This Q&A session is an immediate follow up from the previous post. I wanted to put this in a separate article rather than attach it at the end of the last one so that it didn't get lost in the post on How to implement an electricity backed currency. In this Q&A discussion, I often reference Method#1, Method#2 and Method#3 from the earlier post today.
So now, I'd like to cover a few of the questions and critiques I've received since first writing about an electricity-backed currency (back in Nov 2010), and present my responses to these questions and critiques.
1) How do you transfer electricity long distances?
Typically, we use high voltage power lines of roughly 750 MegaVolts. This generates a transmission loss of between 6% and 12% per 1000 miles. However, with DC superconducting wires transmitting at the GW scale, this percentage can be decreased to nearly 0% per 1000 miles (including the loss of power required to keep the wires at the low temperatures required for superconductivity in today's materials.) With DC transmission, though, there would be a 1% loss in power in the AC-DC conversion and another 1% loss in the DC-AC conversion.
2) Do we have to store huge amounts of electricity for this to work?
In Method#1, the answer is no. In Method #2 or #3, the answer is yes if the government wants to avoid paying out money every time that the price of electricity goes above a set point. This means that the government would be in the business of preventing blackouts, and this could be a good thing. Though, to avoid a price of, lets say 20 cents per kW-hr, the government would have to store enough electricity to last at least an hour. One hour of storage is roughly 422 GW-hr of storage, and might cost the government an up front capital cost of on the order of $30 billion dollars. (Not including the storage already on the electricity grid in the form of water stored behind hydroelectric dams.) If the government thinks that it has to store more than an hour of electricity in order to keep electricity prices always below the set target, then the estimate of the capital costs would go up roughly $30 billion for each hour of storage. (using a capital cost of $75 per kW-hr of storage for advanced, large-scale batteries)
3) Isn't electricity-backed currency just as arbitrary as fiat money?
While it might seem arbitrary to make electricity the backing for currency, there's a scientific reason to make electricity the backing for a currency. Electricity represents the purest form of 'work' (in the force times distance sense of work) Electricity is the near instantaneous capability to do work (such as moving a vehicle, powering household appliances, or running a desalination plant to generate drinkable water.) Money is the capability to do work, and so an electricity-back currency is the least arbitrary form of currency.
The other point I want to make is that knowing that the Federal Reserve can't arbitrarily print money (and hence decrease the purchasing power of the money that you earn) is a positive effect of creating an electricity-backed currency. A gold or silver standard is arbitrary because, if the Federal Reserve wants to inflate the money supply to make up for reckless spending in Washington D.C., then it can go out and mine for some more gold or silver. And since gold or silver have almost no intrinsic value (except perhaps as catalysts or conducting wires), the Federal Reserve would have the capability of devaluing the purchasing power of the dollar. And with a fiat money supply, the Federal Reserve doesn't even need to go through the effort of mining for more gold/silver in order to reduce the purchasing power of your dollar, they can just enact Quantitative Easing 2.0 and take your purchasing power from you.
4) Do other countries have control of your currency? Do exporting countries have control over your currency?
In method#1, the other countries have the same amount of control as they do right now. They can buy and sell US dollars just the same. In Method#3, since there would be electricity lines between countries, it might be possible for a country to dump cheap electricity into your country if there aren't rules outlawing this. But if a country dumped cheap electricity onto the market, this would cause the average electricity price to go down, allowing the Federal Reserve to print money, which would allow the Congress to either: a) lower taxes, b) pay off the deficit or c) increase discretionary spending. (There would be a lot of other side-effects of dumping cheap electricity would be impossible for anybody to predict, so remember that predicting the future of any action on the economy is impossible. It's all educated guesses based off of our understanding of history.)
5) What if the economy is in recession? What happens? How and why would the Federal Reserve remove money from the economy during a recession?
If the price of electricity is increasing because it is getting more expensive to generate electricity, then in an electricity-backed currency, the Federal Reserve has to remove money from the money supply by either: (a) selling assets from its balance sheet and then destroying the cash they receive for the assets, (b) raising interests raises, or (c) increasing the percentage of funds that banks must hold as cash. Regardless of what the Federal Reserve does, the members of Congress and the President can then decide whether to continue spending the same amount of money per year (by increasing the deficit) or to decrease spending so as to balance the budget. The Federal Reserve's actions do not dictate what actions the Congress and President make with respect to deficit spending. However, if the economy is growing and the price of electricity is dropping due to technological innovations, the Federal Reserve can print money to buy US Treasuries, allowing the members of Congress to be more carefree in how they spend money.
6) Will enacting an electricity-backed currency cause us to waste electricity or, even worse, will it force us to build a lot of polluting fossil fuel power plants?
First Question: I think that an electricity-backed currency in Method#1 will have almost no effect how much electricity we waste. In Method#3, we might be able to sell electricity at night to countries like China. Since baseload power plants often sit idle at night, this would be a way to not waste fossil fuels that are used to idle a power plant. We could be generating and selling the electricity to reduce our debt (provided of course that we think that we can make more money selling the electricity than was spent in building the new infrastructure to allow electricity trading between countries.)
