How countries go broke

The American-led political order that started in 1945 at the conclusion of the Second World War is 80 years old and due for a major reordering.

That’s from How Countries Go Broke, the most recent in the “Principles” series by Ray Dalio, the billionaire hedge fund manager who has written a collection of books on economic systems and investment strategy. I read “The Changing World Order” a few years back.

This, like others in the series, is backed what Dalio vaguely refers to a research team he employs. This makes sense, that a billionaire investor would employ research to develop an ever more detailed view of the world, but he’s become best known for a more expansive view than current economic conditions. Beyond his Bridgewater hedge fund, Dalio pumps out content now that attempts to put today into a broader historical context. No doubt simplified, his “big cycle” is the idea that eternally human qualities result in governments following predictable patterns, of relying on a hard, fixed currency before devaluing it long enough until there is a collapse.

He argues we’re something like 90%-95% through this pattern. Dalio has a reputation of prescience, if not precision: His prediction of a coming internet bubble bursting came five years too early (a half decade of earnings). I struggle with this. The books and research are compelling and interesting, but exactly because they’re comfortingly simple, they also read is unhelpful in any specific or actionable way. The interpretation is nonetheless welcome.

Below I share my notes for future reference.

My notes:

• The credit/spending and debt/repaying cycle is inherently cyclical
• The fundamental cycle is longer than a human lifespan so we forget
• The short term 3-10 year debt cycle builds to long term debt cycle
• “A debt is a promise to deliver money. A debt crisis occurs when there have been more promises made than there is money to deliver on them…” the solution is either default or evaluation of a currency both of which lose an investors store of wealth
• His debt cycle: sound money, debt bubble, top stage, deleveraging and then release
• Net selling of debt, especially government debt, begins the deleveraging cycle
• 5 drivers of change: the debt cycle, the internal political order cycle, the external geopolitical order cycle, acts of nature and human technologies
• 5 major parts of the economic system: goods, services and investment assets; money used to buy these things; credit issued to buy these things; debt liabilities that are created when purchases are made with credit and debt assets like deposits and bonds, which (since one person‘s liabilities are another’s assets) are the other side of the debt liabilities
• An investment’s real rate of return matters more than a nominal rate of return, as they are stores of value
• There have been 12, working on 13, short term debt cycles in United States between 1945-March 2025, in the author’s take
• ((The author notes central banks were created relatively recently to soften shocks but they don’t appear to have solved anything in his charts; the cycles as he describes them remain similar
• This below is a visualization of big big debt cycle

• “What separates a sustainable debt cycle from an unsustainable one is whether the debt creates sufficient income to pay for the debt service.”
• Four ways to reduce government debt burden: austerity, debt defaults, printing money or increasing taxes (governments tend to always go to print money)

• Private debt crisis leads to government debt crisis leads to devaluation via printing money leads to deleveraging
• Dalio’s “beautiful leveraging”: the deflationary ways of reducing debt burdens through debt restructuring are in balance with the inflationary ways of reducing debt burdens by monetizing them, avoiding unacceptable amounts of either deflation or inflation
• He. references his other Principles books, especially the Changing World Order one
• “When democracies fail, autocracies come in”
• Plato uses the term “demogauge” to describe the person who leads from democracy to autocracy
• Only brutal war has led to great peace: treaty of Westphalia (respect borders) follows 30 years war; WW1 led to international system and WW2 secured it
• The relationship between interest rates and inflation rate: With higher interest rates and low inflation rate there’s an incentive to save, and when interest rates are low relative to the inflation rate, there’s an incentive to borrow
• Argues if he led Fed policy he wouldn’t be “as extreme and volatile” in interest rates which drives bubbles
• Bretton Woods (1944) started new hard money system, which ran essentially until 1970s
• Even the Cuban missile crisis (1962) and JFK assassination didn’t shock stock markets
• Sunday August 15, 1971: Nixon ended gold monetary system, following deficit spending outpacing gold holding — he predicted this currency devaluation would hurt stock markets but it didn’t (like FDR in 1933)
• “Everything seems bigger up close”
• The Chinese sold Americans cheap goods and then used those dollars to buy American debt

• Mp0: hard currency
• MP3 monetary policy: fiscal and monetary policy Coordination
• Ironically the Sino-Soviet split in the 1960s led to China reapproachment with United States
• Deng Xiaoping: cat can be black or white if it catches mice
• Dalio is again very open and complimentary of China, always letting other voices criticize them while he complements them being open (This always reads as problematic to me because he is so financially invested in China, without ever disclosing in his books. It’s one of my central criticisms of him)

• The U.S. financial position (high debt, low reserves) hinges on being the world’s reserve currency which is it at risk
• “At this time, I judge the long-term risks of US government debt to be very high because the current and projected levels of US government debt and debt service, and sales of new debt and debt to be rolled over, are the highest ever and there are big debt rollover risks ahead. In fact, I judge the US government’s debt situation to be nearing the point of no return. By that, I mean that the debt and debt service levels are nearing those that cannot be reduced without great losses to debt investors because it’s such levels of self reinforcing debt “death spiral”occurs due to the need to borrow to service debt and due to interest rates rising because the risks of holding the debt currency become apparent.”
• Short term risks “relatively low” tho but two big threats: more QE and central government controlling central bank
• He argues: cut deficit to 3% of GDP by cutting from three sources: spending cuts, tax increases and interest rate cuts. Focus on reaching this top down goal first rather than fighting first about bottom up particulars of how

• It would take about an 11% increase in taxes, a 12% cut and spending or a 3% cut interest rates if just one lever was used alone, but interest rates falling by one percent is four times more effective than a one percent increase in tax revenue, and a one percent increase in tax revenue is 1.2 X more effective than a one percent reduction and spending
• See below his sample of reducing deficits through spending cuts
• Do these changes “counter cyclically”when economic times are good

• His “holy grail of investing” is to find and make 15 or more great uncorrelated bets
• “By studying history, we can see that such a challenging times have always led to much more autocratic governance because democracy become too divisive to be effective, and their leaders lose their abilities to compromise effectively”
• See below for two more charts of his research team on partisanship