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By Dick Burkhart
12 November 2008
There is a much closer connection between finances and fossil fuels than most people realize. Namely, modern finance is based on continued economic growth, which is based on continued cheap energy.
So as the cheap energy goes away, so does the growth, then so does the financial system. There are actually two financial problems: (1) interest on loans that has to be paid back from the proceeds of future economic growth, and (2) loans based on "fractional reserve banking" = leveraging = printing of money, which assumes that not only the interest but most of the principal of the loan (which is created out of nothing) will be paid back from the proceeds of future economic growth.
If the growth doesn't happen, either the loans aren't paid back and you get defaults and deflation, or they are paid back with more phony money and you get inflation. We were well into peak oil inflation when the financial system wasn't able to absorb it anymore and switched to deflation. But neither can the system abosrb much deflation, hence the bailouts, which will lead to a resumption of inflation at some point in the next few years.
However the deflation and inflation have affected different parts of our economy. The deflation has applied to things that were overpriced due to the financial bubble (housing, stocks, ...), while the inflation has applied to the real economy (food, energy, ...). A good resolution of the financial crisis will cure the former but not the latter, which will require a massive investment in "green jobs" (renewable energy, energy conservation, electric transportation, low energy food production, ...)
The green jobs are necessary for survival, as they will mitigate the end of cheap energy. However they will occur in tandem with inflation unless they are financed by high taxes on luxuries and other means to reduce sharply reduce the non-essential use of energy and other key resources.
All these considerations are global, and we'll need a global financial system based on a global currency ("earth dollars") or something similar that is backed by real value. The real value of something should be determined by the peoples of the world according to its contribution toward the long term survival of human civilization.
Fractional reserve banking in all its guises must be eliminated, to be replaced by a new earth community process for prioritizing public investment. This public investment would be the only source of the new global currency. However, in a time of overall decline in real value, instead of new money there would be a contraction of the money supply via taxes on things of least real value (luxuries, addictions, ...)