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home | Tea Party Economist | Kilowatt Money: Another Zombie Fiat . . .
 

Kilowatt Money: Another Zombie Fiat Money Scheme.

Gary North - March 20, 2013
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Reality Check

The conservative movement had always been filled with monetary cranks. This has been true for well over a century.

These cranks have never read a book on economics. They have never taken a class in economics. They have zero practical experience in finance.

They come before the conservative public and present crackpot schemes of monetary inflation, all in the name of conservatism.

Their victims are equally unread, equally unskilled amateurs who think, "Gee, that sounds great! Let's do it."

Let's do what? These cranks never have a plan to get from here to there: the Promised Land. They are like Moses with no escape route into the Promised Land by way of the wilderness. They want to wave a magic wand and get True Money (always capitalized).

These crackpot schemes all partake of the same flaw. They want a government-appointed committee of unelected experts to set up the money and banking system at a zero interest rate. Usually, they want a central bank run by engineers and government statisticians. But all of these schemes rely on government statisticians. All of them reject a gold coin standard where owners of private property -- gold coins and bank accounts -- are in charge.

These crackpot schemes begin with this presupposition, which is never admitted by any of the designers: "We do not trust private property and the free market. We trust only government experts." Their zombie followers line up. "Yes, yes, we too believe only in government-employed experts. This is because we are conservatives." Then out into they night they march, looking for other conservatives with brains to eat. They find them. They always find them.

The bank reformers have no political support for their schemes. But they spend time describing the wonders of their system. They call on people to get behind it. Except for a few crackpot schemes, such as Social Credit or Greenbackism, no one ever joins the political movement. There is no political movement. There are only mindless zombies.

ELECTRICITY AS CURRENCY

Here is a recent example: "Electricity As Currency? 10 Reasons It Could Work." This was subtitled: "Energy-backed currency concept"

It began with a deliberate deception.

Remember the good old days when gasoline only cost $1.50/gallon way back in the ancient times of 2000? Why does it cost more than double that today ($3.71)? A gallon of gas is still a gallon of gas, so it seems obvious that the dollar has lost value.

If you are going to prove currency depreciation by an appeal to statistics, use the Consumer Price Index or the Median CPI. The CPI is most common. Using the Inflation Calculator on the site of the Bureau of Labor Statistics, we learn that consumer prices since 2000 have risen by 35%. That is 2.3% per year. This is bad, but it is not anything like mass inflation.

The anonymous writer goes on:

This rapid devaluation of the U.S. dollar makes it an unstable medium of exchange and certainly not a good store of value -- two aspects considered to be the main functions of money. This has led many to examine the flaws of the current monetary system and search for possible alternatives.

This is not rapid devaluation. This is steady-as-you-go monetary depreciation. Hardly anyone notices. Hardly anyone cares.

ANTI-GOLD COIN STANDARD

Some have suggested that returning to the Gold Standard (pegging the dollar to gold) will help control the fraudulent expansion of the money supply and protect the value of the currency.

This is familiar. There is both economic theory and economic history that supports this view.

Others say eliminating the interest attached to each dollar created will get rid of scarcity and provide abundance.

This is Greenbackism.

Each of these ideas has merit since they correct some of what's broken, yet they both also have flaws which make them difficult to fully support.

Greenbackism is totally wrong. It is intellectually bankrupt. Ellen Brown is a prominent Greenbacker. For my detailed refutation of her economic theory and her historical inventions, which she has never answered, go here: http://www.garynorth.com/public/department141.cfm. (She in fact is a Leftist. She has come out in favor of Bernanke's QE programs.)

INVOKING NON-ECONOMISTS

These schemes invariably quote engineers and scientists who never wrote a detailed theory of economics.

One interesting alternative that has been proposed is using an energy-backed currency. The idea is not new. Thomas Edison envisioned an "energy dollar" after seeing the value of electricity, and Henry Ford also conceptualized backing a currency by a "unit of energy" instead of gold. Motivated by the failed monetary system during the Great Depression, Ford even planned to support the idea with his own electric dams. Of course the central bankers scolded Ford's idea because it threatened their schemes.

Henry Ford knew nothing about economic theory. Neither did his friend Edison. They were engineers. They wrote no treatises defending their positions.

In more recent times the idea of using electricity as a currency has gained some traction. An online ebook Energy Backed Money was published in 2009 supporting the concept of backing the dollar with electricity. Kilowatt Cards were introduced as gift cards for electric power meant to be a transferable means of currency. And former NASA scientist, Michael Rivero, proposed the Lectro, a universal electricity based currency whose supply is controlled by production and use of electric power.

Again, these are engineers with no economic theory to support their views.

