were forgiven (Leviticus 25:8-13). Knowing that the debt cycle would happen on that schedule allowed everyone
to act in a rational way in preparation for it. Helping you understand this dynamic so that you are prepared for it
rather than are surprised by it is the main objective behind my writing this.
Because most people don’t pay attention to this cycle much in relation to what they are experiencing, ironically the
closer people are to the blowup the safer they tend to feel. That is because they have held the debt and enjoyed the
rewards of doing that and the longer it has been from the time since the last one blew up, the more comfortable
they have become as the memories of the last blowup fade—even as the risks of holding this debt rise and the
rewards of holding it decline. By keeping an eye on the amount of debt that needs to be paid relative to the amount
of hard money that there is to pay it, the amount of debt payments that have to be made relative to the amount of
cash flow the debtors have to service the debt, and the interest rewards that one is getting for lending one’s money,
one can assess the risk/reward of holding the time bomb.
The Long-Term Debt Cycle in Summary
For thousands of years there have always been three types of monetary system:
Hard Money (e.g., metal coins)
“Paper Money” claims on hard money
Fiat Money (e.g., the US dollar today)
Hard money is the most restrictive system because money can’t be created unless the supply of the metal or other
intrinsically valuable commodity that is the money is increased. Money and credit are more easily created in the
second type of system, so the ratio of the claims on hard money to the actual hard money held rises, which
eventually leads to a “run” on the banks. The result is a) defaults, when the bank closes its doors and the depositors
lose their hard assets and/or b) devaluations of the claims on money, which means that the depositors get back less.
In the third type of system, governments can create money and credit freely, which works for as long as people
continue to have confidence in the currency and fails when they don’t.
Throughout history, countries have transitioned across these different types of systems for logical reasons. As a
country needs more money and credit than it currently has, whether to deal with debts, wars, or other problems, it
naturally moves from Type 1 to Type 2, or Type 2 to Type 3, so that it has more flexibility to print money. Then
creating too much money and debt depreciates its value, causing people to get out of holding the debt and money
as a storehold of wealth, and moving back into hard assets (like gold) and other currencies. Since this typically
takes place when there is wealth conflict and sometimes a war, there is typically also a desire to get out of the
country. Such countries need to re-establish confidence in the currency as a storehold of wealth before they can
restore their credit markets.
The below diagram conveys these different transitions. There are many historical examples, from the Song
Dynasty to Weimar Germany, of countries making the full transition from constrained types (Type 1 and Type 2) to
fiat money, then back to a constrained currency as the old fiat currency hyperinflates.
As noted earlier this big debt cycle plays out over the long term—something like 50 to 75 years—and, at its end, is
characterized by a restructuring of debts and of the monetary system. The abrupt parts of these restructurings—i.e.,