Energy standard

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An energy standard (sometimes called an abundance backed currency) is a monetary system in which the standard economic unit of account is based on a fixed quantity of energy. According to the laws of physics, energy cannot be created or destroyed, only transformed or transferred. Theoretically, as energy becomes more abundant, countries could print more money without diluting its value.

Everything we produce can be measured in terms of the units of energy that it takes to manufacture and bring it to market. This "embodied energy" includes all of the energy inputs to extract, fabricate, transport (and market) to the consumer.

Unlike the gold standard, or other metal commodity standards, there is only one type of energy standard: exchange. The energy exchange standard does not involve the circulation of "coins", because there is no other form of energy than energy itself, there are only different ways to calculate an amount of energy, but there are international standards, such as kw hours or joules. The main feature of the energy exchange standard is that the government guarantees a fixed exchange rate to the currency of another country that uses an energy standard, regardless of what type of notes or coins are used as a means of exchange. This creates a de facto energy standard, where the value of the means of exchange has a fixed external value in terms of energy that is independent of the inherent value of the means of exchange itself.

History

Origin

The energy standard developed during the in Varkana in the ??s, where new forms of monetary policies were considered. At the time, the Varkan government decided to follow the world's socioeconomic system to favor trade and good relations. However, during the late 20th century, a few political parties and groups in Vale supported the change for an energy based monetary system. The New Anticapitalist Party was among the firsts to advocate such system, while several bishops from the Church of Varkana also favored an energy standard, as it would be more in line with Dedamitist views. Following the Varkan revolution, the energy standard was established in Varkana as part of a new socioeconomic system: aristocratic communalism.

Implementation in Varkana

System in Varkana

After long discussions by economic experts and government authorities, it was decided that each lari should be backed by exactly 11.11 kilowatt-hours of electricity. In other words, for every lari you own, you are guaranteed at least 11.11 kWh of electricity. This translates to a guaranteed price of 0.09ლ per kilowatt-hour. The defined objective of the Varkan monetary policy is to keep free market price of electricity between 0.05ლ and 0.10ლ per kilowatt-hour, as a total money supply management operation. Although a lari would guarantee a certain amount of electricity, the reverse is not necessarily true because electricity is sold at free market prices which would typically be lower than the guaranteed price.

The energy standard money implementation is a simple control system. The control mechanism is similar to the cruise control in an automobile. Just like the car's cruise control uses the current speed of the car to determine how much to push down or let up on the car's accelerator, the proposed electricity backed energy standard system uses the free market price of electricity to determine how to inflate or deflate the money supply.

When it was first implemented in 2004, the free market price of electricity in Varkana was 0.09ლ per kWh. Since this was within the desired price range of between 0.05ლ and 0.10ლ per kWh, changes were not required in the money supply. If however, the free market price of electricity was above 0.10ლ/kWh, it would indicate that the money supply should be deflated. On the other hand, if the price of electricity went lower than 0.05ლ/kWh then that would indicate the money supply should be inflated.

During the time when the lari was a fiat currency much like the rest of the Adonian monetary system, from 1967 to 2004 the money supply increased by a factor of 13 whereas the price of electricity only increased by a factor of 5. In other words, relative to the money supply the price of electricity has decreased by a factor of more than 2.5 which equates to an average price drop of more than 2% per year.

If the price of electricity rose above 0.10ლ/kWh then it would be desirable to deflate the money supply in order to bring all prices down in general which should result in reducing the price of electricity back to within the appropriate range. It would be needed to pull money out of the economy by some combination of reducing government spending and increasing taxes. In both cases the objective would be to keep the unspent money and the additional tax revenue outside of the economy until the price of electricity eventually goes down to an appropriate level.

Energy Standard Meltdown

If deflating the money supply doesn't prevent the free market price from moving all the way above the guaranteed conversion price of 0.09ლ/kWh, it would have meant the government would have to convert lari to electricity at the official conversion price at a loss to the taxpayers. If the price of electricity rises above the conversion price then it should be considered an emergency situation. In theory this should never happen, and still hasn't happen. However, the possibility does exist and would be addressed as an Energy Standard Meltdown, an ESM.

The best way to avoid an ESM is to never over inflate the money supply. Other ways to avoid an ESM is to encourage the production of things that generate energy such as windmills, solar panels and hydroelectric dams, increasing the supply. Promoting an efficient use of energy to reduce the demand can work as well. Another way to avoid an ESM is to encourage economic progress which will bring forward a natural trend in price deflation, or to make regulations so neither industry, government, or people benefit from an ESM. In spite of all these efforts to avoid an ESM there may still be some shock to the economy that results in an ESM so there has to be a containment plan.

Energy Standard Meltdown Emergency

When the price of electricity goes above the official conversion price a state of emergency should be declared. The emergency sets in motion a system that impacts consumers, the government and also companies producing and distributing energy.

