Context: This short essay is part of an ongoing series of works that reflect on how we can understand economic systems through an integrated lens of thermodynamic, money and information. The work is grounded in a larger body of theoretical bricolage, which is available separately. This short essay brings together two threads: (1) the insights of sovereign currency issuance on the one hand (in particular, the fact that the constraint isn’t liquidity or solvency per se) and (2) energetic realities that act as material limitations.
The insight that sovereign currency issuers are not financially constrained like households has, over the past century, been a consistent thread in non-mainstream economics. From Knapp’s State Theory of Money, to Keynes, through to Lerner’s functional finance and post-Keynesian accounts of endogenous money, these traditions dismantle the illusion that money is a scarce and finite commodity to be saved, hoarded, or run out of. Rather, money is a political institution, these days typically issued by the state or the banking system (latterly via State-sanction), and constrained not by solvency but by what it mobilises: real resources.
This shift in understanding puts to bed tired analogies about “balancing the books” or “living within our means.” These analogies distract and mislead. But it risks replacing one illusion with another, namely, that once financial solvency for a sovereign currency issuing state is no longer in question, the expansion of liquidity is mostly benign unless it exceeds some vague notion of “real resource constraints.”
The more serious constraint is not fiscal but thermodynamic, as I have argued elsewhere. It’s not about how much money can be issued, but what real surplus energy and materials exist that can be mobilised and transformed into use value. Financial claims, even when perfectly accounted for, are ultimately claims on future production. And that production is embedded in systems of energy, matter and time.
Liquidity as Systemic Flow
Much of the public conversation around money still relies on balance sheet labels like “government debt” or “private sector savings.” Even critical approaches often embrace these categories, correctly noting that what is called public debt is also a form of private wealth.
But this accounting view obscures or distracts from a more dynamic and consequential reality: what matters is not just what shows up on balance sheets, but how system liquidity is created, circulates and is drained. It also tends to ignore the distributional issues that are institutionalised, accounting for things on the basis of a high level of abstraction in which there are only two categories - public or private. I come back to this below.
Liquidity originates in credit creation - whether via government spending or commercial bank lending. It flows through various circuits: investment, production, consumption and increasingly, speculation. And it drains either permanently (taxes and loan repayments) or temporarily (asset conversions and central bank sterilisation operations). These flows shape both the structure and the direction of economic activity. They are not neutral. A surge in system liquidity, even if “balanced” in accounting terms, can concentrate wealth, inflate asset prices and deepen systemic fragility if it channels through speculative circuits. Alternatively, a surge in liquidity that is effectively channeled into the augmentation of existing production capacity or directed towards activities that may impact future energy conversion efficiency, expands available energy surpluses and improves the management of system entropy.
Thus, what we need is not just a reassessment of government solvency, but a systems approach to liquidity. Such an approach sees money as a dynamic, institutionally shaped flow within a broader ecological and energetic regime.
The Aggregation Problem: Not All Surpluses Are Equal
One common argument in sovereign money discussions is that “the government’s deficit is the non-government’s surplus.” While true at the level of macro accounting, this formulation can at times obscure more than it reveals. It suggests that the government’s deficit is “our” surplus in some generic sense. But who exactly is “our” or “us”?
Such framing aggregates away vital distinctions, such as those between households and financial firms, between different economic activities and sectors, between regions and between social classes. It tells us nothing about how liquidity enters the system, through which institutions, or with what effects. A fiscal deficit routed through financial markets may inflate asset prices or deepen leverage more than it supports productive investment or household welfare.
Put simply, not all surpluses are equal, and not all liquidity ends up building real capacity. Without a theory of how liquidity circulates and is absorbed, we risk reinforcing the very dynamics - rentierism, financialisation and systemic entropy-inducing inequality - that critics of austerity seek to overcome.
The Real Constraint: Surplus Energy and Material Throughput
While state money theories have succeeded in freeing us from the false constraint of solvency, they often stop short of grappling with the real constraint: energy. Economic systems require surplus energy, that is the energy left over after securing the energy itself, to do anything useful. This surplus energy is what powers production, transportation, food systems, infrastructure and even digital services.
As the energy return on energy invested (EROEI) declines for many energy sources, it becomes harder to sustain the same level of real economic activity, even if financial claims multiply. When liquidity expands faster than our capacity to generate and apply surplus energy, we do not get sustained prosperity; rather, this liquidity invariably is channeled into ever-expanding markets of fictitious capital. Fictitious capital are financial assets that represent claims on a future that increasingly cannot be delivered.
This is not a hypothetical concern. We already see it: soaring asset prices, expanding private debt, rising expectations of future returns that have no real energetic or ecological foundation. It’s not solvency that limits us; and it’s not liquidity that liberates us. The limits are entropy, energetic depletion and the inability to materialise nominal claims. Liquidity for itself is an interaction of signs with other signs; with today’s rights for tomorrow’s rights.
The problem is not just liquidity creation per se. Rather, it is ungoverned liquidity in a context of declining biophysical returns. In such conditions, liquidity increasingly flows into:
Financial arbitrage and speculation;
Over-valuation of long-dated assets;
Debt expansion divorced from productive investment; and
Unsustainable consumption in wealthy economies.
Even well-meaning public spending can reinforce these trends if not paired with structural transformation of production, distribution and energy systems.
Toward a New Framework: Systemic Exchange Value
What’s needed now is a new framing that embeds monetary analysis within biophysical realities. A theory of Systemic Exchange Value does this by integrating:
Money, as an institutionalised claim on future transformation;
Energy, as the material capacity for transformation; and
Information, as the coordination logic of systems.
From this perspective, money is not just a balance sheet entry; it is a vector. It is a directional force that can build, maintain or degrade capacity depending on its absorption and alignment with material and energetic conditions. Liquidity should be evaluated not only by its source and volume, but by what it activates, how it circulates, and whether it is metabolised into sustainable value. The real question is not “how much can we spend,” but “where will this money flow, and can the system absorb it productively and sustainably?”
The rediscovery of sovereign monetary capacity, whether in chartalist, functional finance, or post-Keynesian traditions, has cleared important intellectual ground. But we cannot stop there. We must evolve these insights to address the emerging realities and concerns of the 21st century: ecological entropy, energy depletion and systemic fragility.
We don’t need austerity, especially if it is rationalised by ideas of public money that are unrelated to the realities of how money comes into existence and circulates. But we do need discipline; I speak of a material and energetic discipline rather than a financial one. A theory of money that stops at balance sheets is useful, but is not enough. We need a theory of monetary ecology: one that recognises the real constraints, not of solvency, but of energy and entropy.