How Countries Go Broke
By Ray Dalio
389ppg, 2025
Avid Reader Press
Ray Dalio has shared a lot of smart things. The smartest by far is how he tackles complex and uncertain situations: “Whatever success I’ve had has been more due to knowing how to deal with my not knowing than anything I know.”
For those unfamiliar, Dalio is the founder of Bridgewater Associates, which was for years the world’s most successful hedge fund and remains the world’s largest. I started paying close attention to Dalio back in 2016 when he predicted that a U.S. domestic conflict was developing between, broadly, capitalists versus socialists.
Since then, Dalio has expanded on his hypothesis that the U.S. empire is in terminal decline, characterizing the worsening political and social conditions as a symptom of a broader cycle that’s ending.
This “Overall Big Cycle” is actually three different smaller but interconnected cycles and two secular factors:
- “1) Big Debt Cycles influence and are affected by largely coinciding 2) big cycles of political and social harmony and conflict within countries that both are affected by and affect 3) big cycles of geopolitical harmony and conflict between countries. These cycles are in turn affected by both 4) big acts of nature (droughts, floods, pandemics, etc.) and 5) developments of big new technologies. Combined, these forces make up the Overall Big Cycle of peace and prosperity and conflict and depression as things progress from one ‘order’ to the next.”
His latest book, How Countries Go Broke, covers the cause and effect of “big, long-term debt cycles that have unfailingly led to big debt bubbles and busts.” These roughly 80-year cycles (“give or take 25 years”) of money creation, debt accumulation, and eventual bankruptcy “[foreshadow] the fall of empires, countries, and provinces.”
Dalio writes that he builds systems to help him make investment decisions because “if you understand these dynamics, you can do very well as an investor… and if you don’t, you ultimately will be hurt by them.”
Dalio is critical of policy makers who repeatedly make the same mistakes, pointing out that if they can’t agree on how systems (like debt) work, then they “won’t be able to agree on what’s happening or what is likely to happen [next].”
That appears to be a fatal error the United States is making, as it’s “dangerously negligent to assume that this time will be different from other times,” and a great many people assume that it will be different.
In How Countries Go Broke Dalio provides a great primer on historical debt cycles to outline the five stages of a debt crisis:
- Sound Money – Debt levels are low and money is sound, but governments transition to fiat so they can print money and take on more debt.
- Debt Bubble Stage – Governments grow the national debt faster than the economy, which leads to a debt bubble.
- The Top Stage – The central banks are forced to tighten monetary conditions, which pops the debt bubble by making money too scarce to make debt payments, leading to defaults. This historically happens first in the private sector, and then in the public sector.
- The Deleveraging Stage – Holders of debt rush to sell assets, which drives prices down because there are fewer buyers, as tight money and credit causes economic weakness (economic depressions, most often).
- Debt Crisis Recedes – The system eventually “resets” and creditors again see debt as an asset because debts can again be serviced by debtors.
Dalio says the U.S. began its debt bubble stage in 1971 when President Nixon de-linked gold and the dollar, and the dollar became fiat. That was the end of sound money, and the beginning of the ability for the U.S. to take on more debt because it could print money to pay the debt.
Today, the U.S. is at the bubble top stage – still inflating but not quite popped. That pop will come during an economic or monetary shock that forces the Fed to tighten monetary conditions, and then the bubble will burst and the deleveraging will begin.
Probably the best part of the book is how Dalio describes what happens during the deleveraging stage.
There are only four ways to resolve a Big Debt Crisis: austerity, default, transfers of wealth, or printing money. The first two are deflationary, and the second two are inflationary. A government and central bank determine whether a debt crisis becomes deflationary or inflationary based on how they go about solving it.
Dalio describes a process of “beautiful deleveraging” where a government chooses a combination of deflationary and inflationary solutions that provide greater stability because the deflationary and inflationary pressures cancel each other out. Otherwise, a debt default creates a deflationary depression, while money printing leads to an inflationary depression.
Dalio writes that governments that are able to print its own currencies to pay off its own debts are in a better position to achieve this “beautiful deleveraging” because they have more policy options – and that certainly seems to be the case for the Federal Reserve.
Ultimately, governments and central banks always choose money printing because default and austerity are too painful. This means that debt bubbles in the fiat age most often end in inflationary depressions.
Dalio sees today’s monetary, political, and geopolitical orders as the next to collapse in a long history of collapsing orders, and he’s made a solid case for that over the last several years.
Dalio ends this latest book with a plan on how to avoid a worsening debt crisis by keeping debt levels sustainable. This includes interest rate cuts to lower the cost of debt, however, the Fed has remained reluctant to do so.
Dalio seems rather pessimistic on whether the U.S. will be forced into an acute debt crisis due to the lack of desire in Washington D.C. to cooperate on the debt issue. If that’s the case, Dalio does offer some advice: “I especially look for big, unsustainable conditions and I position myself to bet that they won’t be sustained.” It’s a good bet that the U.S. fiscal trajectory won’t be sustained indefinitely. – M.S.