Austerity and "Grexits" are only going to result in more and more people getting triaged from the industrial economy and, no less, from such basics as food. The alternative? Gretaway!

Since money is a proxy for energy, energy's limits are putting a damper on credit creation. Could this be the cause for plunging stock markets and oil prices?

The convention says that the supply constraints of peak oil lead to an increase in oil prices. But when you factor in fractional-reserve banking, does this not instead imply a decrease in prices?

"Taaaaake myyyyyy moneeeeey! Pleeeeeease!"
"Taaaaake myyyyyy moneeeeey! Pleeeeeease!"

So here we are on this precipice of sorts, staring upon the twilight of the industrial economy due to peaking energy supplies and thus peaking credit supplies (as explained in part 2 of this 3-part series).

Simply put, being on the peak oil plateau, and with fossil fuel supplies in general reaching their limits (and getting more expensive to extract), there's going to increasingly be less and less of the stuff to go around. This means one of two things, the first being that what's left gets spread around thinner and thinner between all the participants. However, since people of the West (and especially those in the richer parts) have become quite used to their energy-intensive lifestyles and seem to have zero intention of giving them up, this likely implies the implementation of the second approach: cut back on – if not cut off – the fuel supplies to people and nations on the lower rungs of industrial civilization. That way, as the fossil fuel pie continues to shrink, those on the higher rungs don't have to reduce their share too drastically. In effect, this allows for those in the upper echelons of contemporary civilization to hold on to their Nyet-Flix feeds and iGizmos just a bit longer, until the triaging inevitably hits them as well and/or the bottom just completely falls out.

This triaging can be accomplished in more than one way, but for the time being two methods stand out as the most popular. The first is what we know as austerity – cuts are made upon people's pensions, hours, welfare cheques, whatever, so that they have less credit (read: money) to buy and indulge in the spoils of industrialization. Unfortunately, living in this modern world of ours means that the basic necessities of life (such as food) also often fall under the umbrella of industrialization, so being triaged can entail much more than an inconvenient loss of iGizmos.

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Confusion dawns upon the smartest men in the room
(photo by Rafael Matsunaga)
Confusion dawns upon the smartest men in the room (photo by Rafael Matsunaga)

As I began to mention at the end of the first part of this three-parter, I've only just recently come to the conclusion that oil prices aren't going to have a tendency to rise due to the tightening of supply imposed by peak oil, but to depreciate. This of course flies in the face of the common logic of supply and demand, but when factoring in the method by which the majority of our money is created, a deflationary effect can be seen to come into play. This has taken me an absurdly long time to clue into, for although I'd steadfastly amassed a bunch of pieces (various information), I hadn't realized they were actually all part of the same puzzle.

With peak oil and fractional-reserve banking being the first two pieces of this puzzle, the third piece that I needed to factor in (which oddly enough I'd already written about) is the fact that money is a proxy for energy. As I wrote in a previous post, Money: The People's Proxy,

Simply put,... the core function of money is that it enables us to command energy – the energy used to move our bodies with, to power our machines, to feed to domesticated animals whose energy we then use to do work (which nowadays generally means entertaining us), etc. In other words, it might be tough and/or inconvenient, but one can get by without money. You can't get by without energy.

In other words, at their core, our economies don't run on money, they run on energy. Moreover, it doesn't even really matter what you use as your form of currency – coins, pieces of paper, gold, zero and one digibits, conch shells, whatever – because if you don't have the energy to perform the work and/or create the products your society expects, the money is virtually useless and worthless.

Although it would be far too extreme to say that all our economic problems have always had energy issues as their core problem, peak oil (and peaking fossil fuels in general) combined with the fact that money is a proxy for energy, imply, in reverse, a kind of peak to money. In other words, this therefore implies a limit to credit creation. As a result, since private banks create money as debt via the fractional-reserve system and must continually create new loans so that the interest can be created to service previous loans (so that the system doesn't implode in on itself), well, the system is in a bit of a pickle. Furthermore, with oil prices and worldwide stock markets taking a recent hammering, and the situation in Greece and similar countries still a thorny issue, this fermented cucumber seems to be taking shape.

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(image by Viktor Hertz)
(image by Viktor Hertz)

If the ongoing crash of oil prices over the past year – and now the stock market crashes of last week – have continuously taught me one thing, that would be that I've got very little clue regarding the economic implications of peak oil. To explain this I'll have to take a circuitous, roundabout route here, but if you've been as afflicted as I've been then you might find the following a bit illuminating.

For starters, even though I learned about peak oil in 2005, fractional-reserve banking in 2006, and pretty much instantly proceeded to put two and two together, I still ended up falling for what I might unfairly call the "peak oil orthodoxy." I'm not sure where I first came across this "orthodoxy" I speak of, but an example as good as any – and maybe even better than any – would be that of author and a former Chief Economist at CIBC (one of Canada's Big Five banks), Jeff Rubin.

As Rubin explained it in his first of two peak oil books, because peak oil implies a curtailment on the supply of oil, and since the demand end of a growing economy is by definition increasing, the notion of supply and demand imply that prices will head upwards if supply is limited. Because of this, upon oil's peak its price will eventually rise to such ungodly high levels that it'll become unaffordable by many. Following that, its demand will therefore peter out, and so thanks to the new glut in supply the price will crash to equally ungodly low levels. Once things settle down and the consumer can once again afford the now lower-priced oil, the process will repeat itself since the new (and increasing) demand will once again bump up against the limits imposed by peaking oil supplies. As a result, another crash will occur. On and on the process repeats itself, but with the higher price spikes followed by higher troughs.

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