ANTI-FRACTIONAL RESERVE BANKING

These critics have discovered a central flaw in the modern economy: government-licensed fractional reserve banking. But they never identify the source: government licenses to commit fraud of money creation. They offer no theory of free banking or 100% reserve banking. They never alert their readers to the central fact: these institutions are created by government intervention. There is a reason for this. They always call for a "nrew, improved" government-created, government-managed monopoly over fiat money creation. Here is their unstated but always-present assumption: "You can trust the government." You can, but you shouldn't.

First, the attack on fractional reserves.

Currently, Federal Reserve Notes (dollars) are not backed by anything valuable and their value is determined primarily by how much supply is in circulation. The supply of money under our current system is lent into existence as fast or as slow as the bankers or the government determines, leaving a lot of room for manipulation.

Here is the problem: there is lots of room for manipulation. This is the problem with every system of money that is not a commodity-based money system that is governed by the free market.

Significantly, all money is lent into existence with interest owed to central bankers.

This is always the creation of national governments. There is a simple solution: revoke the legislation. Nothing else? Nothing else. This was how Andrew Jackson got rid of the Second Bank of the United States in 1836. When it lost its government license, it went bankrupt.

Second, an attack on the existence of interest rates, which in fact are an inescapable aspect of human action -- a discount applied to expected future income -- as Ludwig von Mises taught.

But this interest is money yet to be created in the system so there are never enough dollars in the system to pay off the debt accrued from the creation of the dollars themselves. This creates a false scarcity and the perpetual need to expand the money supply, which then breeds inflation. This simultaneous scarcity and inflation have a tremendously negative impact on the economy, especially for the poor. Ultimately, it's this interest on every dollar created that inherently enslaves us all to the central bankers who hadn't produced anything of value to demand our servitude.

This is crackpottery. It says that there should be no interest rate. There is always a discount for time. The surest mark of a crackpot is the call for a rate of interest of zero. There are no exceptions to this rule. Whenever you see a call for zero interest, you are seeing the equivalent of a call for a perpetual motion machine.

The only way to solve the inefficiencies of the current system is to use a currency that has real value, whose supply is tied to an accurate economic indicator, and doesn't need interest attached just for the sake of creating it.

This attack on interest denies a fundamental category of human action: "now, not later." This was refuted by Austrian School economists in the late 19th century. Read Chapter XIX of Mises's book, Human Action.

Fourth, the call for a non-market standard of economic value.

Electricity has measurable value in our society and since everything in our modern world runs on power, it may be the most accurate gauge of economic activity we have.

No, it doesn't. Nothing in this world has a measurable value. There is no yardstick of economic value. Value is subjective. It is constantly changing, because individuals keep changing their scale of values as conditions change, including their tastes.

An electricity-backed currency would not be nearly as complicated as our fractional reserve system. It could work something like this: electric producers could issue certificates (money) as kilowatts are produced and they would be removed from circulation once the electric bill is paid (redeeming their receipts), thus always maintaining a consistent and stable supply.

Kilowatts are not measures of economic value. They are a measure of physical flow. The measurement of this flow is in no way the measure of value. The free market establishes economic value.

In good times, these units of electricity keep getting cheaper. The price of a kilowatt in 1910 was a lot higher than it is today. So, there is fixed economic value. Electricity is always getting cheaper. When money gets cheaper, prices rise. This is price inflation.

TEN SILLY REASONS

Here are 10 reasons for an electricity based currency:

1. It Has Real Value: Electricity has recognizable value for every person on Earth, as opposed to gold or silver which are just pretty metals with some minor industrial uses.

Whenever you see Real Value capitalized, you know the person has no economic theory. The writer capitalizes it because he cannot defend it intellectually. Capital letters are supposed to remove the idea from criticism. Yes, there is no real value in electricity -- or anything else that commands a price. That is because real value is subjective. It is real, but it is not capitalized. I have real value. You have real value. Your name is capitalized. Your value isn't. (It is OK to capitalize True Value, if you are referring to a hardware store.)

2. Easily Measurable Units: A kilowatt-hour (kWh) is an absolute unit that can be measured easily and is impossible to counterfeit. The average cost of electricity in the United States has remained relatively stable (mainly due to regulations) over the last few years at around $0.13 per kilowatt hour. But we must stop thinking in terms of measuring things in dollars for this concept to become clear. This currency would represent a kWh, not a dollar amount.

A kilowatt is easily measured by an electrical power company. It is not measurable at all by you or me. We are told by the power company that we must accept its absolute figures. "Believe it, peons, and pay up, or else we will cut off your power!"

Do not forget this phrase: lots of room for manipulation.

3. Universal Flexibility: An electric-backed currency can work just as well as a local competing currency or as a global medium of exchange. Since a kWh of power has the same value all over the world, a kWh certificate issued in Hawaii could theoretically be redeemed anywhere.

Will it work in rural India? Rural China? Sub-Sahara Africa? No? Then it is not universal.

