Chapter 2
The Big Cycle of Money, Credit, Debt, and Economic Activity
Published 04/23/20
Note: To make this an easier and shorter document to read, I tried to convey the most important points in simple
language and bolded them, so you can get the gist of the whole thing in just a few minutes by focusing on what’s in
bold. Additionally, if you want a simple and entertaining 30-minute explanation of how what a lot of what I’m
talking about here works, see “How the Economic Machine Works,” which is available on YouTube.
This article, along with others in this series, are an early preview of a book I’m working on called The Changing
World Order. I will publish the book this fall but felt that, as I was writing it, the learning I was getting from my
research was very helpful in understanding what is happening right now, so I wanted to pass it along to you as a
work-in-progress. If you’d like to sign up to receive updates on this series, go to principles.com. You can also pre-
order the book at Amazon or Barnes and Noble.
Chapter 2: The Big Cycle of Money, Credit, Debt, and Economic Activity
Because what most people and their countries want the most is wealth and power, and because money and credit
are the biggest single influence on how wealth and power rise and decline, if you don’t understand how money and
credit work, you can’t understand the biggest driver of politics within and between countries so you can’t
understand how the world order works. And if you don’t understand how the world order works, you can’t
understand what’s coming at you.
For example, if you don’t understand how the Roaring ’20s led to a debt bubble and a big wealth gap, and how the
bursting of that debt bubble led to the 1930-33 depression, and how the depression and wealth gap led to conflicts
over wealth all around the world, you can’t understand the forces that led to Franklin D. Roosevelt being elected
president. You also wouldn’t understand why, soon after his inauguration in 1933, he announced a new plan in
which the central government and the Federal Reserve would together provide a lot of money and credit, a change
that was similar to things happening in other countries at the same time and similar to what is happening now.
Without understanding money and credit, you wouldn’t understand why these things changed the world order nor
would you understand what happened next (i.e., the war, how it was won and lost, and why the new world order
was created as it was in 1945), and you won’t be able to understand what is happening now or imagine the future.
However, by seeing many of these cases and understanding the mechanics behind them, you will be able to better
understand what is happening now and what is likely to happen in the future.
In doing this study, I spoke with several of the world’s most renowned historians and political practitioners,
including current and former heads of state, foreign ministers, finance ministers, and central bankers. In our
explorations of how the world really works, it was clear that we each brought different pieces of the puzzle that
made the picture much clearer when we put them together. We agreed that the two most essential understandings to
have are of 1) how money, credit, and economics work and 2) how domestic and international politics work.
Several told me that the understanding conveyed in this chapter has been the biggest missing piece in their quest to
understand the lessons of history and I explained to them how their perspectives helped me better understand the
political dynamic that affects economic policy choices. This chapter is focused on the money, credit, and economic
piece.
Let’s start with the timeless and universal fundamentals of money and credit.
The Timeless and Universal Fundamentals of Money and Credit
All entities—people, companies, nonprofit organizations, and governments—deal with the same basic financial
realities, and always have. They have money that comes in (i.e., revenue) and money that goes out (i.e., expenses)
which, when netted, makes up their net income. These flows are measured in numbers that can be shown in their
income statements. If one brings in more than one spends, one has a profit that causes one’s savings to go up. If
one’s spending is more than one’s earnings, one’s savings goes down or one has to make up the difference by