The Greenback: Toward A New Monetary Policy

As we transit to a world of resource depletion and the reversal of the Permagrowth model, what is the proper monetary and currency regime? Clearly, not the existing fiat/credit currency, which depends entirely on financing present consumption by discounting future growth that may never occur. Just as bad would be a throwback to precious metals. It would suppress economic activity without providing incentives for developing alternative energy resources.

Instead, I believe we should implement a monetary system that uses renewable, "green" energy as a benchmark. In previous posts I have called the new currency the "Greenback", an allusion to the fact that for most people nothing would change in their daily routine. Same dollars, same bank accounts, same credit cards. The monetary institutions would also be retained: the Fed and the fractional banking system. The only change - admittedly a big one - would be the rate at which money supply is allowed to expand. Let's call this rate "M green", or M(g) for short and see how it will be calculated.

To begin with, we have the following energy consumption data from the US Energy Information Administation (EIA, see chart below). The discrepancy in percentages is in the original data, but it is very minor.

Data: EIA (2006)

We see that of the total 99.4 quadrillion BTU the US consumed in 2006, 86% was produced by "black" fossil fuels, the rest from nuclear and renewable sources. Adding the last two together gives us the percentage of "green" energy. Though I hesitate to call nuclear "green", it is an indispensable energy source in transiting away from fossil fuels.

For any given period, then, the allowed growth in money supply would be calculated by this formula:

M(g) = ΔE(g)/E(b)

where:

- ΔE(g) is the change in "green" energy consumption from the previous period, in BTU.
- E(b) is the total "black" energy consumed in the previous period, in BTU.

For example: let's say that in 2008 we consume 85 black BTU and 15 green BTU. The following year, we consume the same 85 black BTU but increase green to 17 BTU.

Therefore:

M(g) = (17 - 15)/85 = 0.0235 = 2.35%

i.e. broad Greenback money supply (the equivalent to M3 today) would be allowed to expand by 2.35%.

Putting it in simple terms, money growth would increase with "green" energy use and be constricted if "black" energy grows.

This system would broadly encourage the consumption of green energy and penalize the consumption of black energy, by controlling the money base. A monetary policy that targets money supply has not been used since the early 1980's, when the Fed switched to targeting short-term interest rates (i.e. Fed funds). Nevertheless, the tools and procedures for targeting money supply are simple and consist mostly of buying and selling Treasury securities in the open market.

There are certainly further details that will need to be worked out. Initially, at least, the formula will lead to a restrictive monetary policy and high interest rates. Left unchecked, the elevated cost of money would prevent even "green" projects from going ahead, so exceptions and subsidies should be provided. For example, the government could provide low-cost financing for alternative energy projects.

In addition, GDP growth as measured currently would be impacted negatively. To avoid a prolonged period of high unemployment resulting from sectors of the Permagrowth economy becoming obsolete, the government should implement an appropriate mix of fiscal policy initiatives. For example, increased taxes in "black" sectors could be recycled into "green" sectors, including education and retraining programs and incentives.

Notice that I have not called for a government-sponsored and financed "Greenshot" effort, a throwback to the Apollo Moonshot project. I believe that the proper mix of monetary and tax policies, balanced with liberal subsidies for green/sustainable efforts, will create more than enough opportunity for private enterprise. The prospect for attractive profits will promote vigorous technological advance and produce high value-added jobs.

The whole process will re-invigorate the American economy and society, leading to a long period of global superiority in intellectual and creative advancement. Crucially, we will no longer need to maintain a vast military-industrial complex to guard the world's oil sources and routes. America will once again become the beacon of liberty and hope, instead of fighting bloody resource wars that besmirch our national pride and give birth to sworn enemies.

Final Note: Some readers may not be familiar with actual macro-economic and monetary data and may thus be puzzled by the Greenback's ability to transform the economy. To illustrate, here is a real-life example:

Between 2005 and 2006 US "green" energy consumption grew by 0.53 quadrillion BTU, a tiny increase when fossil fuel consumption in 2005 was 86.4 quadrillion BTU. This means that broad money supply under the above Greenback system would only be allowed to grow by 0.6% for the year. By comparison, the last official reading of M3 growth, before its publication was discontinued in early 2006, was 8.0%.

I expect that the economic effects of such a large difference in money supply growth rates are obvious. If not, please refer to basic texts on monetary policy.