The Collapse Of Fiat Money by a Falling Energy Supply

Each passing day, the world gets closer to a total collapse of the global fiat monetary system.  After the United States unilaterally terminated the convertibility of the U.S. Dollar to gold in 1971, the world has been settling trade on borrowed time.  It was full faith in the dollar and U.S. Treasury market that allowed global trade to continue for 4 decades.

However, faith in the dollar is waning as debts, derivatives and dishonesty plague the financial system.  Most analysts (including many in the precious metal camp) are wasting time debating over the mere symptoms and not the disease itself.

We must remember, debts are nothing more than “Energy IOU’s.”  To pay back a debt, energy has to be burned so the market can generate goods and services.  Thus, this allows for  growth to continue which provides a surplus of wealth enabling the repayment of debts.

The problem the world is facing, is not the huge amount of derivatives or debts, but the availability and affordability of its future energy supply.  Actually, the world has not been able to afford the energy that it has been consuming for quite some time now.  Basically, the world (especially the U.S.) cannot not afford its way of life, so it has created a system of debts and derivatives to cover up and mask the problems.

Most of the Retirement Markets are Liabilities Masqueraded as Assets

Very few realize that their retirement accounts are in fact future liabilities rather than present marketable assets.  This is the typical example of a Ponzi scheme.  Why?  Because there isn’t the available physical assets to satisfy these retirement accounts — only a fraction.  Again, retirement accounts are also “Energy IOU’s.”

If everyone wanted to cash in their retirement accounts today, there just isn’t the available physical assets to satisfy all the requests. Of course, money printing and the buying of U.S. Treasuries & Mortgage Backed Securities by the Fed is an attempt to do this without having to burn energy or exchange physical assets.

Gold & Silver Investment vs U.S. Retirement market Q4 2012

Here we can see that as of Q3 2012, the total U.S. Retirement Market stood at $19.3 trillion (this chart has been updated).  In their most recent update, the Investment Company Institute shows the U.S. Retirement market has grown to $19.5 trillion in the final quarter of 2012.  The retirees can thank the Fed for the $200 billion in growth in this market from Q3 to Q4 2012.

The figures in this graph as it pertains to GLD & SLV we calculated during the beginning of 2013… so the actual total amount would be lower than $81 billion.  However, we can plainly see just how much money has been siphoned into one of the largest Ponzi schemes in history — the U.S. Retirement Market.

That 1% ownership of gold is just a conservative calculation based on the total retirement assets in Q3 2012.  I have seen estimates that gold ownership today in the U.S. is more like a half of a percent.  Regardless, there is a great disconnect by the public as to what are true assets and stores of value — more about this in future articles.

The Collapse of the Dollar due to Energy Constraints

Just like the U.S. Retirement Market, the dollar is backed by a huge amount of future liabilities ($16.7 trillion and growing), which are again… Energy IOU’s.  There is no way these debts will ever be repaid, because there will not be the available energy supply in the future to do so.  As I mentioned before, the energy situation has already impacted the debt laden global markets — it only gets worse from here on out.

Even though the United States is bragging about its new Shale Oil Bonanza, this will turn out to be a mere blip in the whole scheme of things.  World conventional oil production already peaked and the only thing saving the day is… shale oil.  While shale oil has helped to bridge the gap from the loss of conventional oil supplies, it is doing so on the heels of very high annual decline rates — averaging 40% per year.  This is not sustainable.

Then of course we have the next SHOE TO DROP, and that is the decline of net oil imports.  If we take a look at the next chart we can see this taking place in the Middle East:

Middle East Consumption of Domestic Oil Supplies 1980-2011

In 1980, the Middle East was producing about 19 mbd (million barrels a day) of oil while consuming a little more than 2 mbd.  Thus, their net oil exports where approximately 17 mbd that year.  Today you can see, the Middle East now consumes over 8 mbd while the total production has grown to 27 mbd.  Thus, their net oil exports have grown only 2 mbd at 19 mbd in the past 3 decades.

