Tuesday, November 19, 2013

Key Concept 2: Currency = Money = Energy

Key concept 2 is to understand that currency represents money and money represents energy. Today is really a great day to discuss this key concept as several reports have come out recently, accumulating with the OECD report on Canada which underscore the points I am going to make.

This post is just going to focus on energy and currency in general, describing the system itself, Key concept 3 will delve into peak oil and why this monetary system is destined to failure. Some of the flaws can't be avoided as they are fundamental to the way the system works but I will try and keep it as focused on the operation of the monetary system for now.

Energy is the ultimate form of money

With year after year of emergency economic stimulus the emergency has become the new normal and economic growth has become meaningless. New "record highs" on the markets simply represent the rapid expansion of currency while wages, benefits, and taxes purposely ignore it instead opting to utilize the always changing CPI calculations governments use to mask the inflationary pressures they are creating at the behest of their banking masters.

There is one simple root reason why industrialized nation's populations are getting poorer, and why the middle class is getting destroyed: the cost to produce energy has risen exponentially. The reasons why this cost has risen will be explored in key concept 3 but for the purpose of this post what's important to understand is that new energy projects like the U.S.'s "shale oil revolution" or Alberta's oil sands are significantly more expensive to produce which means ultimately there is less spare energy capacity. An IEA analyst recently explained this:
Nor does Mr. Birol expect the surge in tight, light oil production in the United States to drive down global crude prices over the medium to long-term. He dismissed concerns raised by some experts, including Saudi billionaire Prince al-Waleed bin Talal in The Globe and Mail this past weekend – that the world will soon be awash in crude “The era of cheap oil is over,” he said. “Over the last three years, oil prices have averaged $100 (U.S.) a barrel for Brent [the most widely quoted international crude], and I don’t expect this to go down.”

He said many of the most prolific American fields require a price of at least $80 a barrel to break even.
The oilsands likewise have a requirement of roughly $80 / barrel to break even.

Conventional oil, the kind our societies were built on and economies designed around has an extremely good energy returned on energy invested ratio which can range anywhere from 100:1 to 200:1. This means that it takes 1 barrel of oil (in energy equivalence) to produce 100-200 barrels of oil while extreme energy production has a ratio closer to 3:1 - 5:1. A big difference.

When you look at this money printing, the free trade agreements, temporary foreign workers, endless spending cuts and the destruction of the social safety net, Alberta's accounting trick of separating infrastructure and "operational" spending, etc, etc, pretty well any government policy today that revolves around "jobs and growth", they are all an effort to counter and mask this decline in the means of production.

In key concept 1 we discussed political theatre, the reason for this political theatre is to avoid addressing the root problem with our economy and society those in power and the elite are well aware exists: the industrial standard of living is now too expensive to sustain. The elite's actions however tell a very different story and whether "left" or "right" all political figures are striving for the same goals.

If you're following along then you might be saying to yourself that if what I say is true regarding energy and our cost of living the implementation of austerity must be necessary, this is after all the only response to the problem possible, so why is it bad?

Control Systems

The implementation of austerity wouldn't be bad if the problems it was trying to address were open to the public and transparent. It wouldn't be a problem if the negative effects of austerity were distributed proportionately amongst the population. As it stands now austerity is simply the name we've given to a transformation into neo-feudalism. To put it simply the industrial control system is failing and so the elites (who have always been in control) are returning us to a modern implementation of the previous control system.

There has, historically, always been a control system operated by the elite. The control system is what maintains the status quo and keeps the peasants in line. Contrary to popular belief the elite have no interest in micro-managing the peasants so long as the peasants stay out of their way and don't challenge their authority.

The current control system works like this: The elites have controlling stakes in banks which produce currency through loans with compound interest attached. Ninety-five percent of currency in circulation is produced by banks through loans while only 5% is produced by the government. Central banks call this 5% 'M1'. The currency produced by banks is codified and legalized as the only currency you can use to buy items, namely energy.

