Friday, February 1, 2008

"The Greenback" - A Thought Experiment

Today I will pose a thought experiment*.

The money supply of the United States shall be indexed to the production of renewable energy and the "dollar" shall be renamed the "Greenback".

Potshots invited.

Some further information:

Our world is facing two fundamental and interlinked challenges: fossil fuel depletion and global climate change caused by greenhouse gases. These are monster issues and lurk behind each and every major political, economic and strategic decision, from revamping transportation infrastructure to overhauling pension systems and making war.

While there are still entrenched interests that wish to muddle the issue, the Chairman of Shell Oil has just released a statement which begins:

By 2100, the world’s energy system will be radically different from today’s. Renewable energy like solar, wind, hydroelectricity, and biofuels will make up a large share of the energy mix, and nuclear energy, too, will have a place.

Further down, he states:

After 2015, easily accessible supplies of oil and gas probably will no longer keep up with demand. As a result, we will have no choice but to add other sources of energy – renewables, yes, but also more nuclear power and unconventional fossil fuels such as oil sands. Using more energy inevitably means emitting more CO2 at a time when climate change has become a critical global issue.

(*) This is a proposal I made some time ago in a comment to The Oil Drum. It was in response to calls for the re-instatement of the gold monetary standard, which I regard as ill-suited to an era of resource depletion and climate change.


  1. Hellasious:

    I enjoy your blog; it's always thought-provoking and constructive.

    Of course our currency will be "indexed", or valued by our collective capacity to overcome the impending shortage of fossil fuels, and the corollary leap to renewables. Since this force is general and unavoidable, every nation's economy (both production and consumption sides) will be evaluated (valued) on the basis of their success in dealing with this great common challenge.

    What's equally interesting to me is how the different the responses to the challenge are developing, and how they reflect the personalities of the host culture. For example, contrast GM, Toyota, and Tata (Indian conglomerate, just announced $2000 car). Contrast again the technical and production leadership in solar panels among the Germans, the Japanese, and the Americans.

    Will technology "save the day" to permit continued centralized and intensive energy usage patterns, or will the reality of dispersed solar power delivery from the sun direct the focus of innovation toward matching light, distributed consumption to light, distributed supply?

    Here's another twist. Think about telephone physical plant. The countries that made the investment latest avoided major investments in wiring plant (by going directly to cellular). Will the developing world's late investment enable them to leapfrog the West's outdated energy infrastructure?

    Interesting times, these.

  2. Dear outerbeltway,

    Thank you for your comments.In re: leapfrog by developing nations.

    I was at a renewable energy "expo" a couple of months ago. Most of the solar panel manufacturers were Chinese. Slam dunk? Well, not exactly because the more complicated hardware required to hook up to the grid (ballasts, etc) came from European firms, but still...



  3. I believe that Gold forms an ideal form of money regardless of energy crises or climate changes. What makes you believe it is bad?

  4. H your blog is addictive.

    How would you address misreporting of the renewable energy output by countries? Given the amount of lies about oil reserves by oil-endowed nations already, and the recurrent incentive to debase money, wouldn't the temptation soon be too great?

  5. Ted Said:

    "I believe that Gold forms an ideal form of money regardless of energy crises or climate changes. What makes you believe it is bad?"

    A currency should suit a modern economy, driven as it is by the supply/demand of its primary input, i.e. energy. That's the main reason why the dollar is linked to crude oil and one of the secondary reasons why the gold standard was scrapped in 1933.

    As oil depletes and pollutes, the dollar needs to be linked to "something else". Linking it to renewable energy production kills many birds with one stone, which gold does not.


  6. To chep:

    Darn! If my blog is addictive I should charge druglord prices! Free economy and all..

    Misreporting is an issue, but I am envisioning the dollar as a national currency, not necessarily an international one.

  7. I sure do hope you are extracting at least as much benefit out of writing this than we readers and lurkers (some experience with the 'talking to a yellow plastic duck' effect suggest s I don't hope in vain)

    making the greenback a nondeliverable currency... interesting thought. Though it does open quite a can of worms doesn't it? And then, unless you advocate the US totally withdraw from international commerce (North Korean style), comes the issue of the GBK/USD or GBK/EUR forex pricing... (see arguments on proposed "social fairness" and "ecological costs" tarrifs, whichever the names, against China. How can you price fairly your competitor nation's {ecological/social/religious/whatever pet value} behaviour, when you must for this rely on the competitor's reporting, with a total lack, because of national sovereignty, of independent accounting?))