Furthermore, Saudi Arabia has increased its domestic consumption 370% in 30 years, the most in the group.  According to the BP Statistical Review, Saudi Arabia produced 10.3 mbd of oil in 1980 while consuming 600,000 barrels a day — showing net exports of 9.7 mbd.  However, in 2011 Saudi Arabia increased their oil consumption to 2.8 mbd while producing 11.1 mbd.  Even though the Saudi’s have increased their oil production in 2011, their net oil exports actually declined to only 8.3 mbd — this trend will only get worse.

In their April, 2013 Oil Market Report, the IEA forecasts the Saudi’s to increase their oil consumption to average 3.1 mbd in 2013.  While Saudi Aramco plans on adding more oil production in 2013, their increased consumption is taking up a large percentage of this new supply.  At some point in time (near future), the Saudi’s will peak in oil production while their domestic consumption steadily increases — a double-edged sword.

The decline of net oil exports is a phenomenon that is occurring in most of the oil exporting countries in the world.  Unfortunately, the largest energy organizations such as the IEA – International Energy Agency and the EIA, the U.S. Energy Information Agency, don’t seem to pay much attention at all the subject of net oil exports.  And why should they?  It’s just more bad news that would upset the already volatile oil markets.

ENERGY = MONEY

I have stated this before, and will state it again, Energy = Money.  Energy drives the world, and money is supposed to be the accountants.  The present Fiat Monetary System no longer works as it is saddled with $trillions worth of energy IOU’s… liabilities we cannot afford.

Gold and Silver are money because they are in fact stores of what I call “Trade-able Energy Value”.  Each ounce of gold or silver is bought and paid for energy value that can be traded for goods or service of like energy value.  While, I realize this theory will stir up much debate, I believe it to be true and I plan on spending a great deal of time explaining the concept in future posts and articles.

The collapse of the dollar is already taking place.  It has more to do with energy… than most realize.

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17 Comments on "The Collapse Of Fiat Money by a Falling Energy Supply"

  1. Cleburne61 | May 14, 2013 at 1:33 pm |

    Stellar work SRS! I’ve found your work in the past to be most worthwhile. In fact, it’s you who’ve made me think twice about holding miners in my portfolio.

    I can’t think of a single analyst who made the issue of declining ore grades a lynchpin, until I read your work. Now many are playing catch up.

    I only hope that the rising cost of energy, coupled with the falling ore grades ends this manipulation sooner, and once and for all.

  2. peckerwood | May 14, 2013 at 4:08 pm |

    site bookmarked. thank you for all.

  3. Peckerwood.. thanks stopping by. Hope to post something informative stuff here.

    Cleburne61… yeah the miners have been a real drag, however I believe that will change in due time. There is literally $trillions of dollars looking for a home, and at some point in time they are going to make it into the mining sector.

    Mining sentiment is worse than Oct-Nov 2008, however the fundamentals are even better. Now, I don’t mean they are undervalued… that’s nonsense — they are fundamentally producers of what I call “STORES OF TRADE-ABLE ENERGY VALUE. I will explain more of this concept in the future.

    Of course we have to understand that peak oil will impact the mining industry as well as the global economy, but there will still be a number of good candidates.

  4. The idea that energy is money is intriguing. So I look forward to more
    clarity. Saudi Arabia is already analyzing Peak Oil as their leaders recognize how I’ll-prepared the country is for this. The United States hit peak oil in 1971.
    How does the velocity of money figure into your theory? I rarely read much commentary on the subject of velocity but it seems logical that energy and/ or the lack thereof would play into the stasis or mobility of societies.

    Thank You for your blog.

    • RRoss… if we dissect the whole supply chain & system in manufacturing a good or providing a service, the overwhelming percentage of the value comes from energy — in all forms and at all stages.

      The velocity of money aspect tends to be extremely distorted in a system that holds massive amounts of derivatives. Also, right before a typical hyperinflation, money velocity tends to drop considerably. Then all of a sudden it reverses and goes into warp drive.

  5. This documentary covers the energy-money topic in a wider view.

    http://www.youtube.com/watch?v=0CNRWOHtnE4

  6. Kansas Crude | May 15, 2013 at 10:38 am |

    SRS solid work as usual. As a longtime Peak Oil advocate I give you kudos for doing a great job of connecting the dots and thinking outside the conventional. Congrats on realizing the website its off to a great start. Caught your stored energy concept awhile back for Gold and Silver as well as really all finite mined resources. As you have also pointed out everything tangible has an energy investment and how we continue to allocate the master resource energy is vital but unfortunately not well recognized or critically evaluated.