Energy production is kept centralized. It's not that there is a global conspiracy against "renewable energy", and indeed big oil owns most of the patents to renewable energy, there is a global conspiracy against "energy independence". Big oil doesn't care what type of energy the world uses so long as they are the centralized supplier of it. Decentralized renewable energy sources are not road blocked because big oil views oil as important, but rather because having to buy energy through them gives meaning to a currency codified by the banks.

With energy tied up in global cartels which are themselves funded through bank loans people are forced to use the bank's currency to purchase energy which is required for the operation of society. This currency can only be acquired by working where the emphasis on jobs comes into play, you need a job to get the currency to buy the energy. Businesses and people take out loans to expand and these loans are generated out of think air thanks to the magic of fractional reserve banking and you put in real work (energy) to pay them back, plus interest.

This is the essence of the industrialized hamster wheel that keeps the peasants in line. The elites sit on top, loaning out currency at unsustainable interest rates which the peasants work for and fawn over. The difference between an elite and a peasant has nothing to do with their net wealth, it has to do with their purpose in life. Do they work to earn currency, or do they use currency as a tool to make others work?

Investment Manager Explains Why 99.5% Of Americans Can Never Win
The Upper Half of the Top 1%

Membership in this elite group is likely to come from being involved in some aspect of the financial services or banking industry, real estate development involved with those industries, or government contracting. Some hard working and clever physicians and attorneys can acquire as much as $15M-$20M before retirement but they are rare. Those in the top 0.5% have incomes over $500k if working and a net worth over $1.8M if retired. The higher we go up into the top 0.5% the more likely it is that their wealth is in some way tied to the investment industry and borrowed money than from personally selling goods or services or labor as do most in the bottom 99.5%. They are much more likely to have built their net worth from stock options and capital gains in stocks and real estate and private business sales, not from income which is taxed at a much higher rate. These opportunities are largely unavailable to the bottom 99.5%.
Just because you're relatively rich doesn't mean you're part of the elite. If you are working to earn currency you are in the same hamster wheel as a guy making $30k / year even if you are making millions a year.

To put this in perspective consider that during the early reign of Nazi Germany when they were gathering the Jews into ghettos the Nazis deliberately favored certain Jews who were willing to tow the line and gave them privilege over the others. These Jewish lords kept the other Jews in line both by giving them a faux authority and also by giving the other Jews something to "aspire to". The Jews largely kept themselves in line with the Jewish lord's petty selfishness and ego clouding the big picture that they were all in the same boat. When the time came for exterminations these Jewish lords were shown no favoritism and died just like the rest.

Understanding devaluation

Inflation is often confused with devaluation but the two are quite different. Inflation represents a true expansion of wealth or the means of production which requires the creation of new currency to represent the new wealth. Assuming a constant energy ratio, true inflation represents an increase in the collective buying power which ultimately means that prices must rise to meet this new buying power and this is because the energy demand ratio relative to the means of production hasn't changed. If the price of goods didn't rise in this instance then the economy would essentially be declaring that not only are we producing more but we are using less to accomplish it.

Real inflation means that currency is being created to represent value that is already in the system. The added value should be driving the demand for new currency.

However, in today's economic climate the exact opposite is true. Governments and central banks are attempting to use cheap currency as the driver for "economic growth". This is in itself admittance that whenever "officials" discuss inflation targets they are actually discussing devaluation targets. New currency that is being produced is simply taking the value away from existing currency because the underlying energy and means of production are not expanding.

"Inflation targets" today don't seem to be making a lot of sense. We're told that "inflation is low" and yet the cost of living is sky rocketing. From house prices to grocery staples to gas prices, over the past 10 years you've easily seen prices triple and yet we're told there has been 1% or 2% inflation as every year the government modifies it's formulas and excludes more and more of the items experiencing price spikes.

The true loss of buying power is masked by governments focusing on the amount of "utility" you can purchase. Basically this means that if the price of steak skyrockets then "consumers" will just replace steak with some other cheaper product and the end result will be that they have the same amount to eat or "the same utility". This is a fancy way to justify a declining standard of living while not admitting directly that it is declining.

