it's instability) the Japanese are not worried about having taken IOUs from Brazil, because they trust that the US economy will produce whatever goods that can be given in exchange for the IOUs (fiat currency) they issued.

Well, for the first time in history, at least since the so-called Great Depression, and to the dysmal of the whole world and Brazilians like myself, the US economy is showing sigs of weaknesses. It may not be as strong as everyone thought it was. Perhaps the wars being fought are taking a toll on the US economy, but whatever the reason, for the first time in history the thought is now occurring for people that the US might not be able to provide the goods for the IOUs they have issued. Add to that the fact that the US went to from being the largest lender in the world to becoming the country with the largest debt. I have thought much about this and cannot conceive how the US debt will ever be repaid. There is a lot of fraudulent schemes that have yet to come to surface, such as the large amount of personal credit card debt that likely will never be paid in an economy that simply cannot provide jobs. This is not difficul to undestand. And it brings us back to the beginning: it likely will be an economy that cannot provide jobs because of Peak Oil. Petroleum is the most valuable resource on the planet, which fuels all economies in the world, but especially the US economy - the US has a population of about 4% of the world's people that have been consuming about 25% of all the oil produced.

I hope this provides some knowledge to some people who did not understand that cash is IOU. And I'd love to hear some thoughts and theories that can amplify my knowledge on this subject.

It will be interesting to see what is going to unfold in the months and years to come. There are mountains and mountains of US Dollars in Asia and other parts of the world, and we know that our country don't have the goods to back up all these IOUs. In the meantime, the US continues to print money like there's no tomorrow. In my opinion, a hyperinflation that will cause the demise of the US dollar is simply inevitable.