A Gesture from the Invisible Hand
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It's been pointed out by a number of commentators in the peak oil blogosphere that the most popular method for expanding the money supply -- the transformation of borrowing at interest from an occasional bad habit of the imprudent to the foundation of modern economic life -- has outlived its usefulness once an expanding economy driven by increasing fossil fuel production gives way to a contracting economy limited by decreasing fossil fuel production. This is quite true in an abstract sense, but there's a trap in the way of putting that sensible realization into practice.
The arrival of geological limits to increasing fossil fuel production places a burden on the economy, because the cost in energy, labor, and materials (rather than money) to extract fossil fuels does not depend on market forces. On average, it goes up over time, as easily accessible reserves are depleted and have to be replaced by those more difficult and costly to extract. Improved efficiencies and new technologies can counter that to a limited extent, but both these face the familiar problem of diminishing returns as the laws of thermodynamics, and other physical laws, come into play.
As a society nears the geological limits to production, in other words, a steadily growing fraction of its total supply of energy, resources, and labor have to be devoted to the task of bringing in the energy that keeps the entire economy moving. This percentage may be small at first, but it's effectively a tax in kind on every productive economic activity, and as it grows it makes productive economic activity less profitable. The process by which money produces more money consumes next to no energy, by contrast, and so financial investments don't lose ground due to rising energy costs.
This makes financial investments, on average, relatively more profitable than investing in the kinds of economic activity that use energy to produce nonfinancial goods and services. The higher the burden imposed by energy costs, the more sweeping the disparity becomes; the result, of course, is that individuals trying to maximize their own economic gains move their money out of investments in the productive economy of goods and services, and into the paper economy of finance.
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Jim |