Economic growth today is largely artificial, to visualize what's happening picture the economy as a game of Jenga. So you open the box, and start growing the economy one block at a time until you have your completed Jenga tower, but uh oh, what's this, you've run out of Jenga blocks? The goal of Jenga is to continue growing your tower on a thinner and thinner foundation until the whole thing comes crumbling down. To grow the tower beyond the finite pre-determined size you take blocks from the bottom and place them on top. The more you want to "grow" your tower the more blocks must be take from the bottom and placed on the top but no matter how tall you grow that tower there are two certainties:
  1. The number of actual finite blocks doesn't increase.
  2. Eventually the base of the tower can no longer support the top and the whole thing comes crashing down.
If you want to understand why the wealth gap is increasing at an exponential rate then you must understand that what stimulus and low interest rates are trying to do is dilute the currency and send more of the physical wealth to the top. Picture devaluation as though you are taking those finite Jenga blocks and cutting them in half. The number of blocks may have doubled but the total volume remains the same. When central banks and governments engage in stimulus without a subsequent increase in wealth all they are doing is dividing your share of the global economic Jenga wealth pie into smaller and smaller pieces.

A Calculated Crash

The elite's have a limited amount of time to implement a new control system before this one expires. What does this look like? The OECD explains:
The Paris-based organization notes that Canada's central bank has declared that given continued slack in the economy and below-target inflation, interest rates will not be raised for an extended period.

"However, with spare capacity narrowing by the end of 2015, monetary policy tightening may need to begin by late 2014 to avoid a buildup of inflationary pressures," it said.

"It is assumed in the projection that the first policy rate increase occurs in the fourth quarter of 2014 and that the rate rises steadily to 2.25 per cent by the end of 2015."
Note the wording, "spare capacity narrowing", "to avoid a buildup of inflationary pressures". They are not talking about real inflation, but rather hyperinflation which isn't really inflation at all but rather extreme devaluation. Why hyperinflation? This chart helps explain:


This chart shows that by roughly 2015 there will be no additional GDP benefits provided by federal stimulus. This marks the point when "deflation" becomes "hyperinflation" and from this point forward the U.S. is going to have to print more and more, faster and faster to service their debts and remain in operation. If you thought the "partial shutdown" was bad, you haven't seen nothing yet.

I've written previously about how hyperinflation is already waiting for the U.S. and about how Canada to save itself will have to raise interest rates before the U.S. (because the U.S. won't be raising them or "tapering" despite talk of such) which will have the side-effect of increasing the value of our currency beyond the affordability of the U.S. consumer.

If the USD devalues, we'll all devalue, it'll be anarchy

Why is the Canadian government repeatedly "intervening" in the housing market while the central bank keeps interest rates at record lows? Why does the "Minister of Finance" keep declaring there is no housing bubble in Canada despite plenty of evidence to the contrary?

Calgary resale home prices forecast to eclipse half-million dollars by 2017

Faux confidence is the only tool Canada has in it's economic arsenal. We can not raise interest rates, even though we should be, because of our large dependence on U.S. trade.

Canada Dollar Rises to 4-Week High on Rate-Increase Speculation

Canada, with an economy that is 60% dependent on U.S. exports, can't afford to have a currency that is valued higher than our American counterparts. So long as the U.S. maintains their stimulus and Canada's trade depends on the U.S. we must keep up with their rates of devaluation. Talk of Dutch Disease is complete misdirection, the Canadian currency is not getting stronger, the U.S. currency is getting weaker and Canada is just barely keeping up to their rate of devaluation.

The OECD is saying that Canada must increase it's interest rates by 2015 to "avoid inflationary pressures" because it is in 2015 that the USD we are trying to keep up with will enter hyperinflation and if we are still trying to keep up with it then we will enter hyperinflation as well as will any other currency still coupled with the USD.

This explains why Canada has been in such a hurry to "diversify it's economy" at seemingly any cost as the window of opportunity is quickly closing. If Canada has not replaced that 60% of our trade with the U.S. with another customer by that time then we will not have the economic foundation needed to decouple from the USD. Already it seems that Canada is behind in their plans, hitting roadblocks at every turn. As time grows shorter I expect Canada to take more and more risks and give up more and more control over it's sovereignty as compensation and payment for entrance into rising trade blocks and the inevitable competing BRIC currency system.

