controlled—they were built on a much weaker foundation that eventually broke down. Unlike after World
War I, when the losing countries were burdened with large debts, countries that were under US control,
including the defeated countries, received massive financial aid from the US via the Marshall Plan. At the
same time the currencies and debts of the losing countries were wiped out, with those holding them
losing all of their wealth in them. Great Britain was left heavily indebted from its war borrowings and
faced the gradual end of the colonial era which would lead to the unraveling of its empire which was
becoming uneconomic to have.
During this post-World War II period the United States, its allies, and the countries that were under its
influence followed a classic capitalist-democratic approach to resource allocation. New York flourished as
the world’s pre-eminent financial center, and a new big debt and capital markets cycle began. That
produced what has thus far been a relatively peaceful and prosperous 75-year period that has brought
us to today.
As is typical of this peaceful and prosperous part of the cycle, in the 1950-70 period there was
productive debt growth and equity market development that were essential for financing innovation
and development early on. That eventually led to too much debt being required to finance both war and
domestic needs—what was called “guns and butter.” The Vietnam War and the “War on Poverty” occurred
in the US. Other countries also became overly indebted and the British indebtedness became over-leveraged
which led to a number of currency devaluations, most importantly the breakdown of the Bretton Woods
monetary system (though countries like the UK and Italy had already devalued prior to that time). Then in
1971, when it was apparent that the US didn’t have enough gold in the bank to meet the claims on gold
that it had put out, the US defaulted on its promise to deliver gold for paper dollars which ended the
Type 2 gold-backed monetary system, and the world moved to a fiat monetary system. As is typical, this
fiat monetary system initially led to a wave of great dollar money and debt creation that led to a big wave of
inflation that carried until 1980-82 and led to the worst economic downturn since the Great Depression. It was
followed by three other waves of debt-financed speculations, bubbles, and busts—1) the 1982 and 2000
money and credit expansion that produced a dot-com bubble that led to the 2000-01 recession, 2) the 2002-07
money and credit expansion that produced a real estate bubble that led to the 2008 Great Recession, and 3)
the 2009-19 money and credit expansion that produced the investment bubble that preceded the COVID-19
downturn. Each of these cycles raised debt and non-debt obligations (e.g., for pensions and healthcare)
to progressively higher levels and led the reserve currency central banks of the post-war allies to push
interest rates to unprecedented low levels and to print unprecedented amounts of money. Also
classically, the wealth, values, and political gaps widened within countries, which increases internal
conflicts during economic downturns. That is where we now are.
During this prosperous post-war period many countries became more competitive with the leading
powers economically and militarily. The Soviet Union/Russia initially followed a communist resource
allocation approach as did China and a number of other smaller countries. None of these countries became
competitive following this approach. However, the Soviet Union did develop nuclear weapons to become
militarily threatening and gradually a number of other countries followed in developing nuclear weapons.
These weapons were never used because using them would produce mutually assured destruction. Because of
its economic failures the Soviet Union/Russia could not afford to support a) its empire, b) its economy, and c)
its military at the same time in the face of US President Ronald Reagan’s arms race spending. As a result the
Soviet Union broke down in 1991 and abandoned communism. The breakdown of its money/credit/economic
system was disastrous for it economically and geopolitically for most of the 1990s. In the 1980-95 period
most communist countries abandoned classic communism and the world entered a very prosperous period of
globalization and free-market capitalism.
In China, Mao Zedong’s death in 1976 led Deng Xiaoping to a shift in economic policies to include
capitalist elements including private ownership of large businesses, the development of debt and
equities markets, great technological and commercial innovations, and even the flourishing of
billionaire capitalists—all, however, under the strict control of the Communist Party. As a result of this
shift and the simultaneous shift in the world to greater amounts of globalism China grew much
stronger in most ways. For example, since I started visiting China in 1984, the education of its population
has improved dramatically, the real per capita income has multiplied by 24, and it has become the largest
country in the world in trade (exceeding the US share of world trade), a rival technology leader, the holder of