  8. Just to clarify, by "indexed to" I assume you mean "guaranteed to be exchangeable for a fixed quantity of"

    If so, there will have to be an entirely separate system of creating, storing, holding, and accounting for "renewable energy" as opposed to non-renewable. Once the atoms have configured themselves to have potential energy, it's hard to tell whether they did so renewably. The accounting sounds like a nightmare (honestly I don't see any way to do it but to effectively have two economies) but maybe you've a cleverer plan than I can come up with.

  9. Indexed Greenbacks does not mean deliverable against green energy, any more than a dollar is guaranteed to buy a set amount of oil.

    I mean Greenback M3 should vary at a rate indexed to the production of renewable energy.


  10. re: outerbeltway said:

    "Think about telephone physical plant. The countries that made the investment latest avoided major investments in wiring plant (by going directly to cellular)."

    Just because you don't see the infrastructure if you are using a cellphone it doesn't mean that there is none! You need to have a proper fixed network or what do you think how the Base Station Subsystem (the base stations and their controllers) & the Network and Switching Subsystem would work? No leapfrog there...

    re:West's outdated energy infrastructure: What kind of powerstations do you think China is building currently and in the near future? China and India are building coal-fired capacity as fast as they can. China is the dominant player. The country is on track to add 562 coal-fired plants - nearly half the world total of plants expected to come online in the next eight years.

  11. Hellasious,

    I, too, enjoy your blog for some time.

    As a professional in emerging energy sector, I would urge you and your readers to focus on 'realistic' expectations on renewable energy forecasts and true owners of the energy sector (re:Big Oil).

    Indexing Greenback to renewable energy is far fetch at this point, imho, even though all the major dynamics of future energy needs illustrate a solid need for renewable energy sources.

    It is anybodys guess why the developed world (starting with the US) keeps banking and/or jeopardizing its future on fuel sources...



  12. I think currency will morph into something energy export nations want. Saddam wanted euros, Iran wants euros, what's next, silver?

    Financial people have a hard time dealing with changing economic paradigms. Call it a FRN, Greenback, Buck, whatever, it's worthless. It's a faith based currency, coming from a faith based nation. Our alternative energy policy is war.

  13. Hell
    As always, your blog is great. However, I respectfully disagree with your (over)emphasis on developing green energy sources. The lowest-cost source of energy is....
    conservation/efficiency. Building cities that don't require the use of autos; cars that get 100 miles/gal; houses that need little or no heating because they are so well-insulated; micro co-generation for houses in cold climates; LED and compact flourescent light bulbs: none of these require green energy generation, yet would arguably have a much larger impact than the development of solar or wind or geothermal power. The "Solar solution" and the Nuclear Option are attractive to a lot of people because it is high-tech and seems to promise that we can continue our high energy- consumption lifestyles, but I think that conservation/efficiency promises much more bang for the buck.

  14. As Amory Levins spelled out back in the 80's, the crucial issue with energy is end use. If the end use of energy is to produce more needless things, more excess, then even alternative energy is self-defeating.

  15. Hello Hell,

    Since Prof-iteer Roubini has decided to cut free access to the public, I will post my most recent thoughts here. (as I have stated many time before, I am equally a fan of your work, but I usually post there due to it large volume of foot traffic.)

    Anyway, It's something I've recently given quite a bit of time and thought to.

    Solutions. (I've posed the same questions to you recently, and see you've also been giving thoughts to "solutions based on the current topic.)

    Anyhow, WhatI've been workin on is a the concept of a federally funded and controlled: centralized Debt Servicing Company.

    Conceptually it would run like DTC. From an accounting standpoint, there would be virtually no difference on anyone’s books. (don’t fight with the FASB. You will not win. Let auditing run its course.)

    The concept of a federally sponsored centralized Debt Service Corp (“DSC”)would help on multiple levels.

    Currently, your custodians already provide rudimentary servicing for this. They would still maintain this function, but the actual assets get sub-custodied at the DSC. The current custodian’s rudimentary servicing is often based on poor information since these assets are so complex. (it’s not a stretch to say that a custodian would currently allow the acting accounting group for the client come up with the value. …and at your typical big shops, these are usually poorly paid/green/mid level accountants that will accept whatever value a client says it should be.)

