There is this notion that Bitcoin or “Electronic Money” will become the new wave of the future. While this sounds like the inevitable outcome in our high-tech society and economy, I believe we will eventually head back towards a more modest physical system of barter and trade.
Martin Armstrong wrote this as it pertained to Bitcoin & electronic money in one his recent blog entries:
We are headed into an electronic currency regardless of what people say. Bitcoin will not survive, but it is useful to get people accustomed to a cashless society. The difference will be that the government version will be no ”anonymity” and what it being touted as a benefit is the elimination of crime – drug dealers will be eradicated (plus the government will get 100% of all its taxes).
This is why they have been waging war on gold. The only real role for gold will be as an alternative. currency not to the paper dollar – but to the electronic dollar. What maybe more practical is silver coins. But this is why Europe is also moved to a 19% tax on silver starting January 1st, 2014 (see former post). It is not that there is some dark sinister conspiracy against keeping gold prices down, the only concern about government with respect to gold is the untaxable underground economy. France has made it illegal to buy or sell gold for cash or to mail cash. The US has made it illegal to store cash in a safe deposit box. Even India banned gold sales without a license.
This is all about the Sovereign Debt Crisis, the collapse in socialism, and the driving deflationary trend as government clamps down on everything that moves. The precious metals are NOT going to be a hedge against the dollar, hyperinflation, or any of the other nonsense the gold promoters have spun to sell whatever they can like snake oil salesmen. The role of the metals will be as an alternative currency to ELECTRONIC when they terminate “printing” paper money. Wake up and stop listening to propaganda. Open your eyes and look at the real world. It is closing in a hell of a lot faster than people suspect.
At face value, Martin actually makes a lot of sense here. However, he fails to incorporate the coming OIL-ENERGY constraints into his forecasts. This is indeed the biggest flaw in his excellent work and forecasting based on his “Pi cycles.”
I have read a great deal of Martin’s work, especially his long detailed article on the Roman Empire. Martin’s company had acquired a great deal of the different ancient Roman coins that were minted showing each Emperor-Ruler on one side and on the back, a historic event of the time. Basically, the Roman coins chronicled the history of the Empire. As a researcher, this is the kind of work we love to find.
That being said, the most important concept of money-currency that individuals and investors need to realize is this simple equation:
ENERGY = MONEY
I believe analysts cannot correctly forecast aspects or events in the future as they pertain to the precious metals, mining, paper-electronic currency, governments or the overall economy unless they have a good grasp of the energy situation.
For example, how can there be a viable electronic monetary system in the United States if the energy supply that powers the electrical grid starts to decline and suffer shortages? After the banking and housing collapse of 2007-2008, many small towns and cities were shutting off public street lights and reducing services when their tax revenue plunged. This will only get worse during the next phase of the economic collapse.
Energy has been the vital component of our complex infrastructure that allows the economy to function and flourish. We are already seeing cracks in the system as our infrastructure is starting to suffer from years-decades of neglect. There are on average 850 water main breaks in North America every day.
(courtesy of Watermainbreakclock.com)
You can check out the Water main break clock as it continually updates its figures. Maintaining the infrastructure not only consumes a great deal of energy, but it is also becoming increasingly more expensive. Estimates show that to update the entire U.S. water infrastructure would be over $1 trillion. Where are the funds going to come from to update this system when we are now suffering from $17+ trillion in debt?
Okay, let’s get back to the ELECTRIC aspect of money-currency. As I stated, it takes a reliable electric grid to allow an electronic monetary system to work. Not only are we suffering from problems with our water systems in the U.S., we are also dealing with increasing problems with the electric grid.