Edit: I discovered this article after I published this post: US could ‘derail’ economic recovery – OECD

The Transition

From domestic spying to the "dry run" performed at G20 in Toronto to the practice "lockdown" in Boston, the infrastructure for the new neo-feudalist system owned and operated by international corporations and the global elite is being implemented right under our noses. Governments are being put under crushing debt loads after the initial wealth transfer in 2009. Eventually it becomes so bad that the police simply become enforcers of corporate and bank policy as Greece, the canary in the neo-feudalist coal mine, has been experiencing first hand.

The name for the disenfranchised has already been declared: terrorists, and as we move further and further into this feudalist system "domestic terror" will take the spotlight. Domestic terrorists will simply be those broken by the system with nothing to lose, those who are fed up with a political and economic system draped in double standards, wealth transfers, and criminality.

With diminishing energy returns, real wealth growth will increasingly come from the dismantling or outright destruction of society, for instance, Alberta and the federal government are considering the "economic activity" of Alberta's flood rebuilding efforts "growth". You can bet the elite of the world are greedily eyeing the "growth opportunities" in rebuilding the Philippines. We view the cheap exploitation of prisoners as "economic growth". We view institutionalized slave labor through free trade as "growth". We view planned obsolescence, forcing people to re buy products earlier than they should have to as "growth". None of this is really growth though, it is simply the process of taking the blocks out of the bottom of the Jenga economy and transferring them to the top.

Wealthiest 1% earn 10 times more than average Canadian

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Richard Fantin is a self-taught software developer who has mostly throughout his career focused on financial applications and high frequency trading. He currently works for eQube gaming systems.

Nazayh Zanidean is a Project Coordinator for a mid-sized construction contractor in Calgary, Alberta. He enjoys writing as a hobby on topics that include foreign policy, international human rights, security and systemic media bias.

4 comments:

  1. Just wanted to comment that I check your blog daily for updates and that I really like these "Key Concepts" posts. You're a sharp writer and I learn a lot from reading your blog. I've been lurking for so long I thought I should let you know haha.

    I totally agree with your characterization of Toronto and Boston as practice runs for the upcoming implementation of the new neo-feudalist system you described and that preparations are clearly being made to strip remaining civil liberties and enforce these new policies.

    My question is, do you believe that this is a result of a conscious design? I'm not talking about internet conspiracy Illuminati stuff, but more along the lines of an organized and defined group of wealthy/powerful individuals who have their hands upon the levers of global power and are coordinating world events toward their own agenda? Or alternatively, are well-meaning politicians (Harper, Obama, et al) seeing the writing on the wall and are participating in the agenda simply to head off a breakdown of law and order in society? For example, Obama recognizes that the collapse of the current system is inevitable and that the safest way to transition to whatever comes next is with a strong multi-state apparatus capable of maintaining order in the streets when society is most vulnerable? Or - another possible explanation - is that these actors are participating in the transition to this neo-feudalist state unknowingly or unconsciously, much in the same way market forces influence a consumer to make purchases in his own perceived best interest when the opportunity presents itself without realizing he is participating in a grander scheme (as in sub-prime mortgage scenario) that will ultimately harm society?

    I hope this doesn't come across in a challenging tone, it's not meant to. I am genuinely curious what your thoughts are.

    Again, love your blog and I look forward to reading it. Thanks!

    ReplyDelete
  2. Hi Naz, I'm glad you enjoy my posts. I will try to clear up these details for you.

    My question is, do you believe that this is a result of a conscious design?