4. Supply Can't Be Manipulated: The electric money supply would naturally be tied to population growth and economic productivity because electricity is an indicator of those measures. Money (kWh notes) would be created when new electricity is produced and eliminated from the economy when electric bills are paid, maintaining a stable balance.

What measures? What productivity? Whose productivity? Mine or yours? What price? Isn't the price of electricity supposed to fall? Whose population? Population in rural China? Mali? Germany? Also, whose statistics? Collected by whom? Using what facts-collecting formula?

Manipulation? The entire system is based on government statistics.

5. Cannot Be Monopolized: Central banking monopolies are at the heart of many economic problems around the world where entire nations are held hostage by these singular entities. Even though electricity has a universal global value, it would be impossible to monopolize the production of kilowatts.

Power companies are all monopolies. The industry is a monopoly larger than any other.

6. Decentralized: Literally, anyone can produce electricity if they choose to do so. Although larger organizations may be necessary to handle the issuance or certification of kWh notes, independent energy producers would compete to produce electricity as efficiently as possible.

How does the money system factor in the production of electricity by every source? How does money have "Real Value" in such a system? There is no way to assess such Real Value. This is all talk, no proof.

7. Spurs Innovation: The incentive to create electricity would spur incredible innovation in technology. Rivero, of the Lectro, suggests perhaps more valuable certificates could be issued for electricity derived from clean technology to incentivize its expansion. And if by some chance a source of "free energy" is discovered - fantastic - it could still be measured and used to control the supply of money.

Then the economic value of every kilowatt will fall. All of this increase of production means mass inflation: the falling value of money.

8. Spurs Conservation: When electric power literally equals money, everyone will immediately become more conscious of their energy use. This alone would have a tremendous benefit on the environment.

On the contrary, the cheaper a resource is, the less that anyone is willing to pay to conserve it. This is a fundamental law of economics. We conserve valuable assets, not cheap ones. This is why we use so much electricity. It is incredibly cheap in relation to the benefits it delivers.

9. Transportable: Pure gold and silver (commodity money) are not practical physical currencies because large quantities are not easily carried in our pockets. kWh notes would be a paper form of "receipt" or "representative" money where the note can be redeemed for something real and measurable. Fully-backed receipt money is historically viewed as the only form of honest paper money.

So, I am issued paper receipts to electric "money" that were issued by the U.S. government. I am supposed to take these receipts, written in English, to rural India and rural China. I am supposed to believe that some rural villager will accept my paper money receipts for electricity, which he cannot use. Is he an idiot? Offer him a gold or silver coin, and he will sell lots of things. Offer him a piece of paper with an image of Ready Kilowatt, and he will hand it back.

10. Creates wealth instead of poverty during the transition from human labor to machine labor. As we move towards more automation, we become more reliant on electricity and less on human labor. Rivero postulates "At present, human labor precedes all capital, payable in a monetary system that pays primarily for human labor. In switching to a monetary system that pays for machine based power production, we evolve towards a society where machines become the primary creators of capital, and all humans shift towards the demand side of the economy. Instead of creating poverty, the push towards automation creates more wealth."

We all know that tools (capital) produce goods and services. So, this statement is nothing unique: "machines create capital." But Rivero is 100% wrong about another supposed fact, namely, that fiat money is based only on payments for labor. Paper fiat money is only for ink, paper, and a printing press. Digital money requires a computer. This becomes money through government fiat: "You must accept this as money." This is why we call it fiat money.

Rivero does not know what he is talking about.

The proposal calls for demand-side economics: economics without productivity. This is magic. This is something for nothing. This is stones into bread. In short, this is Keynesianism.

All of these fiat-money schemes rely on a Keynesian concept of demand-side economics: productivity by spending fiat money. Yet zombie conservatives embrace these schemes, never having read Keynes's General Theory (1936) or Keynesian textbooks. "This is conservatism," they are told, and they believe it.

Does a currency backed by kWh's of electricity seem viable enough to be used as a possible alternative to our broken monetary system? Tell us what you think in the comments.

http://www.activistpost.com/2013/03/electricity-as-currency-10-reasons-it.html

These are my comments. Thanks for asking.

This is utter crackpottery.

You can store gold coins. Unless you have heavy batteries, you cannot store electricity.

Like all crackpot monetary reforms, this one requires control over money by experts -- in this case, government-controlled electrical power companies and government statisticians.

CONCLUSION

The average conservative activist is utterly ignorant of basic economics. He has not read a book on economics. He is not familiar with economic history. He goes to websites he trusts and finds monetary crackpottery. He thinks it must be great stuff because the site attacks central banking.

I have called the promoters of these systems "zombies." Zombies are the walking dead who seek to eat people's brains.

This may be more accurate: these people are sheep. They are the targets of predators -- or at least bigger sheep.

The anonymous person who wrote this essay was wise to remain anonymous.


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