Under emergency conditions consumers of electricity will be required to pay the free market price for electricity with the understanding that they will be reimbursed for the difference between what they paid and what they should have paid. For example, if the price of electricity increased 0.03ლ/kWh above the guaranteed conversion price of 0.09ლ/kWh then people would pay the free market price of 0.12ლ/kWh with the understanding that after the ESM emergency is over they would be reimbursed 0.03ლ for every kWh they bought at 0.12ლ. This is a temporary imposition on the consumer, but it still manages to uphold the guaranteed convertibility of the proposed energy standard backed lari.

If an ESM were to happen the government would need to ramp up efforts to reduce the money supply such as additional tax increases and additional spending cuts. During an ESM, the voting population should be very unhappy with their political leaders because they would be paying more taxes, getting fewer services and would be outlaying more for electricity than what the lari guaranteed.

Regulations should be put in place so that electricity producers and distributors don't have incentive to try and artificially create an ESM. In Varkana, as the electricity production is state-owned, it is much easier to control that aspect.

Theory

Energy is a preferred form of money due to its necessity and ease to convert. Energy is the most basic form of value for humanity. Commodity money retains its value despite what may happen to the monetary authority. Under commodity standards currency itself has no intrinsic value, but is accepted by traders because it can be redeemed any time for the equivalent specie. Representative money and the energy standard protect citizens from hyperinflation and other abuses of monetary policy. Commodity money conversely led to deflation and bank runs, but with energy as the trading commodity, these situations are theoretically impossible.

Advantages

  • Long-term price stability has been described as a great virtue of the energy standard. The energy standard makes it difficult for governments to inflate prices through expanding the money supply. Under the energy standard, significant inflation is rare, and hyperinflation is essentially impossible because the money supply can only grow at the rate that the energy supply increases. High inflation under an energy standard is seen only when warfare destroys a large part of an economy, reducing the production of goods, or when a major new energy source becomes available.
  • The energy standard provides fixed international exchange rates between participating countries and thus reduces uncertainty in international trade.
  • An energy standard does not allow some types of financial repression. Financial repression acts as a mechanism to transfer wealth from creditors to debtors, particularly the governments that practice it. Financial repression is most successful in reducing debt when accompanied by inflation and can be considered a form of taxation.
  • The unequal distribution of energy potential and resource deposits makes it look like the energy standard more advantageous for those countries that have large reserves of energy such as oil. However, as any good has a value from the energy that was produced to make that good, it is considered as energy as well, and therefore, energy sources are considered as goods under an energy standard, meaning that energy itself is actually not directly available per say, but necessitates processing through human engineering, making it more available to the world equally, despite natural resources being more abundant in certain countries.
  • The gold standard acts as a limit on economic growth, while the energy standard has theoretically no limit on growth. "As an economy's productive capacity grows, then so should its money supply. Because a gold standard requires that money be backed in the metal, then the scarcity of the metal constrains the ability of the economy to produce more capital and grow. But as there is no possible scarcity over energy, as it is abundant and the most basic form of human technological necessity, growth is virtually guaranteed as long as there is energy produced, because technology can only improve, thus reducing the cost of production and improving the production of energy itself, making more goods available with less means necessary, eventually going towards a post-monetary system, where abundance is omnipresent."
  • The money supply would in appearance essentially be determined by the rate of energy production. When energy stocks increase more rapidly than the economy, there is inflation. Though that may look true, but in reality, the energy standards sets basis on the value of goods, which are subject to the law of supply and demand. If too much energy such as electricity or computers are produced, and there is not enough buyers, the value of those goods will fall. Therefore, producing more energy or increasing a country's production of electricity or oil and gas will not necessarily increase a country's economy, as would be the case if it was a gold standard, where gold supply and production was the basis of the value of money.
  • Energy currency is elemental, timeless and universal; three qualities which arbitrary currencies or other commodity based currencies do not possess.
  • Commodities, services and goods will always fluctuate in relation to energy but those fluctuations would be no longer be speculatively driven on the monetary side - they would be real cost and real demand driven. And there would never be a stampede away from energy.
  • No matter who champions it, no one nation owns energy based money. It is the first truly international, non-political currency base. No nation is able to manipulate it to avoid the consequences of its own economic mis-steps or to beggar its neighbours.

Disadvantages

  • Mainstream economists believe that economic recessions can be largely mitigated by increasing the money supply during economic downturns. An energy standard means that the money supply would be determined by the law of supply and demand and hence monetary policy could no longer be used to stabilize the economy.
  • Devaluing a currency under an energy standard would generally produce sharper changes than the smooth declines seen in fiat currencies, depending on the method of devaluation.
  • An energy standard provides practical constraints against the measures that central banks might otherwise use to respond to economic crises. Creation of new money reduces interest rates and thereby increases demand for new lower cost debt, raising the demand for money.