the US dollar as the world’s reserve currency and having the world’s bank that produces that currency, and by
having the power to put these needed dollars in the hands of Americans, the US can help Americans (and others
around the world if it so chooses) more effectively than most other countries’ governments can help their own
citizens. At the same time the US risks losing this privileged position by creating too much money and debt. In the
appendix to this chapter we will look much more closely into how countries that had reserve currencies lost them
and how devaluations of currencies work.
In Summary: How the Big Cycle of Money, Credit, Debt & Economic
Activity Fits In with the Big Domestic and International Political Cycles to
Affect the World Order
Stepping back to look at all of this from the big-picture level, what I’m saying about the relationship between 1)
the economic part (i.e., money, credit, debt, economic activity, and wealth) and 2) the political part (both within
countries and between countries) of rises and declines looks like the picture shown below. Typically the big cycles
start with a new world order—i.e., a new way of operating both domestically and internationally that includes a
new monetary system and new political systems. The last one began in 1945. Because at such times, after the
conflicts, there are dominant powers that no one wants to fight and people are tired of fighting, there is a peaceful
rebuilding and increasing prosperity that is supported by a credit expansion that is sustainable. It is sustainable
because income growth exceeds or keeps pace with the debt-service payments that are required to service the
growing debt and because of central banks’ capacities to stimulate credit and economic growth is great. Along the
way up there are short-term debt and economic cycles that we call recessions and expansions. With time investors
extrapolate past gains into the future and borrow money to bet on them continuing to happen, which creates debt
bubbles at the same time as the wealth gaps grow because some benefit more than others from this money-making
upswing. This continues until central banks run out of their abilities to stimulate credit and economic growth
effectively. As money becomes tighter the debt bubble bursts and credit contracts and with it the economy
contracts. At the same time, when there is a large wealth gap, big debt problems, and an economic contraction,
there is often fighting within countries and between countries over wealth and power. These typically lead to
revolutions and wars that can be either peaceful or violent. At such times of debt and economic problems central
governments and central banks typically create money and credit to fund their domestic and war-related financial
needs. These money and credit crises, revolutions, and wars lead to restructurings of a) the debts, b) the monetary
system, c) the domestic order, and d) the international order — which together I am simply calling the world order.
Then it starts again. For example in the United States in the 1930-45 period there was a peaceful domestic
revolution that produced a significant wealth redistribution that was accompanied by large government borrowings
(creating a lot of government debt) that was financed by the central bank creating a lot of money and credit…and
this was followed by violent external wars that were due to rising powers challenging existing world powers, with
these wars financed by large government borrowings (that created a lot of government debt) that was financed by
central banks creating of money and credit.
The cycle that I am describing is conveyed in the chart below. While no cycle goes exactly this way, almost all of
them by and large go that way.