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.

Everything is under control.

Billy Bob Joe explains how bailout of US automakers will save US economy:

Older video illustrates US economy.

Sustainability Group - what's the purpose?

Recently, I've had second thoughts about starting and establishing a new sustainability group in Seattle - after realizing the amount of work that is involved. Also, I have noticed that when I share with people the idea of creating such a group, that many people do not get it. Some people probably think I have nothing better to do. Others think issues to do with sustainability is what I am most passionate about. And I suspect that others think I just don't know what other "better" things I could be doing with my time.

So in this post I hope to quickly explains where I am coming from, and why the idea to start another sustainability group.

First of all, I'd like to suggest that striving to make your and my lifestyle a sustainable one is about responsibility. If you don't understand this, then please read on. But let me tell you right now that having actions that promote sustainability is not what gives me pleasure or what I love to do in life. I love doing activities that are energy-intensive. For example, I love driving; always have. I love snowboarding, and the long drive that it takes to get to the mountain each time. I also enjoy jet-skiing and snowmobiling. These are very fun activities, but with the current technology we have (which is centered around the Internal Combustion Engine) make is it very improbable that we will be able do these things in generations to come. Now, I say that based on what premise???

I say that based on the "theory" that fossil fuels are finite. It is that simple. It is the "belief" or understanding of a particular process: that a gasoline car will not go up if the tank is empty of gasoline, and that gasoline comes from an oil field, and that an oil field gets empty after the oil is extracted, and that the number of oil fields that on planet earth that we can tap into to extract the oil is finite, that is, it gets used up and there's no more. If you can follow this much logic, then you understand that oil gets used up and then there's no more. So a lifestyle that is dependent on petroleum is not sustainable, which is to say that when there's no more oil those activities will come to an end. This includes everything that depends on petroleum, and petroleum is pretty much on everything around us - not just in the form of liquid fuels.

I'd like to suggest that one reason why people don't easily and readily understand this connection is because we have been living in a delusional society that pretends that we will forever have fossil fuels to burn. Of course this is not the case. And one thing that has contributed to that is language: the fact that oil companies claim they "produce" oil. But we humans - thanks to the great work of oil geologists - understand that no one can make petroleum. There's no formula for making petroleum. We have a grasp of what this formula is, but it takes millions of years and the right "cooking" conditions of the planet for dead matter to be converted to oil. In short, oil companies simply extract oil from underground, but they do not produce oil. Yet the term "oil production" subliminally tells us that there will always be oil, and as a result the way our fossil fuel based societies function and our lifestyles will never have to change. But we humans who are doing some thinking know that this is not the case.

So, once you understand this logic of resources being finite, which introduces the topic of unsustainability, a question inevitably arises. The question is "how much oil (in our case) do we have left?", which is another way of asking "for how much longer can we carry on our current lifestyle?"

Well, some people have already tried to come up with the answer to this question. Being that there's so much secrecy around the numbers that indicate the amount of oil reserves that each country has, it's virtually impossible to come up with an answer that is accurate. But I trust that we can come close. If economic activity continued to increase as well as the world oil consumption which has grown steadily at 2% per year, then we should have about 90 years left before petroleum completely ran out; give or take some years.

If I look at it this way, then my lifestyle of driving is irresponsible because if I have children and grandchildren, I am contributing to a world where in their lifetime there is no oil left. It is hard to imagine what that world will be like, but it will be a very different world.

I have written this just so people can understand that building and promoting a sustainability group is not what I like to do. It's not even in my comfort zone. But it is what I consider the responsible thing to do. I still love driving. But what future will I build for myself and future generations if my actions remain the same? What future will you build if you make no contributions to building a lifestyle that is sustainable.

If the earth's resources - and we're focusing on fossil fuels here - are finite, then we can use the analogy of a pie. The pie represents resources. With an ever-increasing world population and a pie that gets smaller by the day, you can start having an idea of what the future holds for humanity: more people competing for less pie, or fewer resources. This is not a pretty picture. But if we learn to live sustainably, then it can be. There's hope, but it lies in how much we can and are willing to adapt so that we do not rely on finite resources for our sustenance. How to achieve such lifestyle will be the focus of our sustainability group: in the form of discussions that will provide solutions, and actions to implement those solutions and make them part of our lives.

