How Countries Go Bankrupt: Dalio, Founder of Bridgewater Associates
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How Countries Go Bankrupt: Dalio, Founder of Bridgewater Associates
Brief overview of the long cycle.
Navigating Web3 tides with focused insightsAuthor: Ray Dalio
Translation: Block unicorn
Foreword
Today, my new book *How Nations Go Broke: The Big Cycle* is officially released. This article aims to briefly share the core content of the book. Most importantly, I want to convey understanding at this critical moment—so I hope this concise summary delivers the essential ideas in the simplest way possible, leaving deeper exploration up to the reader.
My Background
I’ve been involved in global macro investing for over 50 years, and have actively traded in government bond markets for nearly as long—with considerable success. While I previously kept quiet about the mechanics of major debt crises and the principles for navigating them, I’m now at a different stage in life where I feel compelled to pass on this understanding to help others. This urgency has grown stronger as I see the United States and other nations heading toward what amounts to an economic “heart attack.” That’s why I wrote *How Nations Go Broke: The Big Cycle*, which fully explains the mechanisms and principles I use, along with a brief overview included here.
How the Mechanism Works
The dynamics of debt work the same way for governments, individuals, or companies—the key difference being that central governments have central banks that can print money (which causes currency depreciation) and collect taxes from citizens. So if you can imagine how debt functions for yourself or your business when you have the ability to print money or raise funds through taxation, you’ll understand this dynamic. But remember, your goal must be to keep the entire system functioning well—not just for yourself, but for all citizens.
To me, the credit/market system resembles the human circulatory system, delivering nourishment to all parts of the economy. When credit is used effectively, it creates productivity and income sufficient to repay both principal and interest—this is healthy. But when credit is misused and generates insufficient income to service debts, the debt burden accumulates like plaque in arteries, crowding out other spending. When debt repayment obligations grow very large, they create debt servicing problems, eventually leading to rollover issues as debt holders refuse to roll over their holdings and instead seek to sell. Naturally, this leads to inadequate demand for debt instruments like bonds, creating excess supply. This results in either: a) rising interest rates that depress markets and the economy; or b) central banks “printing” money to buy debt, which devalues the currency and fuels inflation. Money printing also artificially suppresses interest rates, hurting creditor returns. Neither option is ideal. When the scale of debt sales becomes too large, and central banks purchase massive quantities of bonds without stemming rate increases, they begin to incur losses, damaging their cash flow. If this continues, the central bank’s net worth turns negative.
When conditions become severe, both the central government and the central bank borrow to pay interest on debt, with the central bank printing money to lend due to insufficient private market demand—triggering a self-reinforcing spiral of debt, money printing, and inflation. In summary, watch these classic indicators:
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The ratio of government debt servicing costs to government revenues (analogous to the amount of plaque in the circulatory system);
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The ratio of government debt issuance to demand for that debt (similar to plaque breaking off and triggering a heart attack);
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The amount of government debt the central bank purchases via money printing to cover shortfalls in demand (like a doctor/central bank injecting liquidity/credit to relieve a shortage, creating more debt that the central bank assumes risk for).
These typically rise gradually over a long, multi-decade cycle, with debt and servicing costs growing relative to income until the situation becomes unsustainable because: 1) debt payments excessively crowd out other spending; 2) the volume of debt needing purchase vastly exceeds demand, causing sharp rate hikes that crush markets and the economy; or 3) to prevent rate spikes and economic damage, the central bank prints大量 money and buys government debt, causing the currency to lose significant value.
In any case, bond returns become poor until money and debt become cheap enough to attract demand, and/or until debt is repurchased or restructured at favorable terms by the government.
This is a brief outline of the big debt cycle.
Because people can measure these factors, the debt dynamics can be monitored—and thus future problems are easily foreseeable. I’ve used this diagnostic approach throughout my investing career, never disclosing it publicly—until now. Given its current importance, I will fully explain it in *How Nations Go Broke: The Big Cycle*.
More specifically, one observes rising debt and debt servicing costs relative to income, debt supply exceeding demand, initial stimulus via lower short-term rates, followed by money printing and debt purchases by the central bank, ultimately leading to central bank losses and negative net worth, with the central government and central bank borrowing to pay interest—i.e., debt monetization. All of this culminates in a government debt crisis—an economic “heart attack”—as financing constraints block the normal flow of the financial system.
