The chart below shows the balances of goods and services for the United States and China since 1990 in real (i.e.,
inflation-adjusted) dollars. As you will see when we look at China in the next section of this book, China’s
economic reform and open-door policies after Deng Xiaoping came to power in 1978 and the welcoming of China
into the World Trade Organization in 2001 led to the explosion of Chinese competitiveness and exports. Note the
accelerations in China’s surpluses and the US deficits from around 2000 to around 2010 and then some narrowing
of these differences, with China still tending to run surpluses and the US still running deficits.
During this period debt and non-debt liabilities like pension and healthcare liabilities grew a lot in the US and
debts were used to finance speculations leading up to the dot-com bubble of 2000 and the mortgage bubble of the
mid-2000s that led to busts that were stimulated out of by the creation of more money and debt. These debt cycles
are both undesirable and understandable because there is a tendency to favor immediate gratification over long-
term financial safety, particularly by politicians.
Most people pay attention to what they get and not where the money comes from to pay for it, so there are
strong motivations for elected officials to spend a lot of borrowed money and make a lot of promises to give
voters what they want and to take on debt and non-debt liabilities that cause problems down the road. That was
certainly the case in the 1990-2008 period.
Throughout the long-term debt cycle, from 1945 until 2008, whenever the Federal Reserve wanted the
economy to pick up it would lower interest rates and make money and credit more available, which would
increase stock and bond prices and increase demand. That was how it was done until 2008—i.e., interest
rates were cut, and debts were increased faster than incomes to create an unsustainable bubble economy
that peaked in 2007. When in 2008 the bubble burst and interest rates hit 0% for the first time since the
Great Depression, that changed. As explained more comprehensively in my book Principles for Navigating
Big Debt Crises there are three types of monetary policy—1) interest-rate-driven monetary policy (which I
call Monetary Policy 1 because it is the first to be used and is the preferable way to run monetary policy), 2)
printing money and buying financial assets, most importantly bonds (which I call Monetary Policy 2 and is
now popularly called “quantitative easing”), and 3) coordination between fiscal policy and monetary policy
in which the central government does a lot of debt-financed spending and the central bank buys that debt
(which I call Monetary Policy 3 because it is the third and last approach to be used when the first two cease
to be effective in doing what needs to be done). The charts below show how the debt crises of 1933 and 2008
both led to interest rates hitting 0% and were followed by big money printing by the Federal Reserve.

This shift had big effects and implications.
The 2008-20 Money-Financed Capitalist Boom Period
In 2008 the debt crisis led to interest rates being lowered until they hit 0%, which led the three main reserve
currency countries’ central banks (led by the Fed) to move from an interest-rate-driven monetary policy (MP1) to a
printing-of-money- and buying-financial-assets-driven monetary policy (MP2). Central banks printed money and
bought financial assets, which put money in the hands of investors who bought other financial assets, which caused
financial asset prices to rise, which was helpful for the economy and particularly beneficial to those who were rich
enough to own financial assets, so it increased the wealth gap. The putting of a lot of money into the financial
system and the driving down of bond yields provided companies with a lot of cheap funding that they used to buy
back their own stocks and stocks of related companies that they wanted to acquire, which further bid up stock
prices. Basically, borrowed money was essentially free, so investment borrowers and corporate borrowers took
advantage of this to get it and use it to make purchases that drove stock prices and corporate profits up. This
money did not trickle down proportionately, so the wealth and income gaps continued to grow. As shown in the
charts below, the wealth and income gaps are now the largest since the 1930-45 period.
7
In 2016, appealing to those white, socially and economically conservative voters who were hurt by these trends,
Donald Trump, a blunt-speaking businessman/capitalist populist of the right, led a revolt against establishment
politicians and “elites” to get elected president by promising to support people with conservative values who had
lost jobs and were struggling. He went on to cut corporate taxes and run big budget deficits that the Fed
accommodated. This was good for stocks, capital markets, businesses, and the capitalists who owned them. While
this debt growth financed relatively strong market-economy growth and created some improvements for lower-