What Comes After The Current Financial System Ends?

Chaos? A return to gold? Bitcoin? Or, perhaps, something we haven't seen in 70 years?

You, too, can become a billionaire one day… Photo by Rob on Unsplash

Our current money system has multiple fatal flaws — hidden so far by a century of relentless economic growth. And while the Western (capitalist) economic system went through multiple major crises during its short lifetime, the end of material expansion poses an existential threat to it. The question thus poses itself: can an abrupt failure of the banking system realistically be prevented, and if not what, if anything, can be done after it happens?

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Let’s start by stating: I’m not a trained expert in finance or monetary theory, nor an economist by profession. All I have to offer is my humble experience in product development, manufacturing, international trade and sourcing. What financial pundits talk about so casually — manufacturing output, imports, exports etc.— I have seen it all with my own eyes. That doesn’t mean, however, that I did not educate myself in the topic of finance and economics. I started with trying to understand the fundamentals: not just revenues, profit, and debt, but material and energy flows as well; from ecosystems, mines, oil wells and supply chains to the landfill where everything ultimately ends up. This is how I came to the conclusion that our whole industrial-economic-political-financial system was dangerously unsustainable from the outset, and just got more complex and fragile ever since. As one of my favorite quote from Herb Stein, Senior Fellow at the American Enterprise Institute, summed it up:

“If something cannot go on forever, it will stop“

So take the following as a thought experiment — and definitely not as a financial investment advise. (For financial advice, always consult a professional.) What I have to offer is a radically different viewpoint, with purely an educational purpose: for you to gain a new insight into the unfolding great financial reset, the biggest turning point in living memory. But why do I say that? What makes our current monetary and trade system utterly unsustainable?

What is money, anyway?

To begin with money is not the economy. Nor a store of value. Not even a particularly good unit of account (1). It is merely a claim on energy and raw material inputs. If you get a hundred dollar bill today, you reasonably expect that you can use it to buy products and services tomorrow. (Albeit less and less with every passing month as inflation keeps eating it’s value away). All the products you purchase, however, from food to consumer goods, and services, from a haircut to legal advice, take energy and raw materials to make or machines to perform. Even raw materials themselves take energy to get — mines use diesel fuel and electricity to dig up the ores, smelters burn coal and natural gas to smelt metals. Energy is the economy. Money, therefore, is nothing but a claim on future energy use: a right to trigger a cascade of energy and raw material consumption on your behalf. Thus, if money couldn’t be used to buy products and services it would quickly lose its practical value and become worthless.

The wee little problem we face as a civilization is that the world economy is still 100% dependent on cheap, easy to access — but also rapidly depleting — fossil fuels and minerals to fulfill our demands. Each Dollar / Yuan / Ruble / Bitcoin you own, represent a call for the future extraction of these vital inputs. And while the amount of money circulating in the system kept increasing every year, the same could no longer be told about “our” finite resources. As long as we kept discovering new oil, coal or copper reserves (thereby increasing “our” resource base), and as long as we were able to produce more and more petroleum, anthracite and copper every year (thereby expanding annual supply) — a growing money supply was not that big of a concern. As we are getting closer and closer to the point where growth in world energy supply in general, and from oil in particular ends, however, the modern global monetary system faces it’s biggest challenge ever.

Problem is, our money supply keeps growing and in fact must grow, no matter what. Contrary to how the story is told by mainstream economists, money is loaned into existence by commercial banks. As the Bank of England website explains: “if you borrow £100 from the bank, and it credits your account with the amount, ‘new money’ has been created. It didn’t exist until it was credited to your account. This also means as you pay off the loan, the electronic money your bank created is ‘deleted’ — it no longer exists.” The problem with this system is that banks only create the amount borrowed, but not the interest to be paid on that loan. As a result there is now more debt in the world than money… Consequently if we had a fixed money supply, this interest could not be paid back while maintaining the amount of currency in circulation. Newer and newer loans are therefore needed to cover this expense and to avoid recession and debt defaults. Hence the ever increasing pile of private debt, now reaching 150% of GDP worldwide. As economist Steve Keen, Honorary Professor UCL and Distinguished Research Fellow at the Institute for Strategy Resilience & Security, University College London summed it up:

“Banks aren’t “mere intermediaries” who enable Savers to lend to borrowers. They are creators of both debt and money. Lending is not a “pure redistribution”, but a creation of new money and spending power. When lending turns negative — which happens when debtors are repaying debt, or going bankrupt and being unable to repay it — the economy crashes. This is what happened in both The Great Depression and The Great Recession.”