    Aside from this, Wall St shops use multiple custodians. (no one keeps their eggs in one basket!) It’s not uncommon for a big shop to have over 30 custodians. (especially the shops that do a lot of outsourced asset management.) No 2 custodians use identical systems, thus methodology, processing and servicing varies from shop to shop. Likewise, very few clients have identical systems, so custodians have to adapt 100’s of different types of systems. (thus making these “uncommon assets” harder to service)

    p.s Custodians are meat markets. Bad pay. Bad moral. Huge turnover!

    Asset Value (transparency for the clients):
    When you compartmentalize service functions in the finance industry, you create market specialists. These are the types of people we need to strip these complex assets down for the purpose of truly servicing them. They would be able to tear through the tranches and provide the holders of the securities a much better picture of what they own. They would be able to take quite a bit of specuation out of the current game.

    In addition, a specialized company would need a specialized system, one where the second a default hits the books it would find its asset that it was bundled into. (That’s where the specialists have already worked through the assets and assigned security ID’s to every underlying piece. (may sound daunting, but registering a couple million securities is not that bad. A team of 1,000 specialized employees could easily mash this out in a couple of months))

    The Gov’t:
    They’d love this. I would take much of the guess work voodoo they currently perform. It also gives them the ultimate out. “Register your securities, and you don’t need insurance. …if you choose not to register your debt and want your debt off the record, and off the Gov’t books… then you do not qualify for any relief.”

    The Market
    The market needs this! …because investors, countries, gov’ts want transparency. Until it exists, this market is purely speculative. Sure if you’re holding junk, you don’t want the world to know, so you just hold it as opposed to selling it. (movement of registered securities would require disclosure to new party) …but there are currently quite a few complex securities selling WAAAAY below their value. Holders of this good debt would be able to trade it at or around fair market value. …and for those holding registered junk, well upon sale/loss, they qualify for “bailout”.

    If you don’t understand the workings of DTC, Euroclear or the FED, there is a good chance you may not understand the full effects of the benefits. Likewise you may make some assumptions about what else this would let Wall St get away with… (there’s no additional leveraging or accounting reclassification benefit to an owner who would register their debt.) That would be a gross misunderstanding. Summary, it would put a MASSIVE CONTROL over this new debt industry and it would return true value and confidence to this reeling section of the industry.

    This is very possible. Especially with the right architects. (My career background, experiance and intuition tell me this it what needs to happen to truly fix our current situation.)

    I'd love to hear some feedback?

    Besides… I haven’t heard a better idea!

    Rich H

  16. Dear rich h,

    Yeah bummer with Roubini.. but it's a free market, or so they say.
    On the DSC idea..

    I can tell u right away that lots of people don't want the transparency to be 100%. The hanky-panky hiding behind the smoke has been heroic in some cases. Truly heroic. Like 10-15 (big) points of fees.

    I am also sure that big players would not want the gov't to know their positions, for a variety of reasons, e.g. leaks to competitors. This is always a possibility even with DTC, Euroclear, etc. but at least they are presumed to be checked by competition factors.

    At the heart of the problem is not lack of transparency, however. It is that a bunch of "lenders" convinced millions of unfit borrowers to assume debt they could never afford and sold the resulting paper to people who did not understand what they were buying - or in some cases understood well but were "convinced" by brown envelopes.

    "Money for nothing, chicks for free" has never been a valid business plan and naturally did not produce good collateral.

    The problem is 80% fundamental, 20% technical.


  17. Hell,

    I'm with you on the problem. I know it through and through.

    The current path we're on is one without a solid "Solution" though.

    20 years ago, the same arguments could be made on why no company would want anything at a clearing house like DTC. Now, Everything is there.

    As far as Wall St is concerned. This concept would not be something they want, rather something the NEED. The concept of "no bailouts for unregistered securities" is nearly enough to do the trick. (Wall St could choose to keep some registered and some un-registerd (much like they do with DTC securities), but only the reguistered portion would be entitled to federal help.)

    The current fees that WallSt earns will be pointless as these securities potentially spiral downhill to valueless junk. Wall St NEEDS transparency or there will be a collapse of this asset type.

