After the 1980s debt restructurings were completed the 1990s saw a new global increase in money, credit, and debt
begin again, which again produced a prosperity that led to debt-financed purchases of speculative investments that
became the dot-com bubble, which burst in 2000. That led to an economic downturn in 2000-01 that spurred the
Federal Reserve to ease money and credit, which pushed debt levels to new highs and created another prosperity
that turned into another and bigger debt bubble in 2007, which burst in 2008, which led the Fed and other reserve
currency countries’ central banks to ease again, leading to the next bubble that just recently burst. So, between the
1980s debt restructuring and 2008 there were two fairly typical debt/economic cycles. However, the
credit/economic contraction of 2008 needed to be handled differently.
Because short-term interest rates hit 0% in 2008 and that amount of interest rate decline wasn’t enough to
create the money and credit expansion that was needed, central banks needed to print money and buy
financial assets. Stimulating money and credit growth by lowering interest rates is the first-choice monetary
policy of central banks. I call it “Monetary Policy 1.” With this approach no longer available to central banks, they
turned to the second-choice monetary policy (which I call “Monetary Policy 2”), which is the printing of money
and the buying of financial assets, mostly government bonds and some high-quality debt. The last time they had
needed to do that because interest rates had hit 0% began in 1933 and continued through the war years. This
approach is called “quantitative easing” rather than “debt monetization” because it sounds less threatening. All the
world’s major reserve currency central banks did this. The paradigm that began in 2008 worked as follows.
By printing money and buying debt, as had been done beginning in 1933, central banks kept the money and debt
expansion cycle going. They did that by making those purchases, which pushed bond prices up, and providing the
sellers of these bonds with cash, which led them to buy other assets. This pushed those asset prices up and, as they
rose in price, drove future expected returns down. With interest rates below the expected returns of other
investments and bond yields and other future expected returns falling to very low levels relative to the returns
needed by investors to fund their various spending obligations, investors increasingly borrowed money to buy
assets that they expected to have greater returns than their borrowing costs. In other words they followed the
classic bubble process of buying financial assets with borrowed money betting that the assets they bought would
have higher returns than their costs of funds. Those leveraged purchases pushed these asset prices up, drove their
expected future returns down, and created a new debt bubble vulnerability that would come home to roost if the
incomes produced by the assets they bought had returns that were less than their borrowing costs. With both long-
term and short-term interest rates around 0% and central banks’ purchases of bonds not as effectively flowing
through to stimulate economic growth and help those who needed it most, it became apparent to me that the
second type of monetary policy wouldn’t work well and the third type of monetary policy—“Monetary Policy 3,”
or MP3—would be needed. MP3 works by the reserve currency central governments increasing their borrowing
and targeting their spending and lending to where they want it to go with the reserve currency central banks
creating money and credit and buying debt (and possibly other assets, like stocks) to fund these purchases.
Throughout all this time, inclusive of all of these swings, the amount of dollar-denominated money, credit, and
debt in the world and the amounts of other non-debt liabilities (such as pensions and healthcare) continued to rise
in relation to incomes, especially in the US because of the Federal Reserve’s unique ability to support this debt
growth. Though I won’t explain the various ways of doing that here, they were explained in my book Principles
for Navigating Big Debt Crises, which you can get online for free here.
So, before we had the pandemic-induced downturn, the circumstances were set up for this path being the necessary
one in the event of a downturn. If you want to look at relevant research pieces that look at these issues in greater
depth that I did at the time, you can find them at economicprinciples.org.
In any case, throughout this period debt and non-debt obligations (e.g., pensions and healthcare) continued to rise
relative to incomes while central banks managed to keep debt service costs down (see my report “The Big Picture”
for a more complete explanation of the coming “squeeze” this will cause). This pushed interest rates toward nil and
made the debt long-term so that principal payments would be low. These conditions—i.e., central banks owning a
lot of debt, interest rates around 0% so no interest payment would be required, and structuring debt to be paid back
over the very long term so principal payments could be spread out or even possibly not paid back—meant that
there was little or no limit to the capacities of central banks to create money and credit. That set of conditions set
the stage for what came next.