Lastly, I want to say that I am still open to the idea of new technologies that will allow us to have a particular standard of living. But I am taking no responsibility for inventing those technologies, and I don't trust that anyone else will. Notice that when these technologies for "free energy" are mentioned by someone, they are always referring to "someone else or company out there" coming up with such solution and not themselves. Because I don't believe that I can come up with or participate in inventing such solutions, I am choosing to promote actions that are sustainable that can be part of our lifestyle now and in the future.

Thank you for reading.

Obama Infrastructure

By Greg Rock

Link to Obama’s Speech on Infrastructure Investment:
http://my.barackobama.com/page/community/post/stateupdates/gGxtgj

INFRASTRUCTURE INVESTMENT: RIGHT PLAN WRONG ACTION

An investment in our infrastructure is exactly what this country needs right now. Not only will it stimulate our economy, and create jobs our country is also in need of a major infrastructure overhaul. I believe this strategy represents both the most effective short term option the federal government has to combat the current economic slowdown, while at the same time making critical investments in our future. Our current infrastructure as we saw during the summer of 2008 is extremely expensive and inefficient to operate on high energy prices. The most direct correlation lies in the transportation sector which is 98% dependent on liquid fuels which spiked to nearly $150 per barrel this summer. Nearly 4 times its current $40 price.

Oil and other energy prices have collapsed due to the demand destruction created by the recession we now find ourselves in; but these low prices can not be expected to last. As soon as we recover and restart growth, which is our goal, we will be faced again with the same underlying energy challenges that created $4/gallon gasoline this past summer. But next round we will see even higher prices and more extreme price volatility unless we are better prepared. In the near future, supply will have decreased and demand will likely reach even higher levels.

Over the last 3 years, worldwide conventional oil production has essentially stopped growing; something that the U.S. saw happen domestically in the 1970's. Before that, the U.S. peak in oil production led us to start importing oil from the Middle East, and created our current dependence on foreign oil. However this time it is not a domestic problem it is a worldwide problem. With no other planets to import oil from we have been turning to alternatives; some clean (Biodiesel), some dirty (Tar Sands) but all made cost competitive due to higher energy prices. The collapse in prices we are experiencing will impact the alternative energy industry the most. Both existing and planned projects are being delayed, canceled and shut down. If this drop off in energy production is allowed, we will face extremely high price volatility and price acceleration in the energy sector once growth in demand resumes. Extreme price volatility as we have seen can critically damage our economy.

ENERGY EFFICIENCY: THE MOST VITAL COMPONENT OF ANY INFRASTRUCTURE PLAN

While it is clear that we must maintain the course on increased domestic energy production, something President-elect, Obama, agrees with, what is even more important to our economic success is not our energy production but our reduction in energy consumption. Our ability to achieve significantly less energy consumption will be essential, if we are to maintain the same level of commerce and standard of living - essential to the long term success of American cities, citizens and the country as a whole.

Obama has laid out a great plan of attack to stimulate the economy and create jobs through a federally funded infrastructure redevelopment push. In many regards it has the correct focus.

* Short Term: Stimulate Economy and Generate Jobs
* Long Term: Invest in our Future: Education, Energy Production, Efficient Buildings

In regards to Peak Oil, the most important goal we need to achieve over the next 10 years is to redevelop our infrastructure so that it can function more effectively on less and higher priced energy.

MORE ROADS: WHERE THE OBAMA PLAN GOES WRONG

While many of Obama’s proposed actions will assist in this, during his Dec. 8th speech, Obama made a troubling announcement about where he plans on making major investments for our future. He is calling for a major new investment in roadways and bridges. This is exactly what we did over 50 years ago with the launch of the Interstate Highway System of the 50’s. While this action did successfully create jobs and stimulate our economy, it also moved this country down a path of auto orientation. In a high priced energy world this orientation is to our economy’s detriment not benefit.

