Berg_SFU2012c.pptx - Simon Fraser University

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					               Fiat Currencies on
               a Finite Planet

Peter Berg
Associate Professor, Physics
Director, Energy and the Environment program
Faculty of Science, UOIT (soon: NTNU, Norway)
Simon Fraser University, June 20th, 2012
      The Ultimate Challenge: Managing Finite Resources

   20th century: struggle of ideologies

   21st century: struggle against depletion of natural resources, finite planet

             Current global crisis is not a temporary phenomenon!

              The 4 Corners of the Universe

Natural Resources                            Population
    (energy, soil,
  water, metals, etc.)

    Economy                                     Money
 (economic system)                         (monetary system)

      Currently, to serve debts, the economy MUST grow!
In the Right Corner:

    Our Planet

              Scale of the Problem – Oil and Fossil Fuels
                  One-time Endowment with Inertia

Vaclav Smil,
Univ. of Manitoba

   Fossil fuels’ inertia: > 80% of world energy supply built over 200 years!
   Hydro nearly maxed out
   Nuclear?
   Renewables?                                                                 5
                 e-Slaves & “Green Living”

   Average Canadian “consumes” 150,000 Kcal/day, equivalent to

                           53 energy slaves !!!

                       (In fact, it is probably > 100 .)

   Sustainability challenge too vast to continue with our way-of-life.

   Technology alone cannot solve the world’s problems,
    assuming continued exponential and population growth.

                  How do we keep this circus going?
     The Kitchen Sink – Canadian Tar Sands, Shale Gas, CBM
     Land use, tailings, carbon dioxide emissions, water use, energy use,…


                           What Else Can We Do?

Let’s ask the scientist:

Energy Return on (Energy) Investment:

                            useable energy content of outputs
     EROI 
              total energy content of all inputs required to produce outputs

It takes energy to make energy available. It’s just thermodynamics!

   Entropy generation is underrated!
   Global system: approximately 15:1.
   Alternative (liquid) fuels: diminishing returns


D. Friedley,
9 challenges
of alternative
Post Carbon

      Nuclear: large variation in estimates; most well above 15:1 !
      Coal > 20:1
      Biofuels a non-starter?                                         9
             It’s Non-equilibrium Thermodynamics!
    Although difficult to quantify in detail, nature seems to be abiding
     by the following rule of thumb

         the environmental impact of an energy supply technology
        scales inversely proportional with the corresponding EROI.

    In other words,

               the lower the EROI, the higher the associated
                     pollution and environmental impact.

   Carbon dioxide emissions for each energy source increase with
    decreasing EROI (e.g. coal, gas, oil, bioethanol). Energy density
    plays a key role here!

                             That’s not all, folks!                         10
   In physics, complexity may be quantified by the level or the
    intricacies of patterns and pattern formations, and by the connectivity
    of system units.

   Such complexity arises for example in driven, dissipative, nonlinear
    Often, patterns occur as phase transitions which may or may not be
    continuous. This means that new patterns can suddenly appear (or
    disappear) as the rate of energy input increases (or decreases).

   In economics, such patterns are perhaps embodied by the
    infrastructure we built, including the IT world.

   Was the Industrial Revolution a consequence of passing a critical
    rate of energy flow?

   Note that energy needs to flow just to stay steady.
                        Minimum/Critical EROI

   How will a society fare in which complexity, specialisation and
    individualism is increasing while the EROI of its underlying energy
    infrastructure is decreasing?

   Is there a minimum EROI that is required to facilitate the continued
    growth of complexity? Perhaps 5:1 - 7:1?
    If so, nuclear doesn’t look bad!

   In principle, the drag on the economy caused by falling EROIs
    can scale nonlinearly or it could even change abruptly!

                         It’s Not Just Energy

Peak Everything?

    Oil
    Coal
    Fresh Water
    Top Soil
    Natural Gas
    Uranium
    …

    We could perhaps tackle these issues successfully if there wasn’t...

        The Left Corner:

Fiat Money – “It Shall Be (Money)”
   Fractional Reserve Banking


   What is money?
   Why do we need money?


   What is money?
   Why do we need money?

   It facilitates trade.
   Without money, only bartering is possible. No “3-way trade”.
   Money has either some intrinsic value (e.g. silver coins, gold coins) or
    it is underwritten by some authority.
    Coins have been around for 1,000s of years.
    International trade required the Queen’s or King’s word.
   Without a guarantee of a money’s value, how do you conduct trade?


