Why Our Financial System will Soon Collapse

Global warming will permanently and irreversibly shrink the global economy, causing complete financial system collapse.

Financial collapse will occur much sooner than most expect, because of the financial system's severe sensitivity to low-to-negative nominal GDP growth.

Our modern financial system is built on the premise of perpetual growth. It is fundamentally incompatible with a future of permanent decline, no matter how well-managed or gradual.

As climate change permanently erodes our ability to produce goods and services, the entire architecture of global debt and asset valuation faces an existential crisis.

Part 1: The End of "Potential" Output

The economic threat of climate change is rooted in the physical destruction of the planet's productive capacity. Yet, the connection between the physical world and financial world is lost on most economists.

We are accustomed to economic cyclicality - temporary recessions between long periods of growth - where output always returns to an ever expanding potential.

As climate destruction worsens, this paradigm will eventually end. Eroding physical capacity will trigger structural economic retrenchment where humanity's ability to produce goods and services is continuously reduced.

Climate change permanently erodes the core components of economic output: capital and labor.

Physical climate risks (such as intense storms, floods, and wildfires) increase the rate at which infrastructure is destroyed. When roads, commercial ports, factories, and power grids are routinely and repeatedly damaged, the existing capital stock is permanently diminished . This destruction lowers the profitability of long-term investments, locking the economy into a cycle of stagnation.

Economic stability and growth need reliable ecological and logistical systems. Climate impacts, particularly heat stress and extreme weather, introduce massive instability into global supply chains.

Disruptions thousands of miles away cascade through interconnected international trade routes, causing widespread stagnation. We experienced a version of this during the pandemic.

The scale of the infrastructure and logistical destruction is projected to reach tens of trillions by mid century.

The health burden of a changing climate also directly erodes labor. Rising temperatures lead to lower output per worker due to thermal stress. Human illness and deaths will rise due to undernutrition, malaria, diarrhea, and heat stress. Eventually, people will simply starve.

The sustained loss of "human capital" (a cold hearted term, don't you agree?) translates into a chronic, non-recoverable contraction of output from labor.

Models now estimate that the damage will be far greater than previously thought and non-linear.

For every degree of warming, the world is estimated to suffer a 20% decline in global Gross Domestic Product (GDP) in the long run. The current trajectory of fossil fuel useis leading to a 3 degree temperature rise potentially by mid-century. Do the math.

Part 2: The Structural Fragility of Growth-Dependent Finance

Why does a permanent economic decline pose such an immediate threat to the financial system? Because the modern architecture of finance is structurally dependent on perpetual growth.

Our global financial system depends on continuous creation of credit. Banks lend out most of the money deposited with them, effectively creating new money. This system is based on maximizing debt, which is essentially a claim on future economic output.

This system only works if the future economic pie is always expanding. Repaying a $100 loan with $110 requires the additional $10 to come from somewhere: economic growth.

Without potential economic growth above the long term rate of interest, lending seizes and existing debts lose a significant amount of value. This would likely occur as soon as faith in future growth is undermined, becoming a self-fulfilling prophesy. While there will be attempts at normalization, over the long run - long before the physical damage to the world is complete - the financial system will cease to function. Without a functioning financial system, payrolls stop, shelves go bare and life savings are wiped out.

When structural decline hits, a devastating chain reaction known as the debt-deflation spiral begins.

​Incomes Contract: As the physical economy shrinks (due to lost capital and labor), incomes across society contract.

Debt Becomes Unserviceable: Debts become progressively harder to repay, leading to mass defaults and bankruptcies.

Money Supply Shrinks: Old debts are paid off or defaulted upon faster than new credit is issued, causing the money supply itself to contract, making trade and payments nearly impossible.

Asset Values Plunge: Since assets like homes, stocks, and bonds are valued based on expectations of future income and growth, a permanent decline in future output causes a massive, plunge across all financial assets.

This is the critical difference between the coming climate shock and a standard crisis like the 2008 Global Financial Crisis (GFC). The GFC was largely a liquidity crisis - a fear over questionable collateral (sub-prime mortgages). The climate-driven shock is a universal collateral destruction crisis. Since physical capital is destroyed and future productivity shrinks, all assets lose value permanently, moving the system instantly from mere illiquidity to insolvency.

Persistent negative GDP growth invalidates the system's core solvency assumptions, pushing the threshold for systemic collapse effectively near zero.

Was this always the case? The research indicates that the financial system's absolute dependency on continuous growth is a modern phenomenon.

In pre-industrial systems, it was expected that economies would naturally settle into a "stationary state" (an end to expansion). Before the advent of fiat currency and fractional reserve banking, growth was constrained by physical limits like finite gold supply or land availability. The modern system deliberately removed those physical constraints to enable unlimited credit creation, making it uniquely fragile when confronted by the absolute physical limits of the planet.

Adding to this fragility, most developed countries today carry high levels of debt. This severely limits the state’s ability to react to crises and prevent future crises. Large debts structurally incentivize expansionist growth to service the debt - a strategy incompatible with permanent decline.

Part 3: Life in Decline

Early in the decline the average person and business, experiences pervasive operational failure and rapid wealth loss. This will happen much earlier than the physical collapse.

Businesses face escalating costs, chronic supply chain disruptions, and rapidly collapsing returns on investment as physical risks increase the cost of maintaining fixed capital (e.g. factories and equipment).

The debt-deflation spiral makes it impossible for many firms to service debts, leading to widespread and accelerating bankruptcies.

Household wealth tied to appreciating assets (housing, stocks, pensions) plunges globally as the physical output backing that collateral is permanently destroyed. Job security vanishes amidst mass business failures.

Over time, the perception of real value shifts away from debt-fueled consumption toward essential, resilient activities: localized food production, infrastructure maintenance, and essential care work. Too little too late, however, these activities are merely scrambles for survival.

​In this environment, traditional macroeconomic policy tools would fail, leading to an unprecedented policy dilemma.

Central bank monetary policy, as a countercyclical tool, is designed to stimulate demand during temporary downturns. When the shock is structural - a permanent reduction in supply - stimulating demand cannot increase real output. Instead, attempts to inject money against a shrinking resource base risk triggering hyperinflationary stagflation. We got a taste of this problem during and after the pandemic when a supply-constrained world clashed against massive monetary stimulus, triggering a wave of inflation we're still battling today.

Governments are also powerless. They typically respond to crises with massive deficit spending and debt accumulation. However, in a negative growth environment, running deficits only compounds a sovereign debt burden that cannot be serviced by future shrinking output. The vast spending required for necessary climate adaptation becomes impossible to finance, eliminating the critical financial space needed to manage the decline and accelerating the transition to chaotic collapse.

Part 4: The Path to the Steady State

Would permanent decline eventually stabilize? Yes. Since human economies are constrained by the planet’s biophysical limits, economic activity will balance when physical capacity aligns with output. The permanent decline is therefore not the endpoint, but a transition phase toward a stable equilibrium state - the Steady-State Economy (SSE).

The SSE is defined as an economy with a constant stock of physical wealth (capital) and a constant population size, meaning it stops growing materially.

Dont let that get your hopes up for some kind of post-collapse utopia. In all liklihood, after all the financial and then physical destruction, the planet's new steady state would physically support a human population of approximately zero.

Thank you for reading.

My name is Sarah and I run Collapse2050 by myself. It is a place for the collapse-aware community to quietly reflect and connect.

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Sarah