Widely regarded as one of the greatest macro investors of all time, Ray Dalio recently provided a summary of his new book – How Countries Go Broke: The Big Cycle. A book that distills the strategies he’s used for decades to navigate major debt crises—at a moment when he sees “the U.S. and other countries headed toward having the equivalent of economic heart attacks.”
So what’s actually going wrong?
“To me, the credit/market system is like the circulatory system, bringing nutrients to all parts of the body that make up our markets and economy.” Dalio explains, “If it isn’t used well… debt service will build up like plaque that squeezes out other spending.”
That’s where the metaphor sharpens: “When debt service payments become very large, that creates a debt service problem and eventually a debt rollover problem… and naturally when there is a shortage of demand relative to supply… interest rates rise, which drives markets and the economy lower.” The alternative? “The central banks ‘printing money’… which lowers the value of money which raises inflation.”
It’s not just theory—it’s diagnostic: “Because one can measure these things, one can monitor this debt dynamic happening… it’s easy to see problems approaching.” So why haven’t more people caught on? “Interestingly, I couldn’t find any studies about how this happens… I theorize that it is not well understood because it typically happens only about once a lifetime in reserve currency countries.”
And now? “I think we should be very worried… those who worried about the debt crisis happening before… were right to worry… addressing it earlier could have prevented the conditions from getting so bad.”
What about the skeptics who point to Japan?
“Japanese bonds and debt have been terrible investments… holders of Japanese bonds [had] losses of 45% relative to holding US dollar debt since 2013 and losses of 60% relative to holding gold… The typical wages of a Japanese worker have fallen 58%… relative to the wages of an American worker.”
So what can be done?
“My 3 percent, 3-part solution… get the budget deficit down to 3 percent of GDP… by 1) cutting spending, 2) increasing tax revenue, and 3) lowering interest rates.” But Dalio warns: “These things need to come about through good fundamental adjustments rather than be forced.”
And what should investors do?
“Diversifying well in asset classes and countries… underweighting debt assets like bonds, and overweighting gold and a bit of bitcoin… Having a small percentage of one’s money in gold can reduce the portfolio’s risk, and I think it will also raise its return.”
Dalio’s diagnosis is clear. The system is under pressure—and investors, he says, should prepare accordingly.
You can find the summary here:
Ray Dalio – How Countries Go Broke: The Big Cycle In a 5-Minute Read
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