you did before it was considered worth more. In other words, using market values of what one owns to measure
one’s wealth gives an illusion of changes in wealth that doesn’t really exist. As far as how the economic machine
works, the big thing is that money and credit is stimulative when it’s given out and depressing when it has to
be paid back. That’s what normally makes money, credit, and economic growth so cyclical.
The people who control money and credit (i.e., central banks) vary the costs and availability of money and credit
to control markets and the economy as a whole. When the economy is growing too quickly and they want to slow
it down, they make less money and credit available, causing both to become more expensive. This encourages
people to lend rather than to borrow and spend. When there is too little growth and central bankers want to
stimulate the economy, they make money and credit cheap and plentiful, which encourages people to borrow and
invest and/or spend. These variations in the cost and availability of money and credit also cause the prices and
quantities of goods, services, and investment assets to rise and fall. But banks can only control the economy within
their capacities to produce money and credit growth, and their capacities to do that are limited.
Think of the central bank as having a bottle of stimulant that they can inject into the economy as needed
with the amount of stimulant in the bottle being limited. When the markets and the economy sag they give
them shots of the money and credit stimulant to pick them up, and when they’re too hot they give them less
stimulant. These moves lead to cyclical rises and declines in the amounts and prices of money and credit, and of
goods, services, and financial assets. These moves typically come in the form of short-term debt cycles and long-
term debt cycles. The short-term cycles of ups and downs typically last about eight years, give or take a few. The
timing is determined by the amount of time it takes the stimulant to raise demand to the point that it reaches the
limits of the real economy’s capacity to produce. Most people have seen enough of these short-term debt cycles to
know what they are like—so much so that they mistakenly think that they will go on working this way forever.
They’re most popularly called “the business cycle,” though I call them “the short-term debt cycle” to distinguish
them from “the long-term debt cycle.” Over long periods of time these short-term debt cycles add up to long-term
debt cycles that typically last about 50 to 75 years.2 Because they come along about once in a lifetime most people
aren’t aware of them; as a result they typically take people by surprise, which hurts a lot of people. The last big
long-term debt cycle, which is the one that we are now in, was designed in 1944 in Bretton Woods, New
Hampshire, and was put in place in 1945 when World War II ended and we began the dollar/US-dominated world
order.
These long-term debt cycles start when debts are low after previously existing excess debts have been restructured
in a way so that central banks have a lot of stimulant in the bottle, and they end when debts are high and central
banks don’t have much stimulant left in the bottle. More specifically, the ability of central banks to be
stimulative ends when the central bank loses its ability to produce money and credit growth that pass
through the economic system to produce real economic growth. That lost ability of central bankers typically
takes place when debt levels are high, interest rates can’t be adequately lowered, and the creation of money
and credit increases financial asset prices more than it increases actual economic activity. At such times
those who are holding the debt (which is someone else’s promise to give them currency) typically want to
exchange the currency debt they are holding for other storeholds of wealth. When it is widely perceived that
the money and the debt assets that are promises to receive money are not good storeholds of wealth, the
long-term debt cycle is at its end, and a restructuring of the monetary system has to occur. In other words
the long-term debt cycle runs from 1) low debt and debt burdens (which gives those who control money and
credit growth plenty of capacity to create debt and with it to create buying power for borrowers and a high
likelihood that the lender who is holding debt assets will get repaid with good real returns) to 2) high debt
and debt burdens with little capacity to create buying power for borrowers and a low likelihood that the
lender will be repaid with good returns. At the end of the long-term debt cycle there is essentially no more
stimulant in the bottle (i.e., no more ability of central bankers to extend the debt cycle) so there needs to be a
debt restructuring or debt devaluation to reduce the debt burdens and start this cycle over again.
Throughout history central governments and central banks have created money and credit which weakened their
own currencies and raised their levels of monetary inflation to offset the deflation that comes from the deflationary
credit and economic contractions.
Since these cycles are big deals and have happened virtually everywhere for as long as there has been recorded
history, we need to understand them and have timeless and universal principles for dealing with them well.
However, these long-term debt cycles take about a lifetime to transpire, unlike the short-term debt cycles that we