    • Kansas Crude… thanks for stopping by. I believe one of the biggest misunderstanding by many analysts on the Main Stream Media is their notion that gold or silver are just pieces of shinny metal with no instrinsic value whatsoever — only that which is decided upon by two parties.

      However, once the individual makes the ENERGY = MONEY connection, then the dots (as you stated) are easily connected.

      steve

  7. Stacker 007 | May 16, 2013 at 10:40 am |

    A major correction is close at hand! The stock indexes are all rising…as well as the VIX, TVIX, VXX, UVXY and our gold is flying East at a record pace at record low prices dispite the record increase in “money”/currency supply; Junk or “Constitutional” silver is hard to find, and PM dealers inventories are in short supply with new orders facing longer delivery dates. Mines going off-line such as the Kinnecott, Pascua Lama, Pirth-Pilbara et al.-permanent backwardation is becomong more probable. The Baltic ratio is way down, P/E ratios are in dangerous territorities, energy use in the US, Japan, Europe and China are down significantl-(a sign of economic contraction) and real unemployment is rising…and still no report of the 2012 FY Tax revenue- although 90% of filings were done electronically as of April 15th. When those numbers are released, which I expect to be 1.85 Trillion USD, the game is nearly over. Can somebody put a new battery in the flashlight at the end of this tunnel? Or a Vodka Gimlet martini-shakin, not just stirred.

  8. Robert Happek | May 17, 2013 at 10:25 pm |

    An excellent article – no question about it. Nevertheless, I would like to caution the author as well as all readers in drawing premature conclusions. The devil is in the details. For instance, we are already past the peak of conventional oil production, yet total energy consumption is still growing. While I do not believe that a further substantial increase in energy consumption is possible or desirable, it is still possible that the present high level of energy consumption may continue at a more or less stable rate for a very long time – a time beyond the life span of most of us. In short, the fossil fuel industry is not as stupid as many people assume. Lots of money is being moved in this industry which attracts lots of talent and creativity.

    In my opinion, the necessary decline in fossil fuel consumption will be more than compensated by the rise of solar energy. The efficiency of solar cells will double perhaps triple over the coming years while costs of production will continue to fall. What is needed for solar power to be a game changer is a dramatic progress in storing the excess electricity generated during the day by the solar system. That solution does not exist yet, but I am optimistic that a commercially viable solution will be found very soon (in less than 20 years).

    Long term our energy consumption must fall – no question about that. However, the falling energy production does not necessarily mean a fall in the quality of life. In order to get from A to B, we move today tons of metal (called a car) which requires a huge input of fossil fuels (oil). Fuel consumption of a car is directly proportional to the mass of the car. Therefore, reducing the weight of a car dramatically and lowering top speeds, will dramatically decrease the consumption of oil for every mile driven. It is also quite possible that future dramatic progress in battery technology will make the internal combustion engine one day completely obsolete. This is not a fantasy: BMW has already stopped investing money into the development of new combustion engines. All the efforts are now directed towards electric cars. Wind turbines are presently more efficient than solar panels. Nevertheless, I believe that the future is in solar. Today we live in the oil age. The future will be electric.

    Nobody can know the future. True. But that does not mean that we should assume that the present day technology in energy matters is the final one, and that no significant progress is possible in the future.

    It is also a good idea to be cautious regarding the ownership of gold and precious metals. In the former Soviet Union, under comrade Stalin, and in Nazi Germany under the Hitler regime, the possession of gold was a crime punishable by the death penalty. While I do not believe that such measures can happen in our western societies, I could imagine the following “regulation” of the gold market in the future: All trade of precious metals (like the trade ot nuclear material today) must be reported to public authorities. Like real estate today, the possession of precious metals could be subject to a yearly tax on all holdings of precious metals. Such a tax obligation can be avoided only by selling the metals in question via public channels. A simple regulation like that could quickly make gold non competitive (in comparison to fiat money) as a safe heaven asset.

    I am not an advocate of fiat money, to the contrary. But I believe that the money of the future will always be fiat moeny.

    Thanks for an excellent article.

