- He also seems to take a quantity theory of money and price approach. In different forms, this has been debated for over two centuries and remains questionable. Price formation, especially in a regime of credit money and unstable velocity, cannot be reduced to the degree it seems he does but should try to take labor value as mediated through cost of production into account.

- changing levels and types of development also change the dominant money form — the system creates the form of money which it needs and, to degrees, price creates money, which would be no more than a trivial circle were it not for the role of value and its non-identity to price.

It’s also possible, as Drucker said, that a resource doesn’t exist until an innovation makes use of it. Without farming, all plants are weeds. Without chemistry, fossil fuels are just smelly poison.

Which means that the true energy of our economy is the innovative and productive capacity of people. The last 10 years has diverted innovation into financing, arbitrage, and (really) theft. Redirecting that innovation into the real economy is the key, and will happen as the smart people on Wall Street decamp to Pittsburgh and actually start doing something useful with their lives.

As far as energy goes, it means pricing it appropriately for its externalities (such as climate change and pollution), and letting the market develop alternatives. The most significant alternative energy program, of course, is simply to use less. Others become more economic as the price of fossil fuels spiral.

Now, that said, the easiest way for Americans to welsh on their debts to the petroleum producer nations is to inflate them away. Yeah, that has horrible economic consequences, but we really owe the Saudis nothing–let’s not forget that they want us dead. Of course, the inevitable consequence is that Americans will need to count on domestic saving for investment capital.

One could argue that financial assets don’t really count as “goods”, but that is a sort of willful ignorance. If financial assets are losing favor, then you can bet hard assets are gaining favor (especially with negative real interest rates) to make up for it. The money has to go somewhere or it might be destroyed, in a hot-potato fashion.

A corollary of this point is that there may be little central banks can do now to ameliorate the situation. The money and credit have already been created over past decades of easy policies. Now that the “investment emphasis” has switched from financial assets to hard assets in a likely irreversible fashion, central banks face a veritable busted dam of their own past money creation, spilling into a landscape where it is impossible to hide.

Putting that genie back in the bottle would be a conscious decision to deflate — which governments never willfully pick, if even possible to carry out.

Anonymous 11:45am points out that the Fed can bring down prices by reducing money supply. I’m sure that’s true, and I don’t want to argue in favor of massive printing. But I’d argue that controlling the money supply is not in itself the solution to the underlying problem.

It’s also true that the abuses perpetrated by our financial sector have been grotesque, and it’s true, as Yves has repeatedly pointed out, that we have to regain some control over these people and redirect our capital from their pockets into productive investment. But I don’t think these people are really our most important problem. They’re more an irritating side show.

I believe the economy has stopped growing because our energy supply has stopped growing. In fact, our energy supply has begun shrinking (very slowly), because the energy inputs required to maintain flat production have been growing. I believe the only way to resume growth (or at least prevent serious contraction) is to increase energy efficiency. It’s going to take a lot of investment, and a functioning economy, to do that.

I believe inflation is better than deflation at this point because if you allow the rich to make money just by stuffing their capital into a mattress, that’s what they will do. They will take no risk whatsoever, and it will be the people at the bottom who get squashed. Inflation is like the antes and blinds in a poker game–it forces capital to stay in the game and take risks.

Moe Gamble

The Volcker-induced recession played a significant, although not exclusive, role in killing the commodities inflation of the mid-late 1970s, including oil price increases.

I don’t mean to be a Marxist, but one thing Das Kapital largely hit on the head is the labor theory of value. But the labor theory of value works only when there is sufficient competitive capacity to drive prices down to the cost of production. This cannot be said with respect to energy, at least at this point in time, and hence the price of energy has become disconnected from the labor necessary to produce it.

Therefor one needs to update the price of goods to reflect the labor and energy theory of value (energy being a substitute for labor in the production of goods).

In that regard I have to agree fully with Moe’s point.

On the other hand, I have long taken the view that the Federal Reserve Bank will tolerate all kinds of inflation, in whatever asset classes, but will not tolerate general wage inflation – i.e., an inflation which does not work to the detriment of the average person (CEO pay inflation, that is fine with the Fed). The Fed, as well as most central banks these days, is completely in the hands of the elite globalists, whose sole goal is to enrich and empower themselves at the expense of everyone else.

However I do disagree with Moe that a central bank can do nothing to combat this inflation. What a central bank can do to constrain prices is to – GASP – reduce the money supply. This renders each monetary unit more valuable. Imagine, if there was a sum total of 1 billion US dollars in existence, would a barrel of oil still cost $125? Of course not. In this sense, Willem is correct: it is in the power of the central bank, at least one which has free reign, to control inflation.

But again: the agenda of the US Federal Reserve Bank is to enrich the wealthy globalists and to generally collapse the middle class. This explains the Fed’s enthusiastic support for “globalisation” (or, as a direct result, the reduction of wages for the middle class), tax cuts targeted toward the wealthy, grossly understated inflation measures (which reduce wage increases for those workers and retirees obtaining cost-of-living adjustments to income), and virtually every other policy you see them pursuing, including, incidentally, the vast run-up in middle class debt-loads and the modifications to the bankruptcy laws. Of course all of this has to be tied to all of the “terrorism” legislation – beware, when the impoverished middle class tries to assert itself, you will quickly see the terrorist label applied to domestic dissent.

Mark my words.

Ultimately, there is no real value in anything but energy. (Another word for energy is “work”.) For example, copper in the ground appears to have value in and of itself, but that’s only because energy has been so cheap for so long. In fact, copper in the ground has no value unless we have the energy to mine it and transform it into something we can use.

As energy becomes the limiting factor on production, the price of everything will come to increase at the same rate as the price of energy. The price of the thing will, in fact, be the cost of the energy to produce it.

We are starting to see the impact of energy supply problems on broad prices, but we haven’t seen the full effect yet because we’re still squeezing out a lot of fluff–the part of each product’s cost that has been going into things like marketing and profits. But for some products, like food and gasoline, there’s not much more fluff to squeeze out.

No central bank can change the effects of energy price on broad prices with monetary policy. The only thing a central bank can do to influence commodity prices is destroy demand by destroying people. If you destroy enough people at the bottom, you can keep things cheap for the people at the top, but that would be, in my opinion, a really sick solution to our problems.

Moe Gamble

What does this remind me of? Oh yes, the Iraq war “debate”…

Yves, love your blog as always and would not ponder a day going by without checking it.