Second Question: An electricity-backed currency would hopefully force us to separate good environmental regulations on power plants from bad environmental regulations on power plants. If the public convinces their legislators to implement a new environmental regulation, then the laws get implemented. The only thing that changes is that if the environmental regulation causes a large increase in the average price of electricity, then this would force the Federal Reserve to print less money each year (or perhaps even force the Federal Reserve to pull dollars out of the economy.) Either way, this means less money for Congress to spend, and then they would have to weigh the advantages and disadvantages of the new environmental legislation. Would it be worthwhile to implement the environmental legislation knowing that we either have to increase deficit spending, cut money from the budget or increase taxes? In the past, the Congress could implement environmental legislation knowing that the Federal Reserve could print money without having to borrow money, cut spending or increase taxes.
If the environmental legislation was worthwhile, then what you would see would be the eventual decrease in the price of electricity (before the Federal Reserve changed policy to keep the average electricity price the same). For example, let's use mercury emissions as an example. Initially, the price of electricity might increase as fossil fuel power plants have to spend money to invest in mercury clean up equipment. But slowly over time, the amount of money spent at hospitals might eventually decrease (due to less side-effects of mercury...Note: I'm not an expert in mercury, I'm just using it as an example of a hypothetical environmental legislation doesn't necessarily raise the price electricity in the long run.) As the expense of dealing with mercury side effects decreases, the price of health insurance might decrease, allowing the power plant to pay less for health insurance for its workers. After enough time, as the health care costs go down through the economy, the demand and the price of electricity might go down, showing us that this legislation had a win-win effect on the economy. (So, while the Federal Reserve might initially have to take money out of the economy as electricity prices increased, they could print money once the electricity prices decreased due to lower health care costs and perhaps due to lower demand for electricity from hospitals that don't have to treat patients with mercury side-effects.)
7) Will implementing an electricity backed currency disincentivize investment in electricity generation because the government is effectively putting a ceiling on electricity prices?
In Method#1, there is no change in incentive to build a power plant. In Method#2, the government is incentivized to build either electricity generation or electricity storage in order to avoid having to pay every time electricity prices go over the set point. Note that in Method#1 or #2, there is no promise that the government will buy electricity at a certain price. In other forms of an electricity-backed currency that I haven't discussed or though about, there might be an agreement that the government would guarantee a set price for baseload electricity, but this is not a requirement for an electricity-backed currency, and setting the price of electricity might be a bad policy to follow because the day-to-day price of electricity should be allowed to fluctuate. In Method#1, #2 or #3, the Federal Reserve is there only to maintain an average of 0% inflation, and not a day-to-day or hour-to-hour 0% inflation.
8) Couldn't you just make money by selling electricity?
Yup, that's the point. You can do that right now if you wished. You can buy or build a power plant and then sell the electricity on the market. There'd be no difference in an electricity-backed currency. In either case, if the price of building or buying the power plant is too expensive, then you can never pay back your loan, and then your company goes bankrupt.
9) Does every country have to agree to this idea? And if so, it doesn't seem fair to make poor countries use an electricity backed currency.
Method#1 or Method#2 of implementing an electricity-backed currency has nothing to do with other countries. So these Methods could be implemented in one country or in every country. It doesn't matter how many countries implement it. For Method#3 to work, there has to be an agreement between countries to be able to pay back a loan either in electricity or in currency. Mostly, this would allow the US to repay its debt to Japan or China in the form of electricity. (And given Japan's electricity shortage after the recent horrible earthquake. I wish we had electricity transmission lines already built so that we could be paying back our significant debt to Japan in the form of electricity. This would be a win-win for both the US and Japan! ...provided of course that the US didn't go into even more debt to China by building the transmission lines.)
10) Does this incentivize companies to create black-outs?
No, in all cases, there is no incentive for electricity companies to create black-outs. Think about it. How would a company profit from the black out? They could stop generating electricity, and then purchase electricity from the US government at 20 cents / kW-hr, but then what do they do with the electricity? They can't sell it for more than 20 cents / kW-hr because people would always buy their electricity from the government at 20 cents / kW-h. Instead, the US government would have a huge incentive to prevent black-outs (and this is a good thing!) The US government would be forced to invest in electricity storage and would want to avoid black-outs as much as possible.
During the Enron days, the company was able to profit from black-outs by first betting that the price of electricity would increase in California, and then convincing a power plant to go offline for maintenance. Wrong-doing like this is a hard thing to avoid in any economy (regulated or dereduglated, capitalist or socialist). Though, in the Method#2 case, because the price of electricity can't go over a certain price, there's no way for companies to make large profits by betting that the price of electricity will go up. (Because it can't go above a certain set point.)
11) How is an electricity-backed currency different from the Enron scandal? Doesn't deregulating an electricity market allow corrupt companies like Enron to flourish?
Having a Method#1 type electricity-backed currency has nothing to do with whether local electricity markets are regulated or deregulated. All the Federal Reserve does is change their policies in order to keep the average inflation rate of electricity at 0% per year. As well, Method#2 or Method#3 can be implemented regardless of whether the local electricity is regulated or deregulated. There has already been plenty written about the advantages and disadvantages of having a regulated electricity market, so I will not proceed further on this topic.
As mentioned above, in Method#2, there would be no way for a company to profit from black-outs. Regardless of the type of currency we have, there will be good companies and their will be bad companies. The point of the electricity backed currency is two fold:
1) Prevent the Federal Reserve from decreasing the purchasing power of our money
2) Ground our currency in something that has true, measurable value.
Please let me know if you have any other questions about the advantages or disadvantages of an electricity-backed currency and I would be happy to answer them in another post.