In the early stages of the final phase of the big debt cycle, market behavior reflects this through rising long-term interest rates, currency depreciation (especially against gold), and the central government shortening debt maturities due to weak long-term demand. Later in the process, when pressures peak, seemingly extreme measures are often taken—such as capital controls or strong pressure on creditors to buy rather than sell debt. My book explains this dynamic in greater depth with extensive charts and data.
A Brief Overview of the U.S. Government’s Current Situation
Now, imagine you’re running a large corporation called the United States government. This will help clarify the U.S. government’s financial condition and leadership choices.
Total annual revenue is approximately $5 trillion, while total spending is around $7 trillion—leaving a budget gap of about $2 trillion. That means your organization is spending roughly 40% more than it earns this year. There’s almost no room to cut expenses, as nearly all spending consists of prior commitments or essential outlays. Due to decades of excessive borrowing, your organization has accumulated massive debt—about six times annual revenue (roughly $30 trillion), equivalent to each household owing about $230,000. Interest payments alone amount to about $1 trillion—around 20% of corporate revenue—and represent half of this year’s budget deficit, which you must finance through borrowing. But that $1 trillion isn’t all you owe creditors: in addition to interest, you must repay maturing principal—approximately $9 trillion. You’re counting on your creditors or other wealthy entities to re-lend you that money or lend to others who will. Thus, total debt servicing costs—i.e., the combined principal and interest required to avoid default—are about $10 trillion, or roughly 200% of revenue.
This is the current state of affairs.
So what happens next? Let’s imagine. Regardless of the size of the deficit, you borrow to fill it. There’s much debate about the exact deficit figure. Most independent forecasters project that within ten years, debt will reach $50–55 trillion—about 6.5 to 7 times annual revenue (expected to be $3–5 trillion). Of course, in ten years, if no plan exists to address this, the organization will face even greater debt servicing burdens, squeezing expenditures further, and face heightened risk: the debt it must issue will lack sufficient demand.
This is the full picture.
My 3% Three-Part Solution
I firmly believe the government’s financial position is at a turning point: if not addressed now, debt will accumulate to unmanageable levels, causing massive trauma. Crucially, this adjustment must occur when the system is relatively strong—not during economic weakness, when government borrowing needs surge dramatically.
Based on my analysis, this situation requires what I call the “3% Three-Part Solution”: balancing the budget deficit down to 3% of GDP through three coordinated actions: 1) spending cuts, 2) increased tax revenues, and 3) lower interest rates. These must happen simultaneously to prevent any single adjustment from being too disruptive, as excessive moves in any one area would cause traumatic consequences. These adjustments should result from sound fundamental improvements—not forced actions (e.g., if the Fed artificially suppresses rates without organic support, it would be highly detrimental). According to my estimates, relative to current projections, spending cuts and tax increases would each contribute about 4%, while interest rates decline by roughly 1–1.5%. This would reduce average interest expenses by 1–2% of GDP over the next decade and stimulate asset price appreciation and economic activity, generating additional revenue.
Common Questions and My Answers
The book covers far more than space allows here—including descriptions of the “whole big cycle” (encompassing debt/money/credit cycles, domestic political cycles, external geopolitical cycles, natural events, and technological progress), which drives all major world changes; my outlook for the future; and investment perspectives during such transitions. For now, I’ll answer frequently asked questions about the book and invite you to read it for deeper insight.
Question 1: Why do large government debt crises and big debt cycles occur?
Large government debt crises and big debt cycles can be easily measured by: 1) rising ratios of government debt servicing costs to government revenue, reaching levels that squeeze essential public spending; 2) government debt issuance significantly exceeding demand, pushing up interest rates and dragging down markets and the economy; 3) central banks responding by lowering rates, which reduces bond attractiveness, forcing them to print money and buy government debt—devaluing the currency. These dynamics build gradually over decades until they become unsustainable due to: 1) debt servicing crowding out other spending; 2) excessive debt supply relative to demand causing sharp rate hikes that devastate markets and the economy; or 3) massive money printing to buy debt, causing steep currency depreciation. In all cases, bond returns remain poor until debt becomes cheap enough to attract buyers or is restructured. These metrics are measurable, and we can clearly see they are trending toward an impending debt crisis. When financing constraints hit, it triggers a debt-driven economic “heart attack.”
Historically, nearly every nation has experienced this debt cycle multiple times, providing hundreds of reference cases. In short, all monetary regimes eventually collapse, and the debt cycle I describe is the mechanism behind those collapses. This pattern stretches back through recorded history and explains the fall of every reserve currency (e.g., the British pound, earlier the Dutch guilder). In my book, I present the most recent 35 such cases.