World domestic credit to private sector (% of GDP). Source: World Bank

Clashing with reality

It’s not particularly hard to see how this monetary system clashes with a planet of finite resources; as all its participants rely on an infinite growth of the material economy to pay back their dues. The system only survived this long (and in fact the only reason it seemed to be a good idea in the first place) because the global material economy just kept growing ever since capitalism was born. Once growth in world oil supply — the master resource, enabling the extraction and delivery of all other resources — stops (2), however, these monetary promises will become impossible to fulfill. And according to the data presented by Rystad Energy, a respectable research and energy intelligence company, we are really not far from that point. Simply put as oil fields mature, they deplete faster and faster year after year. Even though we still keep discovering new oil, global reserves are now maxed out, and these new additions will soon become woefully inadequate to offset the accelerating decline from ageing fields.

Source: IEA

Without adequate amounts of energy to keep the system going, and to honor all those claims, increases in gross domestic product (GDP) are simply reduced to an increase in the amount of money changing hands and the expansion of the worldwide credit bubble, not real economic growth. This is where we are right now: in a Wile E. Coyote moment — as Nate Hagens likes to call it — suspended in mid air, at the peak of our civilization’s trajectory. And while mainstream economists like to sell this as proof for “decoupling economic growth from material and energy use,” this situation is more akin to jumping off a cliff and stating: “I have decoupled my existence from the ground supporting me.” Unfortunately, saying “So far so good” after falling a hundred feet down won’t save anyone from the dire consequences of such a deed.

At the same time demand for more oil also seem to be quietly disappearing, generating what analysts call a‘stealth surplus.’ As global supply silently exceeds slowing demand, at least until supply begins to fall on the other side of the peak oil curve, the excess gets increasingly absorbed into China’s growing stockpile and into floating storage. As energy analyst Osama Rizvi noted: “When Chinese buying slows or storage fills, that hidden surplus will surface quickly — turning today’s calm into tomorrow’s glut.” This is what I and other analysts have been warning for years now: peak oil will be extremely deflationary (leading to falling prices) and not inflationary (that is, causing the cost of oil to climb and to stay high for long).

The reason lies in energy economics, and thus remains unseen by pundits focusing on the monetary aspects of the world economy alone. The Journal of Petroleum Technology has warned us in an article in 2023 already that the energy necessary for the production of oil liquids is growing at an exponential rate. While the portion of energy needed to be reinvested into obtaining the next barrel of oil represented 15% of the energy produced by burning that barrel of oil in the early 2020’s, this metric is projected to reach a proportion equivalent to half of the gross energy output from petroleum by 2050. This is nothing but pure energy cannibalism, materializing in an increasing amount of electricity, natural gas and diesel fuel being used up in oil extraction and processing, making an increasing portion of these energy resources unavailable for the rest of the economy. This not only contributes greatly to the ongoing (and worsening) cost of living crisis, but forces a range of businesses to compete for energy in oil extracting regions, such as Canada and the U.S..

Paradoxically, perhaps, this makes drilling for oil one of the greatest impediments to economic growth. “Problem” is, none of the “alternatives” can be made or maintained without oil (not to mention food production, construction or transportation) — leaving us in a “damned if you do, damned if you don’t” situation. Oil extraction, much like anything else we as a civilization do, is a self-terminating process once the costs start to outweigh benefits on a societal level. Too bad, that none of the “alternatives” are true alternatives, neither in terms of energy density and versatility, nor in their ability to be made without the use of oil.

Once the effects of peak oil make themselves felt across the broader economy, debt defaults and business failures will first become more likely, then inevitable. The supply of oil can be expected to go down hand in hand with the demand for (and supply of) real goods and services. Except for food and other essentials where inflation will remain persistent. After fifty years of not doing anything about the matter, we are now on a trajectory set by the forces of geology and physics, not monetary policy. Consequently, there is not much any central bank or government can do to turn things around, as energy cannibalization, a cost of living crisis and growing inequality slowly kills demand, and the economy begins to contract.

What comes next?