    -- Both yes and no. I would say it is an organized response by the wealthy to an inevitable problem that they probably calculated was statistically low and unlikely to happen when they implemented this string of control systems. I have no doubt they would prefer the current one to an authoritarian one because of the energy an authoritarian society requires. However, being that infinite growth is unsustainable and we've now hit a limit to (real) growth, they are purposefully detonating the system in what can only be described as a controlled demolition as they replace more and more of the old system with the new system. 'They' in this case would refer to the powers behind the central banks, primarily the Federal Reserve and Bank of England (ours is still a part of the government but operates within their systems)



    Or alternatively, are well-meaning politicians (Harper, Obama, et al) seeing the writing on the wall and are participating in the agenda simply to head off a breakdown of law and order in society? For example, Obama recognizes that the collapse of the current system is inevitable and that the safest way to transition to whatever comes next is with a strong multi-state apparatus capable of maintaining order in the streets when society is most vulnerable?

    -- Not Obama. Not Harper. Those in control don't do interviews. The politicians are actors but also active participants. They have an active stake in the system, IE: they "hate" each other on TV but then go out for drinks, and private events ( http://canadiantrends.blogspot.ca/2012/05/when-our-leaders-talk-about-austerity.html ). It transcends party lines and national lines. IE:
    Paul Martin on G20: http://www.youtube.com/watch?v=OjIsyc-Rims
    Stephen Harper on G20: http://www.youtube.com/watch?v=oVctL20CcP8

    This international apparatus is beyond the power of any politician though they certainly play their part. This also isn't the first transition either, it's just going to be the most brutal as we're at the end of the line of "consumerism". Gold standard, Breton Woods, etc, There's always a control system, and these consumerist ones transition often as they have a lifespan of about 40 years (then the Ponzi scheme collapses and so they replace it before it does). This current transition though proposes a great challenge as due to peak oil (peak everything, really) the current control system can not expand further and the only available options given the circumstances are authoritarian. All empires during their decline become authoritarian and as Dimitri Orlov describes the U.S. or Anglo-American empire is most certainly in decline: http://fora.tv/2009/02/13/Dmitry_Orlov_Social_Collapse_Best_Practices


    I'll answer the second portion to your question in the next comment.

    ReplyDelete
  3. At this point though politicians in general have become fairly ceremonial and I think that fact is beginning to show quite obviously. The people still vote for their politician but the majority of politics now is voting on bills that corporations have lobbied for or even written themselves. Few politicians even read the bills they vote for if party line dictates the vote.

    Public policy is further hampered by the trade agreements and senior bond holders which now hold ultimate authority on much of national, and provincial policy prerogatives through international courts and rating agencies. For most politicians, they get their cut, or their career or whatever, and that's it simple as that. It's largely out of their hands now anyway - the control is gone, signed over, done deal. It's only getting worse with the TPP now.

    The very prospect of challenging the system so late in the game can be daunting as well, and our class of politician these days I don't think is up to the hard work or has the will power to pull it off anyway. The reason is that the system being constructed is global, and power is being shifted to this authority via free trade deals. These deals have now created an economic environment globally (globalization) so co-dependant that to reject the system and go it alone is both economic and political suicide. The short term results would be catastrophic. WTO fines, sanctions, lawsuits. Both our imports and exports would drop off a cliff, leaving the country unprepared and unsupplied. Our currency would be sent into a tailspin of epic proportions.

    The good news is this, we don't need politicians to overcome this challenge and I don't believe their neo-feudalist society will last very long (I was going to get to some of these points in future Key Concepts but that's ok). The real challenge is going to come after this period, after the smoke clears and the dust settles Already the implementation of their new control system has hit numerous roadblocks, the most recent being Syria which is looking like a huge set back at the moment, especially now that Assad has complied the U.S. can not take any direct military action while Syria is wrapped in red tape. You can bet China and Russia know this and are providing Assad the wiggle room he needs to push back the U.S.'s rebel force. They're probably counting down to 2015, too.

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  4. Economy it’s very difficult and interesting science. Not everyone understands for what is this science. Unfortunately the most people don’t understand anything in economy. As the amount of the debts only rise we can say the level of the economy fell down. More and more people take payday loans because they don’t have money for living. As people don’t have money they can’t pay back any loans. The biggest advantage of these loans is that you can take if 24/7 even with bad credit score.

    ReplyDelete