    • Robert… thanks for your lengthy reply. You brought up several good points that make a great deal of sense at face value. However, as you stated, “the devil is in the details.”

      Part of the problem with alternative forms of energy such as solar and biofuels has to do with their LOW EROI – Energy Returned On Invested compared to oil and natural gas. The EROI of Solar PV is about 6-7/1. Where as conventional imported crude is approximately 18/1 currently. Wind power is higher than Solar PV at 17-20 EROI on average.

      Unfortunately, there are several problems with Solar PV and Wind Power. First, are the high initial costs and, Second is the ROI – Return on Investment, and lastly is the problem of available cheap energy in the future to be able to produce these alternative sources of energy.

      I have seen economic studies on wind farms in the United States that cannot repay the initial investment within 20 years — its depreciated lifespan. Why do you think BP did the following in April of this year:

      BP Selling Its Entire U.S. Wind Power Business; Will Focus on Oil and Gas for Future Growth

      BP will sell its entire American wind power business in an effort to “position the company for sustainable growth” and return to its core business of oil and gas production.

      “BP has decided to market for sale our U.S. wind energy business as part of a continuing effort to become a more focused oil and gas company and re-position the company for sustainable growth into the future,” BP said in an emailed statement to CNSNews.com.
      ———————————

      It looks like BP- Beyond Petroleum is now back to being called British Petroleum.

      Robert… if you stay tuned to this site, I will provide some interesting information on just how bad the energy situation has become.

      steve

  9. Robert Happek | May 19, 2013 at 11:50 am |

    Steve, thanks for your reply. Regarding EROI of renewable energy, I think that ratio does not make much sense as long as it is greater than 1. If I understand it correctly, then EROI of 5 means that only 80% of the energy produced can be used for purposes different from the energy production itself. That is not a bad deal given that solar energy is basically inexhaustible. I am not impressed by a EROI ratio of 20 or even 100 if the energy source (fossil fuels) are exhausted within a few generations. If we are truly concerned about the survival of the human species in the long run, investing into fossil fuels is a waste of time. Fossil fuels are an illusion which corrupts our thinking by suggesting that EROI ratios of more than 5 are the standard against which anything else should be compared to.

    EROI of 5 with an infinite yield is infinitely better than EROI of 100 with a finite yield.

    By the way, the EROI ratio itself is based on an intellectual dishonesty as it does not really calculate all the energy costs involved. When oil is produced with EROI ratio of 20, then there is still no energy produced. In order to produce energy, the oil needs to be burned which requires oxygen and produces vast quantities of carbon dioxide. The energy cost of producing the oxygen and the energy cost of preventing the carbon dioxide entering the atmosphere is quietly omitted from the calculation. However, with solar energy, the end product is electricity which is the purest form of energy. There is no need for oxygen and there is only a very minimal amount of environmental degradation caused by solar or wind. I am quite confident that if all energy costs are properly accounted for, then renewable energy would be the energy with the absolutely highest EROI ratio among all forms of energy.

    The whole business of energy is full of inaccuracies based on political ideology.

    Regarding your example of BP going out of the business of renewable energy as a proof that renewable energy is non economical: The truth is, BP went out of business in renewable energy for completely different reasons. Seven years ago, I had installed on my roof a solar system made out of BP solar panels. These panels lasted only 6 years. It turned out that the design of the panels had problems which led to a premature failure. Although wind and solar are low tech in comparison to nuclear, these technologies still require high quality engineering in order to withstand the weather for decades. BP has withdrawn from the solar business simply because they were not able to deliver a quality product at a reasonable price. But that does not mean that nobody can do it. There are many excellent products in the solar industry. The situation is similar to the development of the car industry. Over the past 100 years, more than 90% of all car companies had to give up simply because they were not able to produce a quality product at a low price. The same story with solar and wind. So the example of BP failing in renewable energy does not mean much. By the way, they also failed spectacularly in the business of drilling for oil by making many mistakes in the gulf of Mexico. The disaster in the golf may have forced them to give up their other businesses as the losses in the golf were life threatening.

    In conclusion, I think the concept of EROI needs to be investigated much more deeply. It has many ramifications all the way to social politics like setting interest rates in a monetary system, negotiating wages for workers, retirement policies etc. If we to not stop thinking that only EROI of 18 or more are acceptable, then indeed, we will never recover from the present economic depression. If we accept that the future means EROI of 5, than we made the very fist step towards recovery.