During the 50’s, our highway systems were expanded and most major U.S. cities tore out their rail based mass transit systems. Truck transport replaced huge volumes of rail cargo, and the highway, trucking and oil & gas lobby groups became the most influential non-elected voices in Washington. This decision, although it has since cost the U.S. trillions of dollars in imported foreign oil and created massive environmental degradation, still was probably the right choice for our country at that time. The automobile was new and innovative and acted as the backbone of our new growing economy. Federally funding the construction of the massive roadway infrastructure which was both expensive to build and is expensive to maintained was the correct choice especially without the hindsight we have today regarding the negative external impacts of such a strong auto orientation.

Today however is not the 1950’s. A new movement towards auto orientation, a new investment in a system for moving personal automobiles and transport trucks is not the change this country currently needs. The change we need is away from auto orientation and thus away from oil dependency. Certainly we still need automobiles and roads on which to drive them but we do not need to expand the existing system. We need to expand our transportation options. Big budget spending on transportation should be reserved for creating new options, specifically to bring back rail based passenger and cargo transport to this country and its city centers.

Rail transit, be it inter/intra city passenger or cargo, is a far more energy efficient and thus environmentally and oil price friendly method for transporting people or objects around a built environment. Rail transit would provide a more advanced construction projects which creates the higher paying, advanced jobs on which we in America pride ourselves. Most importantly, it is an investment in our future that will earn our states and our country a return on investment over time. Over its life a public transit system will save its riders many times more energy and dollars, from the avoided fuel consumption and vehicle maintenance costs, compared to the costs associated with constructing and operating the transit system. Having a cheap and affordable transportation system for getting employees, and consumers from their homes to their destinations as well as goods across the country will make the difference between economic growth and collapse during the decades of high energy prices we face ahead.

Obama is calling for a use it or lose it strategy. This is also a good idea as we don’t want states sitting on funds but rather spending them so that they actually are stimulating the economy and creating jobs. Unfortunately, this may corner many states and cities into choosing easy roadway expansion or redevelopment rather than the more challenging but more important public transit infrastructure systems our future requires.

Obama has not made his plan completely clear however, if history is any representation of what we might expect from federal funds being allocated to states it is highly likely that funding may be specifically allocated for only road and bridge construction. This would make it impossible for states to use these new federal dollars to fund the growth of new rail based transit systems and the energy efficient urban economy we should be promoting. This plan will actually force many states to expand roads even if they weren’t planning on it just so they can get access to the new funds to promote their local economic growth --- thus creating a major growth in our nation’s auto dependency and escalating the annual maintenance cost associated with our highway system.

SEATTLE: A CASE STUDY

As a resident of Seattle, Washington, I’ve seen an ongoing battle here between constructing a public transit system or expanding our state and federal roadways. Perhaps the best example of this story is the Washington State Route 99 Viaduct. This portion of the state highway runs through the city center, along the waterfront on an elevated viaduct parallel to our federal interstate route 5 which also slices through the city center.

As an auto orientated city with no public transit system, except our buses that get stuck in traffic with the cars, it has been perceived important to have multiple highways going into the heart of the city center to provide good automobile access and to create multiple routes for through traffic. The viaduct is however listed as one of the most dangerous major highways in the country and needs to be torn down.

Thus the debate begins. On one side auto advocates and businesses, that fear anything that reduces the number of vehicles flowing into or around the city, believes rebuilding this state route is essential (Cost: 2 Billion). Then there is another group that feels that the Seattle water front is too valuable to waste with an elevated highway and proposes a massive and expensive tunnel for the vehicles so the highway still exists but we get to reclaim the waterfront for other business and recreational uses (Cost 3.5 Billion). Finally there is a third camp that says tear down the viaduct and don’t rebuild it. Replace it with surface streets, transit and walkable/bikable recreational and business corridors (Cost: 1 Billion). This type of non-auto focused redevelopment has been extremely successfully in revitalizing urban centers and stimulating economic growth in European cities like Copenhagen, Denmark. Copenhagen has spent the last 30 years successfully moving away from auto orientation by tearing out existing roads and parking lots which it converted into bike and pedestrian routes, public squares and parks.