    So for the purpose of keeping a value on their assets, having a fed safety net, and providing specialized top flight debt servicing, I believe wall st will be willing to make the sacrifice of letting the Gov't in (and also taking regulatory control)

    Regardless, this shouldn't be Wall St's call. The Gov't should demand this. As you've stated... How much debt is there? Too MUCH>

    This will give the Gov't the handle they need, and allow them to assess true stress on the credit/debt market.

    Once again, humbly, Rich H

  18. "Our alternative energy policy is war." -- Anon @6:06

    I couldn't have said it better myself. You get a cookie.

  19. Have you heard of Technocracy?
    They are quite a bit more radical, but they wanted to link the currency to energy (production capacity). They also wanted to make the currency non-transferable and give it an expiration date...So as I said, a bit more radical.

  20. " ... ... every improvement in the circumstances of the society tends either directly or indirectly to raise the real rent of land ... ..." A. Smith (1776).

    Renewable energy, whatever this means will require significant land usage - unless you are suggesting that individual customers catch their own photons!

    A dollar is set at 1.0 Gmol of photons - seems a pretty stable amount.

    I have asked this before; What is the assumed model of growth (economic)? Annual exponential increments are completely unsustainable (aka: unrenewable). What other model will be adopted? This is a very unpleasant thought experiment.

    Next bubble? Dihydrogen oxide!!!

    Brian P

  21. Thanks for your response H. I have a few follow up questions, if you will oblige. You wrote that:

    "A currency should suit a modern economy, driven as it is by the supply/demand of its primary input, i.e. energy."

    What makes a currency suitable? Gold was never the primary input of an economy, yet I would argue that for many (if not all) it was very suitable.

    "That's the main reason why the dollar is linked to crude oil..."

    The dollar is not officially linked to anything. You cannot redeem it for anything. There are correlations, however, especially vis-a-vis commodities like oil. (Could the fact that the US produces 4% of the world's oil while consuming 25% have anything to do with oil-dollar correlations?)

    And incidentally, the dollar also exhibits correlations vis-a-vis gold.

    "...and one of the secondary reasons why the gold standard was scrapped in 1933."

    Because it was unsuitable to the economy? Says who? The dollar was adopted as currency long before any government came and put its official seal of approval on it. It was deemed suitable by the many people acting independently in the economy.

    In contrast, the scrapping of the gold standard was done by government edict - which is hardly evidence of its unsuitability.

    "As oil depletes and pollutes, the dollar needs to be linked to "something else". Linking it to renewable energy production kills many birds with one stone, which gold does not."

    For example?

  22. The dollar is not especially linked to crude oil. In fact the price of WEST TEXAS intermediate crude has gone up 50% in dollar terms in the past year. Texas (well, Cushing Oklahoma is the real delivery point) is within the USA.

    One way or another we have gotten other producers to price their crude in USD. That is useful to us but obviously doesn't guarantee a fixed dollar price.

    Gold was on a fixed standard when the Fed had a supply of it to back up Federal Reserve Notes. Do you suggest that the Fed start inventorying "renewable energy" or some sort of renewable energy credits. Who gets to decide what is worth how many credits??

    Renewable energy technologies (e.g. ethanol in gasoline) can cause the production of a lot of Greenhouse Gases. Will you endogenize that into the money supply?

    I think OPEC is already endogenizing the shortage of "fossil fuels", taxing us by charging high and apparently increasing prices for their crude.

  23. Hell, you have an interesting. Do you mean something like the absolute amount of BTU's produced in the world thru non-renewable sources?

  24. Hellasious:

    Great concept, but implementation would be hell. It seems to me that a bureaucracy would have to be established to define renewable and to fix the points. Kind of like the Fed but greater by an order of magnitude. Legislation would have to be passed, vulnerable to special interests (technically oil is renewable, but just at a glacial rate (or so the lobbyists would say))

    Jason B

    PS. Looks like Roubini let his great analysis and prognostication go to his head. Greed is the root of all evil...

  25. "Technocracy" recommends a currency that has an expiration date? Everyone would just stop using it. They could switch to gold or something else. Neither buyers nor sellers would want to hold such a currency, so they would "agree" to switch to something else.

    That idea just wouldn't work.