In a recent article, regular contributor Guy de la Bédoyère described the relationship between the supply of money and the quantity of goods and services in the economy. He noted that increasing the supply of money against a fixed or falling supply of goods and services produces inflation. If you haven’t read it, I highly recommend it.
In this essay, we’ll go beyond the immediate inflation created by the pandemic response. We’ll look more closely at the relationship between the supply of goods and services in the economy and the supply of energy in the world. Then we’ll examine fundamental changes taking place in the supply of energy and the effect this has produced on the global money supply to understand why hyperinflation is now inevitable. Finally, with a sceptical eye, we’ll briefly examine the implications of so called ‘Net Zero’ energy policies.
As Guy noted, if the quantity of goods and services in our economy is increasing, the supply of money can (and should) also be increased.
A corollary of this is that, if the quantity of goods and services decreases then, to preserve the value of each unit of money (prevent it dropping, i.e., inflation), the supply of money must also be decreased.
Since all goods and services require energy for their manufacture and supply, the quantity of goods and services at any time is determined by the availability and cost of energy. For over 100 years, the economy has benefited from an energy format – hydrocarbon – that has provided extraordinarily cheap and abundant energy. The economy, and the money supply, have grown as a result.
They have not just grown. They’ve grown exponentially. Rather than increasing by a fixed amount in equal time intervals, they have doubled in equal time intervals (the time interval has varied at different times). Why?
It’s the consequence of the most fundamental operation in the Western capitalist finance system – interest. Our finance system employs interest rate (prohibited in Islamic finance) as a mechanism for pricing and rewarding risk. So, in our system, money doesn’t just get created from goods and services. Money gets created from money. And that is why the financial system must grow exponentially with time, even when the economy of goods and services does not.
This means that, to avoid inflation, the physical economy of goods and services has also had to grow exponentially with time. And, as we’ve seen, this means that the net energy supply has had to grow exponentially with time.
And until around 2006, it did.
Around 2006, for technical reasons associated with irreversible changes in the largest oil reservoir in the world, the ability of the global oil system to sustain an exponentially rising net supply of energy ended. Over the next two years, the price of energy shot up, breaking the global financial system at its weakest point – the securitised subprime mortgage market – and triggering a cascade. We call that event the ‘2008 financial crash’.
The appearance of solvency in the global financial system since then is an illusion, sustained (until now) through the production of vast quantities of hallucinated money. And that process is accelerating. In the six months prior to the March 2020 placing of the global economy in an induced coma through a coordinated global programme of ‘lockdowns’ – worldwide suspension of economic activity and credit demand – the Federal Bank of New York created and injected $9 trillion directly into the U.S. banking system. That’s 40% of US GDP.
Why hasn’t printing money worked? Because even without printing it, as the supply of money continues to expand exponentially, the net supply of energy to support it is now contracting. At a time when the supply of money should be reduced, we are experiencing an exponentially widening gap.
This is not easily addressable. The amount of oil that remains is not known, but is quite easy to estimate. Since we can’t produce what we haven’t found, the pattern of oil discovery – which is known – defines the upper limit of what can be produced. The peak of oil discovery occurred around 1970 as we were landing on the moon, and has declined at around 5% per year since then. That defines the upper limit of all that has been and predictably will be discovered unless efforts are stepped up. At current drawdown rates, the known and anticipated oil volume will be exhausted within 30 years. Rystad Energy, a respected Norwegian energy consultancy, estimates that global oil discovery in 2021 was the lowest in 75 years and that commercial oil firms have around 15 years of reserves left. Yes we have gas, but rapidly increasing amounts of it now have to be reallocated towards maintaining the services we already need – most of them critical, such as food production – that oil currently supports.
Contraction of the net supply of energy has thus been driving inflation for over a decade; printing vast quantities of money to pay people to sit at home is throwing fuel on the fire. What about ‘Net Zero’ policies?
‘Net Zero’ policies presuppose that our energy system can be replaced by contraptions that harness ultra-diffuse sources of energy such as wind, and should be replaced by them because of changes in the climate that, it is claimed, are catastrophic.
The merit of such policies on the basis of ignoring the laws of thermodynamics and reliance on controversial, contested and increasingly falsified claims about the future state of the climate obtained from observably broken toy models of atmospheric physics, is beyond the scope of this essay.
But irrespective of those grounds for dismissal, the policies are absurd and reckless. Three points stand out:
- The construction, operation, maintenance and endless replacement of ‘Net Zero’ devices in fact require an ongoing supply of colossal volumes of hydrocarbon to provide the energy and advanced composite materials needed by the global industrial manufacturing system necessary for their production. Long before these devices are constructed, that hydrocarbon will have been reallocated to higher utility applications, such as food production, to avert shortages. They will never be built, much less operated, maintained, and replaced.
- The establishment of such a system will require colossal quantities of additional debt, driving an already unstable financial system even closer to (and probably beyond) collapse.
- Substitution of high density energy sources with these ultra low density sources will intensify the reduction in net energy already underway, reducing further the capacity of the economy to produce goods and services, accelerating hyperinflation and eventually collapsing the financial system.
What can we do? I can’t advise. For my part, I withdrew a significant fraction of my ‘pension’ (a hypothetical sum of money payable at some time in the future from funds that do not currently, and now never will, exist), and used it to build a house that maintains 19 degrees year round in Scotland without a heating system. I’m growing a large supply of potatoes for the coming winter. You might speak to your political representative and instruct them to end Net Zero policies that are unachievable and suicidal, and re-establish our financial and energy policies on sound principles informed by the physical laws as they operate in this universe.
Richard Lyon is a former senior oil and gas operations manager with 35 years of international experience and academic qualifications in electrical engineering and power systems, petroleum engineering, and energy economics. He maintains the Substack newsletter the State of Britain and can be contacted via LinkedIn.