Money Is Not Real Wealth

John Michael Greer continues to eviscerate conventional economic thinking in his series on economics. Excerpts below.

Link: The Archdruid Report: The Metastasis of Money.

If economists took a wider view of the history of their discipline than they generally do, they might have noticed that what most of them consider a fundamental feature of all economies worth studying – the centrality of money – is actually a unique feature of an economic era defined by cheap abundant energy. Since the fossil fuels that made that era possible are being extracted at a pace many times the rate at which new supplies are being discovered, current assumptions about the role of money in society may be in for a series of unexpected revisions.

In an ironic way, this process of revision may be fostered by the antics of the world’s industrial nations as they try to forestall the Great Recession by spending money they don’t have. The economic crisis that gripped the world in 2008 was primarily driven by a drastic mismatch between money and wealth. When the price of a rundown suburban house zoomed from $75,000 to $575,000, for example, the change marked a distortion in the yardstick rather than any actual increase in the wealth being measured. That distortion caused every economic decision based on it – for example, a buyer’s willingness to go over his head into debt to buy the house, or a bank’s willingness to lend money on the basis of imaginary equity – to suffer similar distortions. Now that the yardsticks have snapped back to something like their proper length, the results of the distortion have to be cleared out of the economy if the amount of money in the system is once again to reflect the actual amount of wealth.

Yet this is exactly what governments and businesses are doing their level best to forestall. Governments are scrambling to prop up economic activity at a pace the real wealth of their societies can no longer support; banks and businesses are doing everything in their power to divert attention from the fact that a great many of the financial assets propping up their balance sheets were never worth anything in the first place and now, if possible, are worth even less. Both are doing so by the simple expedient of spending money they don’t have. As government deficits worldwide spin out of control and the total notional value of the world’s derivatives market climbs steadily above one quadrillion dollars, the decoupling of money from wealth is even more extreme than it was at the height of the real estate bubble.

Storing Wealth in Uncertain Times

Charles Hugh Smith questions the whether gold is the best way to store wealth in the coming "Great Transformation", when oil becomes very scarce. (I remember how valuable gasoline was in the movie Mad Max 2: The Road Warrior). He suggests that having a convenient supply of energy and food are the most valuable sources of wealth in very hard times. Excerpts below.

Link: Of two minds: The Great Transformation: Trends and Cycles of History.

If we understand that "money" as a store of wealth is simply stored energy, then we reach another understanding of "the problem" and thus of the "solution."

Let's say that the fragile supply chain of remaining oil breaks down in a complex interaction of positive feedback loops. Oil would not just be costly; it would be unavailable to individuals. The government would undoubtedly ration what was left for essential services like agriculture, food distribution, police and hospitals, etc.

Let's say we anticipated this and responded not by hoarding gold but by buying a 100 KWhr/day solar power array, productive land in a mild climate, a store of fertilizer and a few electric vehicles to share with our family/community. We own zero gold but we own a power supply, the means to grow food and transportation that does not require petroleum.

Now would we sell these productive assets for gold? At what price, if they were essentially irreplaceable? What would we do with our pile of gold if we can't go anywhere, can't grow food and have no power source?

The holder of gold assumes that all goods can be purchased with a means of exchange holding a tangible value, i.e. gold or an equivalent commodity. But this may not be entirely true. Yes, we will sell some of our power/energy output for gold, but we will not sell our "wealth" i.e. the power plant for gold, which may or may not be able to buy a replacement. As a store of wealth, gold is no match for a productive source of energy.

The reason is "money" as a store of wealth is simply stored energy. From this point of view, fertilizer is stored energy. You may or may not be able to exchange "money" in any form for stored energy, for "wealth" is either stored energy or the capacity to generate energy sustainably. Everything else is merely a means of exchange.

Will gold hold more value as a means of exchange than paper money? If history is any guide, yes—but that's a different "problem" than building or storing wealth.

There are many other examples of "problems" whose solutions may well completely fail to address the structural challenges we face.