One of the interests I’ve developed since falling down the rabbit’s hole of peak oil, societal collapse, and ecological overshoot is how economics and, in particular, the monetary systems humans use are impacted by and, in turn, reinforce aspects of these phenomena.

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I hold no educational background or training in economics at all except for that which I received in a few under/graduate anthropology/archaeology courses, where modes of exchange (i.e., reciprocity, redistribution, and market exchange) were discussed and studied to a limited extent. One thing that I have found interesting is that from an anthropological/archaeological perspective human history has for 99% of its existence been dominated by reciprocity and redistribution systems; market exchanges have been a relatively recent phenomenon–a fragile outlier as it were. It’s also noteworthy to realise that pre/history shows that when energy surpluses shrink and complex redistribution schemes fail, societies tend to shift back towards localised systems of reciprocity.

With that framing in mind, and the fact that my understanding of economics and our monetary systems should be considered fundamental at best, this Contemplation aims to trace the causal chain from modern money to ecological overshoot and back again, because the relationship is not passive. The monetary systems currently employed by humans appear to be not just a neutral scoreboard; they are an active and increasingly significant accelerator of thermodynamic drawdown. All human technologies (including social ones such as our monetary systems) are themselves expressions of energy transformation — tools that amplify our power to extract, transform, and consume resources, but always at the cost of increasing system complexity and accelerating the depletion of high-quality energy and other resource stocks. Conversely, thermodynamic limits are the structural breaker that will eventually shatter the monetary logic.

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The Mechanics of Modern Money
Most people assume governments create all the money that exists in modern human societies. That is not how it works, however. In our current fiat systems, over 90% of the broad money supply (M2/M3) is created by private commercial banks when they issue loans. A mortgage or business loan does not draw from existing deposits as fractional-reserve banking lore leads most to believe; the bank simply credits the borrower’s account with new digital money created from thin air. The loan creates the deposit. The deposit becomes purchasing power. This is the primary mechanism of money creation in modern economies.

Shadow banking and retail credit operate differently but are still important to my analysis. Shadow lenders — hedge funds, money market funds, private credit funds, and non-bank financial intermediaries — cannot create new deposit money as commercial banks can, but they amplify the credit cycle by purchasing and securitizing bank-issued loans, extending credit directly through private debt markets, and providing wholesale funding to banks. Retail businesses issuing credit — store cards, buy-now-pay-later schemes, and consumer installment plans — similarly extend purchasing power without creating new money. These entities increase the velocity of money, amplify leverage, and expand the total stock of debt claims in an economy. Their institutional relationships and systemic implications are examined more fully in the following section.

This entire architecture matters because every loan or issuance of credit — whether from a commercial bank, a shadow lender, or a retail credit provider — comes with interest. The bank or lender creates the principal (in the case of commercial banks) or extends existing money (in the case of shadow/retail), but none of them create the interest needed to repay the debt. To pay back both principal and interest, borrowers must obtain money that exists somewhere else in the economy. That money, in turn, can only come from other borrowers taking out new loans or other forms of credit, further expanding the total debt stock. The system therefore has a structural dependency on perpetual growth in total debt and credit. If total lending and credit issuance ever contracts, the money supply contracts with it (through loan repayment and deleveraging), triggering defaults throughout the debt superstructure.

Institute of International Finance

Perpetual growth in debt requires perpetual growth in nominal gross domestic product (GDP), which historically requires perpetual growth in resource throughput, particularly of energy. Here occurs the first point of friction with physical reality.

The Symbiotic Relationship Between Banks, Shadow Lenders, Retail Credit, and the State
The previous section outlined the operational mechanics of how money and credit are created. This section examines the deeper institutional relationships that drive this system — specifically, the co-dependency between the private credit ecosystem and the state, and why this structure actively perpetuates the growth imperative despite its biophysical impossibility.

Private commercial banks are the operational engines of monetary expansion. They decide, case-by-case, who receives credit, for what purpose, and at what interest rate. Their fiduciary duty to shareholders (and other profit incentives) compels them to maximise lending, which directly translates to maximising the creation of debt-claims on future energy and resources. They are profit-seeking corporations, not public utilities; they do not operate with ecological conscience or thermodynamic awareness. Their survival depends on continuous circulation and expansion of credit — which is perhaps the reason many (most?) who oversee and benefit from this system deplore deflation and speak of its potential to destroy economies.

