Quite interesting, and has a useful graph for M1, M2, M3 dollar supply.
I'd like to know what everyone thinks.
From the FT Alphaville blog
It’s not a liquidity crisis, it’s an energy crisis stupid
While the world’s best brains work furiously to try and alleviate the current financial crisis with all sorts of monetary and fiscal measures, Michael Lardelli posting on Australia’s ‘Online Opinion’ platform presents another explanation for the crisis.
Lardelli’s explanation notably doesn’t blame liquidity, but declining global energy resources.
Bear with us, his reasoning is pretty convincing. First, consider Lardelli’s following point (our emphasis):
No living or manufactured thing exists on this planet without energy. It enables flowers and people to grow. We need energy to mine minerals, extract oil or cut wood and then to process these into finished goods. Without energy the goods would not exist so we can think of each product as containing “embodied energy”. So the most fundamental definition of money is that it is a mechanism to allow the exchange and allocation of different forms of energy. The economy is energy.
Quid pro quo, if the most important source of energy is hydrocarbon-based, sharp fluctuations in hydrocarbon supplies will have an effect on the economy.
As Lardelli explains:
Until recently (about 2005) the world economy was growing. The number of people has been increasing which requires increased production of food, clothing and shelter - the basics. On top of this, many of us have been using more energy than previously - to travel farther, eat more food, buy additional clothes and enhance our shelters. Until 2005 we could expand our energy use to meet this demand. This is something we were able to do - with occasional interruptions - for the past 150 years. However, after 2005 we could not expand our energy supply. In other words we could not expand the world economy.
The important point being:
That is not to say that we did not try to expand the world economy after 2005. However, much of the expansion that occurred was an illusion. In many industrialised nations a great deal of “money” was created (by increasing the money supply and other means) but it did not correspond to an increase in energy use. This is illustrated by what happened in the USA, where the rate of money creation increased greatly after 2005.
Lardelli supports the view of rampant money creation since 2005 with the following chart depicting M3 money supply — a statistic the Fed actually stopped compiling around 2006.
Others nevertheless stepped in to duplicate the measure and Lardelli uses their data to complete the time-series.
What it shows is the extent to which money creation tried to compensate for energy supplies in driving global growth, but failed. According to Lardelli, the financial crisis proves the move was simply unsustainable. What’s more, a global shock via GDP contraction was actually needed to rebalance the world in preparation for the growing scarcity of energy supply.
You might ask in that case where is the associated spike in energy prices that comes with such a rebalancing?
Lardelli feels the notion typifies the economic rather than scientific view of how the energy problem will be resolved. Economists, he says, believe scarcity will ultimately raise prices via market intelligence, encouraging investment in new alternative sources. In that scenario there is no ultimate limit to how much energy humanity can use. That is not the ’scientific’ opinion however. As Lardelli explains:
If we view the economy as a thermodynamic system (since “the economy is energy”) we would say that a high energy price leads to the greater allocation of a society’s current energy production into the production of more energy. But there is a problem - the energy investment required for new energy production from mined sources increases with time.
No source of energy will be exploited if the energy it yields is less than the energy investment required to exploit it.
Which, consequently, is the situation that is currently materialising in the market — the price of oil is falling below the level most oil majors would need to consider investing in more expensive alternatives. This comes despite voluminous calls from international energy experts that investment is critical to avoid a future crisis. As Lardelli goes on to explain:
The world’s energy production is now declining and the profitability of energy production is declining at the same time. This means that the net energy available to support activities other than energy procurement will decrease much faster than the fall in total energy production. We are approaching a “net energy cliff” that gets very serious when less than five units of energy are produced for each unit of energy invested.
He reprises the following chart reflecting ‘energy return on energy invested’, first published on The Oil Drum blog:
So how to stave off the perpetual global contraction that will inevitably come with declining energy supplies?
Well, Lardelli says nothing short of a wartime crash programme will do. Huge proportions of the world’s remaining oil energy simply must be diverted into building alternative sources like nuclear power stations and solar arrays etc.
Unfortunately this is unlikely to happen, he says, especially in democratic nations. As he concludes:
…it would require large, voluntary reductions in living standards in the midst of a serious and worsening economic crisis. The immediate cries for help now (e.g. unemployment benefits, company bailouts) will outweigh any future possibility of improved living standards. Wartime crash programs can work because a nation’s population literally has a gun pointed to its head - the population fears death at the hand of the enemy. Energy decline can be just as deadly as any human enemy but, like climate change, its effects are slower and most people do not understand enough about energy to fear its loss.