In Seattle we don’t need two major highways intersecting our city; one is enough. Our waterfront could be a thriving downtown attraction and center for commerce if made accessible by alternative transportation instead of being held hostage to 1000’s of vehicles flying by at 60 mph. The nearby city of Vancouver, BC has proven that having no major highways transecting the city center is an effective strategy to reduce urban sprawl, increase public transportation use and encourage shorter commutes. This is the type of change we need in America - not more assistance to the already highly subsidized auto orientated infrastructure.

It seems all too clear to me and others hoping to move away from an auto and oil dependency orientation that Obama’s plan, as he described it last weekend, will cause Seattle to rebuild its Viaduct something many believe is the wrong path for this city to follow. During this last election period, Seattle did pass the construction of a significant light rail public transit system estimated to cost 17 billion during its 12 year construction period. Shouldn’t federal transportation funding be allowed to fund this effort either by directly paying for construction over the next couple years, instead of local tax payers, or by using additional funds to accelerate the construction process. Instead, I fear the funds will force our local government to expand its roadways, further encouraging more auto usage and possibly delay Seattle’s long awaited public transit system.

Putting Seattle aside think about how this plan will impact less progressive cities that don’t have any intention of constructing rail based public transit systems? Obama is missing out on a golden opportunity to redevelop America’s transportation systems not into an expanded auto orientated system but instead into a multi modal system. By creating mass transit specific projects in excess of auto projects he could help shift the modal balance away from auto and oil dependency to create more transportation options. The more options consumers and workers have, especially lower cost options, the more successful our economy will be.

Personally, I do expect that rail expansion will be part of Obama’s plan but believe we must be very careful with how much he chooses to allocate to roadways. We already have a massive system which requires draining amounts of maintenance. This is a system that is already established and does not need to grow as it would thus require more annual maintenance and encourage more vehicle transit and less mass transit. The only way to shift the modal mix is to make significantly more investment in rail than we do in roads.

WHY WASN’T TRANSIT MENTIONED? TWO REASONS

Unlike Seattle, most cities don’t have a shovel ready mass transit project on the books. While almost every state has some new roadway expansion ready for funding. This challenge may delay the economic stimulus which is part of its intention, but it is far better to accelerate the correct plan, even if it creates a delay, than to act quickly and invest in a bad one.

The other challenge mass transit faces (aside from lobby groups) is that nothing will be more effective toward stimulating our current auto-orientated economy than an auto orientated subsidy. Subsidizing the roadways is a time tested and proven method for stimulating the auto sector and thus the whole economy. While effective, it is also short sighted if you believe that energy constraints are the greatest economic threat we face. This act will stimulate transportation inefficiencies rather than energy efficiency leading towards more extreme economic challenges in the near future.

More auto transit means more vehicle purchases and a re-strengthening of the old backbone of our American economy; the automobile industry. But it is an old backbone that is failing our economy. Today we need real change. We need to move forward by stimulating and growing a new economy not struggling to keep the old one alive. I believe both rail based infrastructure and alternative energy production projects can be the new and stronger backbone of the U.S. economy. To compete in the world economy, we need to become a world leader in these two critical sectors. The time to make that shift is now. The way to make that shift in a capitalist system is with dollars and Obama is talking about pumping billions if not trillions into the economy. An act that is sure to create movement.

Mark my words, higher energy prices will haunt our economy again if a diversification of our transportation options is not achieved. Obama is talking about a 50-100 year investment in our infrastructure. The question before us is will we use this window of opportunity --- before energy prices take off again to start moving ourselves onto a path of change toward future stability, or instead will we simply replicate what was done in the 1950’s and hope that it leads us somewhere else.

PLEASE JOIN ME IN LETTING PRESIDENT-ELECT, OBAMA, KNOW BY WRITING HIM THAT:

* At a minimum we want federally allocated transportation dollars to be flexible enough to allow spending on mass transit, sidewalks and bike paths instead of just roads and bridges.
* Call on him to mandate that the lion’s share of spending is invested on mass transit and other alternative transportation options while little to no money is spent on new roadway expansion - only on existing road maintenance.

Greg Rock
Sustainability Engineer
greg@greencarco.com
Founder