Of course, commercial banks do not operate in isolation. The shadow banking sector has grown enormously since the 1980s, and in some jurisdictions now rivals or exceeds the traditional banking sector in total credit extended. Retail credit providers have similarly become significant players. As noted in the previous section, these entities amplify the credit cycle by increasing the velocity of money and expanding the total stock of debt claims. Their crucial role in the broader financial ecosystem cannot be overstated.

While governments are not responsible for the vast majority of money creation, they are not passive enablers of this entire credit superstructure. They are active, dependent partners. Modern states are addicted to the credit that the entire financial ecosystem creates because economic growth is the primary driver of tax revenues, which fund state operations, social programmes, and sovereign debt service — the expansion of which helps to support the narrative that governments are the primary reason for economic prosperity. If the credit system seizes up — whether through bank lending contractions, shadow banking liquidity freezes, or retail credit defaults — the money supply contracts, tax revenues collapse, and the state faces a fiscal crisis. The state needs the entire credit apparatus to keep expanding just as much as the financial sector needs the state’s backing.

This backing takes several forms. Central banks act as lender of last resort, bailing out failing commercial banks during crises. Shadow banks, however, exist in a grey area; they often lack direct access to central bank facilities, which makes them more vulnerable to runs and fire sales, but in practice central banks have repeatedly extended emergency lending to shadow banking entities during crises — as seen in 2008 and 2020 — effectively backstopping the entire credit superstructure.

Governments provide deposit insurance, preventing runs on commercial banks. They accept bank-created deposits for tax payments, which gives private money its fiat value. Central banks also set the base interest rate, effectively gifting banks access to virtually free reserves that can be leveraged into loans. For shadow banks and retail credit providers, the state’s role is more indirect but no less crucial: central bank rate policy influences their borrowing costs, and state-backed bailouts during crises insulate them from the full consequences of their risk-taking–thus the refrain from an array of critics that “gains/profits are privatised while losses are socialised”.

These are not passive acts of enabling; they are active state subsidies to the entire private credit ecosystem.

Conversely, governments and regulators set capital requirements, leverage ratios, and lending standards — rules that determine how much credit can be extended relative to underlying collateral and reserves. Historically, they have consistently loosened these rules during booms (encouraging more lending) and only tightened during busts (reacting to damage already done). The shadow banking system, in particular, has often been less regulated than traditional banks, allowing it to expand credit more aggressively during booms and collapse more catastrophically during busts — a pattern that makes the entire financial superstructure more unstable. This pattern makes the state a pro-cyclical accelerant rather than a neutral referee.

In thermodynamic terms: commercial banks create the money; shadow banks and retail credit multiply its velocity and leverage; and the state — by guaranteeing the system, providing emergency backstops, and setting regulatory permissiveness — removes the natural brakes. Neither commercial banks, shadow lenders, retail credit providers, nor the state can survive without the others in the current structure. If the government withdrew its backing tomorrow, the fractional reserve system would collapse within days, and the shadow banking superstructure would unravel even faster. If commercial banks ceased lending tomorrow, the shadow and retail credit superstructure would lose its foundation, the government’s tax base would evaporate, and sovereign debt would become unserviceable.

They are multiple heads of the same hydra, all chasing an infinite horizon on a finite planet. This symbiotic trap is not a conspiracy; it is a structural outcome of how modern economies have chosen to organise money, credit, and sovereignty. It is also the institutional foundation upon which the thermodynamic consequences described in the following sections are built.

The Thermodynamic Constraint and Odum’s Maximum Power Principle
The First Law of Thermodynamics states that energy cannot be created or destroyed, only transformed. When a central bank creates $1 trillion digitally, it creates zero new joules. That trillion, however, becomes a potential claim on existing and future energy transformations.

The Second Law states that every transformation disperses concentrated energy into diffuse waste heat. Every barrel of oil burned, every ton of coal consumed, is an irreversible drawdown of a finite stock of ancient sunlight. This applies no less to “renewables” and other so-called non-/low-carbon energies.