Question 2: If this process repeats so often, why isn’t it widely understood?
You're right—it is not widely understood. Interestingly, I can’t find any dedicated studies explaining exactly how this process unfolds. I suspect it remains obscure because, in reserve currency countries, it typically occurs only once per lifetime—when the monetary regime collapses—and when non-reserve currency nations experience it, people assume reserve currency nations are immune. The only reason I discovered this process is that I observed it firsthand in sovereign bond markets, prompting me to study numerous historical cases so I could navigate them properly (e.g., the 2008 global financial crisis and the 2010–2015 European debt crisis).
Question 3: While waiting for U.S. debt problems to erupt, how worried should we be about a “heart attack”-style debt crisis? People have heard many warnings about imminent crises that never materialized. What makes this time different?
Given the conditions outlined above, I believe we should be very concerned. Those who worried about debt crises when conditions were less severe were right—because timely action, like early warnings to stop smoking or improve diet, could have prevented things from deteriorating this far. The lack of broader concern stems both from insufficient understanding and from complacency bred by past false alarms. It’s like someone with clogged arteries, eating high-fat foods and not exercising, telling their doctor: “You warned me that if I didn’t change my lifestyle, I’d get into trouble—but I haven’t had a heart attack yet. Why should I believe you now?”
Question 4: What might trigger a U.S. debt crisis today, when could it happen, and what would it look like?
The catalyst would be the convergence of the various forces described earlier. As for timing, policy decisions and external factors (such as major political shifts or wars) could accelerate or delay the onset. For example, if the budget deficit fell from the ~7% of GDP currently projected by me and most analysts to around 3%, the risk would be greatly reduced. A major external shock could bring the crisis forward; absence of shocks might delay it—or prevent it altogether if managed wisely. My guess—imperfect as it may be—is that if the current path persists, the crisis will occur within three years, plus or minus two.
Question 5: Do you know of any similar cases where budget deficits were significantly reduced in the way you describe, with positive outcomes?
Yes, I know several. My plan would reduce the budget deficit by about 4% of GDP. The closest and most successful precedent is the U.S. fiscal consolidation between 1991 and 1998, which reduced the deficit by 5% of GDP. My book lists several other national examples of similar successful adjustments.
Question 6: Some argue that due to the dollar’s dominance in the global economy, the U.S. is generally insulated from debt-related issues/crises. What do such people overlook or underestimate?
If they believe this, they misunderstand the mechanism and ignore historical lessons. Specifically, they should examine history and understand why all previous reserve currencies ceased to be reserve currencies. Simply put, money and debt must function as effective stores of wealth—or they will be devalued and abandoned. The dynamics I describe explain precisely how reserve currencies lose their effectiveness as stores of value.
Question 7: Japan—whose debt-to-GDP ratio stands at 215%, the highest among developed economies—is often cited as proof that a country can sustain persistently high debt levels without experiencing a crisis. Why doesn’t Japan’s experience reassure you?
Japan’s case perfectly illustrates the problem I describe—and will continue to serve as evidence supporting my theory. More specifically, due to excessive government leverage, Japanese bonds and debt have been terrible investments. To make up for weak demand for Japanese debt amid low yields, the Bank of Japan has printed大量 money and purchased vast quantities of government debt. As a result, yen-denominated debt holders have lost 45% versus dollar-denominated debt and 60% versus gold since 2013. Since 2013, Japanese labor costs have declined 58% relative to U.S. labor costs. My book includes an entire chapter analyzing Japan in depth.
Question 8: From a fiscal perspective, which regions appear particularly problematic yet underappreciated?
Most countries face similar debt and deficit challenges. This applies to the UK, the EU, China, and Japan. That’s why I expect most nations to undergo similar debt and currency devaluation adjustments—and why I anticipate non-government-issued forms of money, such as gold and bitcoin, will perform relatively well.
Question 9: How should investors position themselves to manage this risk and prepare for the future?
Individual financial situations vary, but as general advice, I recommend diversified investments in asset classes and countries with strong income statements and balance sheets, and minimal internal political or external geopolitical conflicts—while reducing exposure to debt assets like bonds, and increasing allocations to gold and a small amount of bitcoin. Holding a modest portion in gold reduces portfolio risk and, I believe, enhances overall return.
Finally, the views expressed here are solely my own and do not necessarily reflect those of Bridgewater Associates.
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@RayDalio
