Citizen Action Monitor

We have an economy based on energy, but we think we have an economy based on money — Nate Hagens (3/5)

In the US, the cost of extracting oil has gone up almost 400% since 2000, and they’re wasting most of it.

No 2218 Posted by fw, May 15, 2018

To access links to other posts by Nate Hagens about The Human Predicament, click on the Tab titled Teachings of Dr. Nate Hagens about The Human Predicament – Links to Posts

Dr. Nate Hagens

“And remember, at the end of the day, financial capital – money – is just a marker for real capital. Real capital is: ‘natural capital’ – that’s a picture of my back yard, healthy ecosystem, soil, trees, rivers; ‘social capital’ – our friends, our networks, this is a picture of my dog; ‘built capital’ – this is my house, there’s chainsaws, there’s some solar panels, there’s an aloe vera plant, there’s a barbecue grill; and ‘human capital – our skills, our knowledge, our health — that’s me identifying an edible mushroom, and that’s my dad growing vegetables and complaining about it. So, we don’t think about it, but most people in our world view things from a monetary lens. But our economy, quite simply, is how fast we can extract fossil sunlight and burn through it in terms of getting immediate neurotransmitters, feelings and stuff.” Dr. Nate Hagens

Just to recap: In Pt 1 of this series of transcriptions of Dr. Hagens’ keynote address at Saudi Arabia’s King Abdullah University of Science and Technology, in January, 2018, he defined the purpose of his talk:

“I’m going to go through seven energy and economy basics; I’m going to explain why humans in the global market economy are functioning like a superorganism; I’m going to have some implications on what that means; and I’m going to conclude with some “What to Do?” suggestions.”

In Pt 2, Dr. Hagens’ went through energy basics – basic terms, basic concepts, basic principles. “They are basic,” he says, “but a lot of people don’t know them.” Further along in his presentation, Hagens incorporates these ‘basics’ in his talk – so, they are important in understanding his message.

In this post, Pt 3, Hagens goes through what he initially called “economy basics”, and is now calling “money basics”. And “technology basics” follows hard on the heels of money basics.

Again, I remind readers that Professor Hagens covers a lot of new, at times dense, cognitive ground, very quickly. And he doesn’t always explain the meaning of his message. If you get muddled trying to wrap your brain around familiar words used in new ways to express novel ideas, just go back to Pt 1 and review his 8 main points, and 4 big ideas about “What the future will NOT be” and, hopefully, you will begin to see the forest without all the trees.

Below is the embedded video of Hagens’ full 58-minute address, followed by a 22-minute Q&A session. My transcript of this segment on”money basics” begins at the 8:00-minute point and ends at about 18:46 minutes. I have omitted Hagens’ slides, but you can view them by watching/pausing the video of his keynote address in another window while referring to the transcript.

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WEP2018 TV: Energy, Money and Technology and the Human Superorganism by KAUST Official, streamed live on January 23, 2018

TRANSCRIPT (from 18:46 to 25:43)

18:46 — OK, talking about money. If we have to understand energy, what about money?

“The majority of money in modern economy is created by commercial banks making loans. Money creation in practice differs from some popular misconceptions – banks do not act simply as intermediaries, lending out deposits that savers place with them, nor do they ‘multiply up’ central bank money to create new loans and deposits. Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money. The reality of how money is created today differs from the description found in economics textbooks.”

This isn’t some fringe blogger that wrote this (the preceding passage). This is the Bank of England in a recent monetary report.

19:31So money is created from thin air. This never used to be a problem because we needed more money to give to the entrepreneurs because we had plenty of untapped resources and ideas and research. But since 1971 there’s not been a single currency in the world – other than Bitcoin – with a link to physical resources. So banks do not loan money, they create it.

19:54And they create a lot of it. This is a little complicated but somewhat important. The graph on the left, the blue [area along the bottom] shows GDP for America. And the red line shows debt added. And you can see that over time we add more and more credit just to keep GDP going [growing].

On the right graph is China. China used to have two credits [one new debt] added to get one unit of GDP. And recently, they’ve had six units of new debt out of thin air to generate one unit of GDP.