Now, that material growth slowly comes to an end, we need a new monetary system. One which has the potential to cope with a relentless contraction of the real, material economy caused by resource depletion and a lack of demand. The breakdown of globalization via trade barriers, the rapid spread of alternative (non-dollar) payment systems, the increased risk (uncertainty) all points toward a meteoric loss of resilience. I believe it’s only a question of time when the Big One hits. It might be due to the AI-bubble bursting, or due to another yet unseen factor emerging. It can also happen as a result of a thousand little cuts, none big enough in and of itself, but collectively proving to be devastating.

“The financial system has become a truly Byzantine structure of cross-collateralization, in which nobody really knows which component, perhaps small in itself, could, by failing, bring down the whole house of cards.” — Tim Morgan

With our financial and political elite still in complete denial, though, one thing seems to be sure: the economy has to fall off the cliff first, before any meaningful change could happen. As much as I’d love to, I simply cannot see how this ship could be turned around before it reaches the waterfall. Especially with such a clueless crew onboard. Precisely how and when that fall happens, or what comes after is anyone’s guess at this point — and this is where we enter highly speculative territory. Nevertheless, I still find it useful to use our imagination beforehand, exploring what is potentially possible, plausible or even likely. Again, take nothing written below as an investment advice, prediction or advocacy for certain policies (let alone ideologies). Rather, use this as a mental exercise to hone your imaginative skills, and to craft your own way forward.

Now, back to our story. One of the many possible crash scenarios I see the following as the most likely. After hitting a tipping point in private (corporate and household) debt burden a cascade of defaults begins and liquidity (cash and other quickly salable assets) dries up like rain on a hot summer day. Banks and large corporations alike stand in long queues asking to be bailed out. In response to these events a bank holiday is put in place, upending all transactions in a matter of hours (or even minutes). No payments are allowed beyond a very small amount (such as buying groceries). Access is denied to savings accounts. Trade on the stock market also comes to a halt. Governments around the world begin to scramble for (or start to implement right away) their plan B. But what could that be…?

Returning to a gold based currency, or adapting Bitcoin, maybe? Perhaps, but in my opinion it will not suffice, as none of these “replacements” for the now rapidly failing basket of currencies could prevent food inflation, nor a general economic depression. You see, this is not purely a monetary crisis but a crisis of energy supply — necessitating a rapid reorganization of priorities. The question is not what we use for payment, but how do we allocate a shrinking amount of energy and raw materials among the participants of the economy the best way we can. If the supply of energy — and as a consequence the supply of products and services — begin to shrink, while the amount of money in circulation stays the same, inflation is sure to follow. At least in theory.

Practically, returning to a gold standard cannot and will not solve the biggest ailment of the economy — killing demand and pushing entire industries into a deflationary crisis — wealth inequality. In fact, it can only make it worse. Spending by the top 10% in America is already about half of all consumption. Those who will have the most gold / Bitcoin will thus not use it to buy more goods, as a) they could not consume more, and b) non-essential goods will only get cheaper with time as a race to the bottom continues. As a result the wealthy will end up hoarding all the gold (or Bitcoin), causing a scarcity of money. Those who need money the most — to buy groceries and pay for rent — however, will not have the means to obtain it. You see, in a shrinking economy production facilities, mines, factories will have to close in droves — due to the combination of a liquidity and debt crisis, a lack of demand (due to a worsening cost of living crisis), and an increase in input costs (due to deteriorating material supply). The coalescence of these trends, on the other hand, could easily turn a deflationary recession into an outright economic depression, destroying even more productive assets and potentially leading to a state failure.

An active management of the money supply seems to be necessary at this point to navigate the crisis ahead. Dropping the reins and letting “free markets” to work things out, can only create more chaos. Make no mistake, I’m not against freedom, nor for a state controlled economy. All I’m suggesting here is that some kind of regulation of the money supply and wealth distribution will have to be done, if we are to avoid a violent revolution, chaos or tyrants from emerging. This level of wealth inequality and debt burden must be dealt with and left behind for good.

To do that we would need a mechanism to destroy money when there is too much of it, and creating then donating it to those in need. Could a modern debt jubilee — as suggested by prof. Keen — achieve that? Partially, yes. Creating money to enable households to drastically reduce their debt levels could relieve a huge burden on families and the economy alike. With that said, it could not recreate the economic conditions of the past: forgiving debts cannot recreate cheap resources, nor increase the returns on energy invested. So while it is a good starting point, we will need much more than that.