According to the article, Aging U.S. Power Grid Facing Game-Changing Threats:
It notes that the country’s electric grid is more than 100 years old and was designed to carry much smaller loads. The study quotes figures from NERC, the nonprofit North American Electric Reliability Corp., that 70% of the grid’s transmission lines and power transformers in the U.S. and Canada are now more than 25 years old, while the average power plant is more than 30 years old.
and then we have this from another article, BAD NEWS: The U.S. Power Grid is Getting More Expensive and Less Reliable:
U.S. electric customers are now paying 43 percent more to build and maintain local power grids than they did back in 2002. At the same time, the grid is also becoming less reliable, with blackouts now taking 20 percent longer to fix.
….Problems with the power grid now cost the economy some $150 billion per year.
What is taking place in both the aging and decay of the U.S. infrastructure can be attributed to the falling EROI – Energy Returned on Invested. I have not discussed the aspect of the EROI on this site much, but I will be focusing more on it in the future.
However, to put it simply… the larger and more complex a society becomes the more energy it takes to sustain and run it. Thus, our U.S. economy is suffering from the same ravages of a falling EROI as did the Roman Empire.
If we look at the chart below, we can see the EROI ratios of U.S. oil & natural gas.:
(chart courtesy of David Murphy-TheOilDrum with my annotations)
What this chart represents is the falling EROI of U.S. oil and gas since the 1930’s. In 1930 the U.S. could produce 100 barrels of oil for the cost of one barrel of oil in energy. This has continued to decline and in 2000, it fell to 11/1. Thus in 2000, the oil industry could only produce 11 barrels of oil for the cost of each barrel of oil.
Folks, it just takes a great deal more energy to produce energy today than it did just a few decades ago — and a hell of a lot more than during the 1930’s.
Shale oil with an approximate EROI of 5/1, makes the overall EROI of the U.S. even lower. The United States was built on a high EROI of energy and is now coming under stress as the present EROI is falling below the carrying capacity of the society and economic system.
For all those who still don’t believe that shale oil will peak soon and think we are going to become energy independent with this stuff, fail to realize that the shale oil’s EROI of 5/1 is too low to sustain our complex society and economy.
Furthermore, there is now a growing concern by governments that the peaking of global oil production will have a severe negative impact on the U.S. and world economies.
A new multi-disciplinary study led by the University of Maryland calls for immediate action by government, private and commercial sectors to reduce vulnerability to the imminent threat of global peak oil, which could put the entire US economy and other major industrial economies at risk.
The new University of Maryland study, in contrast, conducts a review of the scientific literature on global oil production and argues that the bulk of independent, credible studies indicate that a “production peak for conventional oil [is] likely before 2030″, with a “significant risk” it could occur “before 2020.” Unconventional oil such as Canadian tar sands is “unlikely to expand enough to fill the gap”, and this also applies to “shale oil and gas.” Shale wells, the study argues, “reach their maximum production levels (peaks) much earlier than conventional ones and are therefore difficult to operate profitably.”
As I mentioned in a prior article, the CEO of Core Lab, Dave Demshur believes the global peak in oil production will occur in the next several years. Core Labs has over 70 offices in 50 countries and their business is to analyze drill results from the largest oil & gas companies as well as 100’s of smaller ones located throughout the world. If anyone has an idea of what the future oil production outlook will be, Dave Demshur is certainly one of the most qualified.
This is something that Martin Armstrong as well as the overwhelming majority of analysts fail to comprehend. While their forecasting and opinions receive a great deal of weight and exposure in the media, their opinions will most certainly fail the test of time because they are doing so in an “Energy Vacuum.”
Even if the U.S. did try to transition to an electric monetary system, its lifespan would be very short due to the coming energy constraints and the falling EROI.
I believe the viability of either Bitcoin or an electric monetary system will be problematic and not functional in the U.S. and world as we enter into a new more local economic paradigm due to a declining energy base.
Gold and silver will provide a necessary function as money (as they have for over 2,000+ years) at some level because they are a store of “Economic Energy” (term by Mike Maloney) and can be used in either a high-tech or more local low-tech environment. Bitcoin and electronic currency will not be able to function in a society that will have to survive with less energy and technology in the future.