So debt productivity, or how much GDP we get from an additional dollar of new debt is in decline globally.

20:37So if you think about a big picture, energy is really our capital, our major wealth. We have a lot of it left but it’s declining in quality. It’s becoming more expensive.

But money, we’re creating more digitally and physically in terms of paper and such. We don’t think of it this way, but when we take on debt as a nation, as a company, or as an individual, that debt some day has to be paid back with energy.

21:01 — And remember, at the end of the day, financial capital – money – is just a marker for real capital. Real capital is: “natural capital” – that’s a picture of my back yard, healthy ecosystem, soil, trees, rivers; “social capital” – our friends, our networks, this is a picture of my dog; “built capital” – this is my house, there’s chainsaws, there’s some solar panels, there’s an aloe vera plant, there’s a barbecue grill; and “human capital” – our skills, our knowledge, our health — that’s me identifying an edible mushroom, and that’s my dad growing vegetables and complaining about it.

21:37 – So, we don’t think about it, but most people in our world view things from a monetary lens. But our economy, quite simply, is how fast we can extract fossil sunlight and burn through it in terms of getting immediate neurotransmitters, feelings and stuff. I mean it’s more detailed than that, but that’s a reasonable summary.

And another summary way of putting it is — we have an economy based on stocks but we think we have an economy based on flows.

22:13 – This is a graph: Our society views the world solely through a monetary lens. The monetary lens is the black line, where we really have an economy based on the red line which is a Gaussian* curve which is cycles in nature, ends up looking like that they reach a peak and decline. And the green curve is more of a renewable flow, how much of our economies are sustainable and stable. [*Gaussian distribution, with a ‘bell curve’ shape, is a common continuous distribution used to represent real-valued random variables whose distributions are unknown].

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23:07 Technology.

23:39There’s two general types of technology. Technology 1 is how we improve the resource use, like a power plant would use the same amount of coal to generate more electricity. Or a new development on technology – geothermal or a solar power cell that’s more efficient.

But the other type of technology [technology 2], the vast majority of technology, is things that replace what humans used to do, like a chainsaw replaces people chopping trees manually. And then new resource conversions like Facebook and things like that that we never had in our ancestral past.

24:15The vast majority of technology is this type 2, which ends up growing demand globally for more primary energy.

24:27Even digital consumption requires energy, and it’s increasing rapidly. You say, “Oh, yeah, but I just use Facebook and I do things online so I’m not using a lot of energy.” The short thing here is the Internet, with our consumer devices, the data centers and the creation of the items is almost 13% of our electricity right now, on the way to 15%.

24:48 – And finally – and I won’t get into this because this should be know to many of you – but we’ve used a large percentage of our fossil stocks. There are plenty left, but they’re going to be more costly, which means, because of that price dynamic I showed [the cow milking story in Pt 2], lower benefits to society.

This is a complicated graph. Just look at the red line. Basically, in America, the cost of extracting oil has gone up almost 400% since the year 2000. And there’s a very important difference between the price of oil, which is what we pay at the pump, and the cost of oil, which is what the oil companies pay, and the value of oil.

The value of oil to a human 200 years from now, looking back to today is amazing. And, a personal side note, we’re wasting most of it.

25:43 – Okay, that’s the energy [and money and technology] basics.

About Dr. Nathan John Hagens – Hagens, 51, worked on Wall Street at Lehman Brothers and Salomon Brothers for 10 years before closing his own hedge fund in 2003 to develop a systems synthesis approach to the human predicament. At one point, he was the lead editor of the influential online news and information resource, theoildrum.com. At present, Dr. Hagens is a professor at the University of Minnesota where he teaches a systems synthesis Honors seminar called Reality 101, A Survey of Human Predicament. The readings and lectures cover literature in systems ecology, energy and natural resources, thermodynamics, history, anthropology, human behavior, neuroscience, environmental science, sociology, economics, globalization/trade, and finance/debt with an overarching goal to give students a general understanding of how our human ecosystem functions as a whole.

Visit Nate Hagens’ personal website at The Monkey Trap.

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