Then can a programmable central bank digital currency (CBDC) save the day? Well, governments around the world would like to think so, that is for sure. So, most likely they will try to implement it using emergency powers once the turd really hits the fan and starts spraying around violently in the room. But what is a CBDC? In a nutshell it’s a digital form of a country’s fiat currency with built-in rules that can automate transactions and control how money is used. These programmable features can be used for purposes like government stimulus payments that expire after a certain time or are restricted to specific goods, streamlining financial aid, and improving compliance. There are, however, two major problems with such a digital currency. First, there is the lack of trust from the population. ‘Self destroying coins in my purse? No thanks!’ This is why it would be hard to push such an idea through in ‘peacetime’… During war, or a financial meltdown? Well, that’s a completely different story.

The second, and in my opinion much larger, issue with CBDC-s is their dependence on a stable electric grid. Initially, when the financial crisis hits — but when fossil fuel and electricity production is still adequate — issuing a digital currency might seem to be a good idea to mitigate the economic decline and chaos. However, as resource extraction continues to contract worldwide due to the depletion of easy-to-get coal, oil, natural gas and metal ores, and as the grid becomes ever more fragile due to an increased share of “renewables” and a lack of maintenance (let alone expansion (3)), black-outs will increasingly become commonplace. Now, how would you operate such an elaborate network as a nation’s payment system, when power goes out all the time? Even if you hook central bank servers on a nuclear power plant, individual stores will certainly not have that luxury and will have to accept cash in case of a power outage. Oh, and should that outage become countrywide, as it happened in April, 2025 in Spain, even nuclear power plants will have to be disconnected to avoid dangerous imbalances on the grid.

That leaves us with the only option with a proven track record of managing scarcity during an economic collapse or war: rationing. You know, coupons on paper. I know it sounds low-tech, and that it brings back bad memories, but at least it works. ‘Sorry, you could buy only so much gas, and Doritos this month!’ Done properly (avoiding fraud or the appearance of exceptions where the rich buy whatever and whenever they want) rationing can and does reduce inequality and lowers the chance of a rebellion. However, the already deep lack of trust and the general disbelief among the citizenry that we have indeed reached the end of growth, and that previous levels of prosperity were wholly unsustainable, will still create huge issues. That makes my thoughts circling back to war, as the ultimate tool to justify just about anything... I can, but hope I’m wrong here.

Conclusion

The coming financial meltdown, will fundamentally shake western citizen’s belief in capitalism and free markets. Once the complete failure of capitalism becomes clear, we will, just like the soviets did three decades ago, find ourselves in a state of shock and disbelief: what did went wrong? Besides the economic chaos, it will be this profound loss of meaning and the failure of previous narratives that will wreak the biggest havoc. As fellow collapsologist Dave Pollard put it:

“I think collapse is beginning to be not only a collapse of the systems of our industrial civilization, but a collapse of many of the ideas that underpin it. Ideas that were well-meant and hopeful and promising, but which on a closer look have turned out to be dubious, simplistic, and naive.”

Industrial capitalism is self-terminating in front of our eyes, just like communism did in the 1980’s. Not in a big bang, but bit by bit in a hyper-normalized fashion, until the Jenga tower finally falls. And while most watch in disbelief, those who were paying attention knew this all along. I know this sounds harsh, or outright “doomerish”, but those who think otherwise might want to at least play with this idea, before a major crisis puts everyone in emergency mode.

Until next time,

B

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Notes:

(1) Having a system of stable and convertible units of measure is essential to do any engineering job. Money — and especially prices — are, however, anything but stable. The price of wooden beams, for example, can move up or down one day to the next, even though their length, width and other properties did not change an iota. Using prices (and thus money) as a unit of measure is like having to use an elastic measuring tape, the length of which changes by the day. Just imagine building a house, where the walls you erected and measured yesterday, measure 2 feet higher today, then one feet shorter an hour later… In such a system it would be impossible to build or make anything resembling a useful product.

(2) While oil supply still seems to be growing, at least on paper, these new barrels added deliver less and less punch — i.e.: real economic growth enabled by diesel fuel.

(3) Insufficient investment in grid modernization is already causing issues like critical congestion and blackouts in Europe. Countries there, like the Netherlands, are already experiencing power cuts and energy consumption austerity measures due to rapid clean energy adoption without commensurate grid infrastructure development.