Solar panels, wind turbines, and battery storage are not energy sources in themselves; they are energy transformers. They require hydrocarbons to mine the raw materials, manufacture the components, transport them to installation sites, maintain them over their operational lifespan, and ultimately decommission and recycle or dispose of them. The net energy of renewables is the surplus after subtracting all these hydrocarbon-fuelled inputs. As high-energy return on investment (EROI) oil declines, the energy cost of building and maintaining the renewable infrastructure rises, compressing the net surplus available to society. Renewables are not a replacement for hydrocarbon fuels in thermodynamic terms; they are a way to extend the useful work from the remaining hydrocarbon inheritance, but they cannot escape the Second Law’s dissipation or the finite stocks of rare earth metals and other materials required for their construction.

Nuclear power, while producing no direct CO₂ emissions during operation, faces a similar thermodynamic and material constraint. Uranium and thorium are finite resources, and their extraction — from conventional mining to in-situ leaching — requires significant hydrocarbon-fuel inputs. The construction of nuclear reactors demands vast quantities of high-grade steel, concrete, and specialized alloys, all of which are energy-intensive to produce. Enrichment of fuel, particularly for light-water reactors, consumes enormous amounts of electricity, itself derived largely from hydrocarbon or existing nuclear sources. Over the reactor’s lifetime, maintenance, fuel fabrication, waste management, and eventual decommissioning all draw from the same shrinking pool of net energy.

The EROI of nuclear is debated, but even optimistic estimates place it below historical oil and coal; when uranium grades decline and enrichment costs rise, the net energy return compresses further. Moreover, nuclear waste remains a multi-millennial liability requiring active cooling and secure storage, both of which demand continuous energy input and institutional stability — a condition unlikely to hold in a simplifying world. Like renewables, nuclear is not a perpetual motion machine; it is a way to convert one finite geological stock into usable power, with its own thermodynamic overhead and entropy debt.

Odum’s Maximum Power Principle (MPP) observes that natural selection favors systems that capture the most energy and convert it to the most power, rather than those that are merely efficient. Our monetary system is the ultimate expression of this principle. Cheap credit allowed energy companies to finance extraction projects with marginal or negative EROI — deepwater drilling, tar sands, fracking — that would have been unviable under strict biophysical accounting. The same logic applies to nuclear and renewable megaprojects, which also depend on low-interest debt to cover enormous upfront capital costs. The debt forced the extraction. The extraction maintained gross volume. But the net energy surplus per unit extracted declined steadily. We’ve spent more joules to get each new joule, satisfying the MPP demand for total throughput while eroding the surplus that actually runs the rest of the economy.

Technological efficiency, often touted as the solution to resource depletion, historically follows Jevons Paradox: gains in efficiency reduce the cost of energy services, which incentivises greater total consumption, not less. More efficient engines led to more cars; more efficient lighting led to more illuminated spaces; more efficient computing led to exponentially more data centers. Our monetary system, by lowering the cost of credit, accelerates this cycle, funding ever-larger technological infrastructures that lock us into higher gross throughput while eroding net surplus. Each new technology promises to “solve” the energy problem, but in practice it becomes another way to maximise power drawdown — another tool in the service of Odum’s principle, not a departure from it.

Catton’s Overshoot and the Ghost Acres
Catton described overshoot as a population and infrastructure drawing down “ghost acres” — resources that existed in the past (hydrocarbon fuels) or that are being drawn from the future (soil depletion, aquifer drawdown) — to support, temporarily, a population above sustainable carrying capacity.

The monetary system compounds this effect. Debt issued today is a claim on future production. But future production itself depends on future energy availability. When we draw down high-EROI oil to finance present consumption and debt service, we are effectively mortgaging the net energy of future decades. The interest on that mortgage requires even more future energy extraction. Catton’s ghost acres are not just physical; they are financial. The claims pile up faster than the underlying energy surplus can service them.

Tainter’s Diminishing Returns and Financial Complexity
Tainter argued that societies invest in complexity to solve problems. Each added layer of complexity — bureaucracy, infrastructure, military, legal frameworks — costs energy to maintain. Initially, the benefit exceeds the cost. Eventually, the marginal return drops to zero, then negative.

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Applied to our monetary system, the complexity is the global financial architecture itself: derivatives, cross-border settlement systems, high-frequency trading algorithms, regulatory frameworks, and the entire central banking apparatus. This architecture does not produce food or energy. It consumes massive amounts of electricity and human labor simply to operate.

As net energy declines, maintaining this financial superstructure consumes an increasing share of the shrinking surplus. The cost of managing the claims begins to exceed the real wealth the system generates. At that crossover point, the complexity ceases to be a solution and becomes a drag.

