Central banks faced a dilemma after the 2008 debacle over how to keep the global financial system from the type of broad financial collapse experienced in the Great Depression. The prolonged US negative real interest rates after 2001 set the tone for the globalized capital markets. As they did during the Vietnam War, countries responded after 2008 by following US-centric negative real interest policy.

Bretton Woods members supported the United States during the Vietnam War by buying up the US dollars used to finance it. This stabilized the fixed exchange rates of the Bretton Woods era with the US fixed price of gold. After 2008 democratic, globally integrated countries around the world followed US real interest rate policy to stabilize the floating exchange rates of the fiat era.

International central banking innovated policy to mimic the United States on real interest rates. By maintaining the same real interest rates, exchange rates could remain stable. If real interest rates were higher in a country than in the United States, capital would flow into that country and cause its currency to appreciate.

Countries followed US real interest rate policy across both developed and emerging markets. For example, China followed the US policy until 2014, after which it disengaged from the democratic capital policies of the international financial system, while still holding trillions of dollars of US debt (Csabafi, Gillman & Naraidoo 2019). Other international central banks had to react quickly to induce negative real short-term interest rates so as to avoid currency appreciation through capital arbitrage.

Arbitrage happens when, for example, capital savings can earn a real return of 2 per cent in a European market and only – 1.75 per cent in the US market. Then financial industry traders can move the capital from the United States to Europe to get the higher return on capital. Capital flowing into Europe would push down the return on capital in Europe. An equilibrium results whereby arbitrage possibilities are eliminated by equalizing the real return on capital, net of any arbitrage cost, across global capital markets.