    • Robert… you bring up several excellent points worth discussing. Your assumption of the EROI, “I think that ratio does not make much sense as long as it is greater than 1” is one that many make, but it is indeed an incorrect one. Charles Hall, the leading expert on the EROI believes a modern society needs at least a 10/1+ to sustain itself — that is if you want the modern conveniences.

      But, let’s just put that aside for a minute. If we look at the Fishing Industry, they are already failing miserably in regards to producng a positive EROI.

      Here are some EROI ratios for the different fish species:

      Energy Returned (protein output)/ Energy Invested (Fossil Energy input)

      Herring = 1:2
      Salmon Pink = 1:8
      Tuna = 1:20
      Shrimp = 1:150

      So, we can already see that in the Fishing Industry, the EROI is well below 1:1 – break-even. This is a much different story than what took place when the indigenous peoples in the past used nets in small boats close offshore, to catch enough for the majority of their small tribe.

      There’s a lot more to be written about the EROI and energy. If you remain patient and keep in touch with new posts and articles from this website, you may see things a bit differently in the future.

      steve

      • Robert Happek | May 20, 2013 at 1:28 am |

        Steve, as interesting as these EROI numbers about fisheries are, they are nevertheless meaningless. People buy fish not for the calories but for the quality of nutrients and the taste of it. If EROI is all that mattered in food, we would all be eating cheap chicken loaded up with growth hormones, antibiotics and other contaminants. I for my part prefer to eat fish even if it costs significantly more than chicken.

        Regarding Charles Hall and his belief that society needs an EROI ratio of at least 10 in order to sustain itself, that is not science – that is political ideology. A few centuries ago, humanity has been thriving on a EROI ratio of close to 1. Five thousand years ago, the ancient Egyptians managed to create a high civilization on a EROI ratio of little bit more than 1. Modern civilazation means mostly mindless consumption which translates into huge production of garbage. I agree with Charles Hall, if the goal is to maximize garbage production, than an EROI of 10 or more is highly desirable. (An EROI of much less than 10 could possibly mean huge recycling efforts which we clearly do not want).

        I have been following the peak oil discussion since 1999. Over the years I have seen many ridiculous claims being made. Roughly ten years ago, many experts on the oildrum claimed that the EROI for solar systems is less than 1. That of course turned out to be a lie.

        I will continue to follow your website and, if time permits, I will post comments. I hope you do not mind if these comments are occasionally critical. I like your approach to precious metals via the energy it takes to mine and to refine these metals.

        • Robert… while I agree with you that the fishing industry does not survive based upon its EROI ratio, it will be greatly impacted by both the declining oil supply as well as the loss of global fish stocks.

          The two EROI ratio examples you gave were from societies that survived on human and animal labor. I know from studies by Thomas Lough that human food production had an EROI of approximately 5:1 and using draft animals lowered that to more of the 1:1.

          The difference as I see it, after the collapse of the Roman Empire, most of the farming was done by human labor (serfs) which provided that 5:1 ratio. However, as mankind cut down more forests and expanded technology including draft animals, this ratio declined towards that 1:1 in food production.

          This low 1:1 EROI ratio of food production worked fine as there were always more forests to cut down and more farmland to grow crops. Furthermore, there was plenty of land and grazing areas to sustain the draft animals. While it was a low EROI, there was plenty of land to sustain this system. Thus, economies were built on the continued exploitation of forests (or prairie land) for food production.

          I also agree with you that Hall’s EROI of 10:1 is based upon consuming lots of worthless crap and garbage we really don’t need… but Robert, that’s the social and economic system that we currently have now. How on earth are all the suburbs across this land going to survive on a low EROI energy?

          As you probably realize, the United States is suffering from over 100,000 water main breaks a year. The U.S. Interstate Highway and Infrastructure were built on a higher EROI of say 20:1+. How are we going to maintain all this stuff as the energy supply declines as well as the EROI from oil and gas? Solar won’t help in that regard would it?

          Anyhow, your comments are always welcome. I enjoy critical replies as I try to keep an open mind. It allows me to continue to learn even though it may mess up my preconceived notions.

          steve

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