In Part 2, the analysis shifts from the mechanics and institutional drivers of our monetary system to the dynamic consequences of these structures when placed against biophysical limits. I will lay out four interconnected feedback loops that show how the symbiotic trap of state-backed credit creation operates in motion: debt driving low-EROI extraction, falling net energy trapping monetary policy, ecological overshoot destroying financial collateral, and technological complexity becoming unserviceable. From there, I will turn to the anthropological baseline — examining how pre-market societies organised exchange without perpetual growth, how previous civilisations navigated collapse, and why the current global overshoot presents conditions unprecedented in scale and severity. The conclusion will address the boundary conditions of our predicament and the question of what the ruling elite are likely to do as consequences become increasingly apparent.

Relevant articles of interest:

What’s Really Driving the Global Economic Crisis is Net Energy Decline — resilience

Net Energy Decline

The Engineered Barrel — Part I: Matt Simmons, aging reservoirs, and the new physics of global oil — Oil & Gas 360

Are Energy Markets Tighter Than Investors Realize

The Die Is Cast — Energy And Financial Markets Upset Inevitable

Energy Cliff, Supply Chain Shock: The Toxic Cocktail Behind The Urgent Push For An Iran Deal | ZeroHedge

The Fed Is Quietly Abandoning Its 2% Inflation Target

Strategic Oil Reserve Nears Collapse… US Must Choose: Guns or Butter

The Mask and the Barrel

Top Economist: U.S. Debt Bomb Is About to Wreck the Stock Market

EROEI — Running out of Easy — by Seeing Clearly

April Money Supply Growth Hit a 49-Month High. And Prices Soared. | Mises Institute

A Weakening AMOC Left One Blue Scar On The Map — And Its Consequences Run Pole To Pole

Why the Bank of Japan’s Decades Old Manipulation is Finally Coming Apart

We Don’t Need the Real World, We Only Need Money

Debt Tsunami: The Alan Greenspan Legacy | The Epoch Times

The Coming Return Of Commodity-Backed Money | ZeroHedge

#323: They first make mad | Surplus Energy Economics

Special Offer
If you have made it to the end of this Contemplation, I have an offer for you. Send me an email at olduvaitrilogy@gmail.com requesting a copy of Part 1 of my trilogy and I’ll fire off a PDF of it to you for your “fictional” reading pleasure. If you like the beginning of the tale, please consider ordering the trilogy here: Purchase Book(s) — Olduvai.ca.

What is going to be my standard WARNING/ADVICE going forward and that I have reiterated in various ways before this:

Only time will tell how this all unfolds but there’s nothing wrong with preparing for the worst by ‘collapsing now to avoid the rush’ and pursuing self-sufficiency. By this I mean removing as many dependencies on the Matrix as is possible and making do, locally. And if one can do this without negative impacts upon our fragile ecosystems or do so while creating more resilient ecosystems, all the better.

Building community (maybe even just household) resilience to as high a level as possible seems prudent given the uncertainties of an unpredictable future. There’s no guarantee it will ensure ‘recovery’ after a significant societal stressor/shock but it should increase the probability of it and that, perhaps, is all we can ‘hope’ for from its pursuit.

If you have arrived here and get something out of my writing, please consider ordering the trilogy of my “fictional” novel series, Olduvai (PDF files; only $9.99 Canadian), via my website or the link below — the “profits” of which help me to keep my internet presence alive and first book available in print (and is available via various online retailers).

Attempting a new payment system as I am contemplating shutting down my site in the future (given the ever-increasing costs to keep it running).

If you are interested in purchasing any of the 3 books individually or the trilogy, please try the link below indicating which book(s) you are purchasing.

Costs (Canadian dollars):
Book 1: $2.99
Book 2: $3.89
Book 3: $3.89
Trilogy: $9.99

Feel free to throw in a “tip” on top of the base cost if you wish; perhaps by paying in U.S. dollars instead of Canadian. Every few cents/dollars helps…

https://paypal.me/olduvaitrilogy?country.x=CA&locale.x=en_US

If you do not hear from me within 48 hours or you are having trouble with the system, please email me: olduvaitrilogy@gmail.com.

You can also find a variety of resources, particularly my summary notes for a handful of texts, especially William Catton’s Overshoot and Joseph Tainter’s Collapse of Complex Societies: see here.