Sunday, January 29, 2012

The Relationship between Energy "E(Δt)" and Currency "M0, M1, M2, M(Δt)"

Despite the technical title of this post, the theme of this post is relatively straightforward:  there is one-to-one correspondence between the different ways of measuring the amount of currency in circulation (i.e. M0, M1, M2, etc...) and the amount of work that can be generated within a certain time, E(Δt). This post builds off of the previous posts on electricity backed currency as well as the money supply.
The problem is to associate the correct type of currency (i.e. M0, M1, M2, etc...) with the correct value of E(Δt). In order to glimpse the important, but complex relationship between energy and currency, we need to first define E(Δt) and M(Δt).

Wednesday, January 25, 2012

Falling Prices of Natural Gas and Electricity... Ideas for Lowering the Cost of Driving

The national average price of electricity in 2011 was close to $100/MWhe. (or $28/GJ). This price includes generation, distribution and transmission costs. The price of electricity had been increasing steadily over the last decade, but it now is decreasing because the abundance of natural gas has caused the price of natural gas to plummet. This is a good thing, and if we had an energy backed currency, then this would mean that the Federal Reserve has the right and the duty to print money in order to maintain a constant price for the generation of electrical and mechanical work. The money that the Federal Reserve prints could be given to the US gov’t to lower its debt, or it could be used to make loans to businesses. This is how an energy backed currency is supposed to work…as prices start to drop, the Federal Reserve should print money (or lower interest rates) and if prices increase, then the Federal Reserve should remove money from circulation (or raise interest raises.) Of course, our current Chairman seems to be really good at the printing money, but not good at the removing currency from circulation. (In fact, most Reserve bank chairmen are better at printing money than removing money…and that’s why we almost always have inflation, and almost never have deflation. 

As I've stated before, I don't have a problem with the Federal Reserve printing money when the prices of mechanical and electrical work decreases (especially if it's due to technological innovation...such as horizontal drilling in tight shale formations.) It'll be interesting to see if Ben Bernanke starts printing money or whether he decides to allow prices to deflate in order to make up for the >2%/yr inflation over the last ~6 years.

In this post, I want to point out why natural gas prices have now reached the point in which baseload electricity prices are dropping in the US, and I want to discuss the impact that falling natural gas prices might have on the type of vehicles we drive. I’ll start with the impact on electricity prices, and then discuss vehicle transportation.

Monday, January 16, 2012

Examples of How An Energy/Electricity Back Currency Would & Would Not Operate

This post continues the theme from the last post: how would an electricity or an energy backed currency operate? What are the benefits and what are the potential drawbacks of an electricity or an energy backed currency? In addition, this post will also point out examples of what to do and what not to do when prices of energy increase or decrease.

When I was describing how an energy/electricity backed currency would operate, you should notice that the Federal Reserve doesn't purchase energy, electricity, gasoline or natural gas with the money they print. Instead, when the Federal Reserve prints money, it lends it out to major banks and to the US government at a given interest rate. The Federal Reserve wouldn't use the money to purchase electricity, gasoline, natural gas, etc... and the reason why it wouldn't do this is simple. The goal of the Federal Reserve should simply be to maintain an average constant price for purchasing mechanical and electrical work. The goal is not to become an electric company or an oil/gas company. The goal is likewise not for the Federal Reserve to be a trading company like Enron. It shouldn't be guessing at which way prices of electricity/oil/gas will go in the future. The main goal of the Federal Reserve is simply to maintain price stability.

Forcing the Federal Reserve to maintain price stability will go a long way to providing dampening to the constant sources of price instability, such as oil price volatility, natural disasters, commodity bubbles, and runs on the banks. For example, if we had adopted an energy backed currency before 2007, it would not have been possible for Ben Bernanke to lower interest rates at a time when the average price of electrical and mechanical work was sky rocking. For example, the price of crude oil went from ~$70/bbl to ~$130/bbl from summer 2007 to summer 2008. Meanwhile, the Fed's interest rates decreased from 5.25%/yr to 2.0%/yr. Instead, the correct response to the increase in crude oil prices (along with increases in the price of natural gas and electricity) would have been to increase the Federal Reserve's interest rates. Why? If the real price of energy is increasing, then we are investing too much in luxuries and not enough on projects with real rates of return on work invested. Back in 2007, there were at least two effective ways that we could have tried to correct the problem of consuming too many luxuries and not investing enough into producing cheap oil/gas/electricity.

Saturday, January 7, 2012

Interest Rates & Fractional Reserve Requirements in an Energy or Electricity Backed Currency

The term "energy backed currency" means different things to different people. In fact, every time that I've seen a journalist, a novelist, an engineer or a scientist use the term "energy backed currency, it's been used to describe completely different concepts.
Sometimes, it means that there will be no more dollar bills, only electricity for currency. Sometimes, it means that the government can print dollar bills and use the money to build power plants. Sometimes, it means that we'll get rid of the Federal Reserve and develop local currencies based on trading renewable energy. While at other times, it means that oil/gas will become the new currency of exchange. And then, there's my opinion of what an energy backed currency should be: The Federal Reserve printing or removing dollar bills from circulation in order to maintain a constant average price for purchasing mechanical and electrical work. (i.e. roughly every 3 months, the Federal Reserve should print money if the average price paid by all consumers of mechanical and electrical work decreases, and the Federal Reserve should remove money from circulation if the average price paid by all consumers of mechanical and electrical work increases.)

My point here is that the term "energy backed currency" means a lot of different things to different people, and there's no one single definition of what is an energy backed or even an electricity backed currency. But one similarity between all ideas regarding energy backed currency is that the amount of currency should in some way depend on the country's ability to produce electrical and mechanical power. The tough question to answer is: For a given economy, what is the optimal amount of currency in circulation?

This is not an easy question to answer because it depends on so many factors, including probably the most important one: the fractional reserve requirement, r [%]. Fractional reserve banking is an essential element of our global banking system, and is an essential element of any 'energy backed currency.'