   Most money only exists virtually!
   Cash and coins represent less than 10 % of all money in circulation.

   If over 90% of the money does not exist physically, do banks have
    the money they lend you and guarantee to have?

                      Fractional Reserve Banking

The Geometric Series
Suppose we pay in $100 into our savings account.
The government allows the bank to lend out 90% of it,
i.e. leaving 10%. This means the bank is leveraged 10:1.

   What happens to the money supply?
                      M 0r  1  r
                     n 1

   With r = 0.9, it increases 10-fold !!!

                     Fractional Reserve Banking

   Banks create money out of nothing!

   This is the root cause of inflation!

   Amazingly, the banks can charge interests on money they don’t
    really have or need to have! This requires more money in circulation in
    the future to serve debt payments or faster circulation of money. If
    things balance, inflation is kept in check.

   This is not conspiracy or anti-capitalism talk, this is reality.

   The problem occurs when banks are asked to “show the money” the
    apparently hold (“Run on the banks”).
    When loans default, banks may not be able to meet their obligations
    (savings accounts etc.). This can cascade.
  Fractional Reserve Banking

Defaults need to occur on a finite planet
 whose economy cannot grow forever.

                          Monetary System
Q: Where does the money come from in the first place, i.e. the money that
   is put into circulation for the very first time?

Let us study the Federal Reserve, i.e. the central bank of the USA.

                          Monetary System
Q: Where does the money come from in the first place, i.e. the money that
   is put into circulation for the very first time?

Let us study the Federal Reserve, i.e. the central bank of the USA.

The Federal Reserve:
 is a private bank; shares held by (US & UK) commercial banks etc.
 is the authority that creates money out of thin air in the first place.
 transfers money to the US Treasury at interest. The American people
  need to pay income taxes to serve these debts.

                            All money is debt!
     There is never enough money in circulation to pay off all debts.
                  If we tried, no money would be left!
                   Growing GDP = Growing Debts
Some Evidence

In Debt We Trust: USA

                     Canada Is Not Immune

Total debts: It’s not just the federal government…

                          Monetary System
The amazing thing is that the money (almost everywhere in the world,
including Canada) is not backed up by anything. It is a fiat currency.

fiat (Latin):   “let it be done”; money has no intrinsic value, it has value
                by government decree

What are the alternatives?

                            Gold Standard
One alternative is for a government to back up each unit of currency by an
equivalent amount of a good, e.g. a commodity such as gold. In this case,
we speak of a gold standard.

The United States and many other countries have been on (and off) gold
standards over the course of history. Richard Nixon decoupled the US
dollar from gold in 1971, apparently to allow for money printing to finance
the Vietnam war.

Q: How do you guarantee the value of fiat money?
A: Oil, manufacturing,…

Some Evidence

              Government-issued Debt-free Money

The government could assume the authority to issue debt-free money.

   Henry Ford: Why borrow money as a government when you
    can issue debt-free money to finance new infrastructure?

   Abraham Lincoln: Financed the US Civil War by issuing debt-free
    currency (the Greenback) rather than borrowing it from the money

   The main problem would be to control inflation.

                           The Bottom Line
   The current world monetary system is based on fiat currencies and
    fractional reserve banking.

   Both inevitably increase money supply (and debts), hence leading to
    inflation (see e.g. price of loaf of bread in 1950 or house prices in
    1970 etc.).

   Debts can only be repaid with interest if the economy grows

   This is impossible on a finite planet.
    “Faith is what religion and money have in common!”

   Our future may depend on issuing debt-free, government money
    (see Abraham Lincoln & Civil War).
                   The Bottom Line

           The Infinite Growth Paradigm will fail.

       In this regard, alternative energy technologies
                  will not make a difference.

Sustainability requires a change in our monetary system.

        Unless you change the way money works,
                  you change nothing!
                   (Michael Ruppert)

              Sustainability – The Rubber Band

Fiat Currencies, Fractional Reserve Banking and Finite Resources:

                    Are we running fast enough?



      There are 3 possibilities: progress, progress and progress.

“I have learned to seek my happiness by limiting my
    desires rather than in attempting to satisfy them.”
                  (John Stuart Mill)


                       Dr. Peter Berg
                       Associate Professor, Physics
                       Director, Energy and the
                          Environment Program
                       Faculty of Science, UOIT
                       2000 Simcoe Street N.
                       Oshawa, ON, L1H 7K4, Canada
                       Tel.: +1 905 721 8668 ext. 2457


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