Original Block unicorn Block unicorn June 4, 2025 17:01 Chongqing Author: Ray Dalio
Article translated by: Block unicorn
Preface
Today, my new book (How Nations Go Broke: The Big Cycle) is officially published. This article aims to briefly share the core content of the book. For me, the most important thing is to convey understanding at this critical moment, so I hope to communicate the core points in a minimalist way, leaving the depth to the discretion of the reader.
My Background
I have been engaged in global macro investing for over 50 years, and my time betting on the government bond market is nearly as long, and I have done very well. While I have previously been quite reserved about the mechanisms of significant debt crises and the principles for addressing these crises, I have now reached another stage in my life where I am eager to pass these understandings on to others and help them. Especially as I see the US and other countries heading towards a situation akin to an economic 'heart attack,' I felt compelled to write (How Nations Go Broke: The Big Cycle), a book that comprehensively outlines the mechanisms and principles I use, along with a brief overview of this book.
How the mechanism works
The dynamics of debt operate similarly for governments, individuals, or companies, with the distinction that the central government has a central bank that can print money (which leads to currency depreciation) and can extract funds from the people through taxes. Therefore, if you can imagine how the debt dynamics would operate if you or your business could print money or obtain funds through taxes, you can understand this dynamic. But remember, your goal is to keep the whole system running well, not just for yourself, but for all citizens.
To me, the credit/market system is like the circulatory system of the human body, providing nutrients to all parts of the market and economy. If credit is used effectively, it can create productivity and income sufficient to repay debt and interest, which is healthy. However, if credit is misused, leading to insufficient income to repay debt and interest, the debt burden will accumulate like plaque in blood vessels, crowding out other expenditures. When the amount of debt repayment becomes very large, debt repayment issues arise, ultimately leading to debt extension issues, as debt holders are unwilling to extend and want to sell. Naturally, this will lead to insufficient demand for debt instruments like bonds, resulting in excess supply, hence leading to: a) rising interest rates that depress the market and economy; or b) the central bank printing money and purchasing debt, which will lower the value of the currency and push inflation higher. Printing money also artificially suppresses interest rates, harming creditor returns. Both methods are undesirable. When the scale of debt sales becomes excessive, and the central bank has purchased a large amount of bonds yet cannot contain rising interest rates, the central bank will incur losses, affecting its cash flow. If this situation continues, the central bank's net assets will turn negative.
When conditions become severe, the central government and the central bank will both borrow to pay interest on the debt, and the central bank will print money due to insufficient demand in the free market to provide loans, leading to a self-reinforcing spiral of debt/money printing/inflation. In summary, focus on the following classic indicators:
The proportion of government debt repayment costs relative to government income (similar to the number of plaques in the circulatory system);
The ratio of government debt sales relative to government debt demand (similar to plaques shedding leading to a heart attack);
The amount of money the central bank prints to buy government debt to fill the debt demand gap (similar to doctors/central banks injecting a lot of liquidity/credit to alleviate liquidity shortages, generating more debt, which the central bank takes risks for).
These usually accumulate gradually over a long-term cycle of decades, with debt and debt repayment costs rising relative to income until they become unsustainable because: 1) the cost of debt repayment excessively crowds out other expenditures; 2) the supply of debt that needs to be purchased is excessive relative to the demand for purchase, leading to a significant rise in interest rates that severely impacts the market and economy; or 3) to avoid rising interest rates and worsening market/economy, the central bank prints a large amount of money and purchases government debt to compensate for insufficient demand, leading to a significant decrease in the value of the currency.
In any case, bond yields will be poor until money and debt become very cheap enough to attract demand, and/or the debt can be cheaply repurchased or restructured by the government.
This is a brief overview of the big debt cycle.
Because people can measure these factors, it is possible to monitor the occurrence of debt dynamics, making it easy to foresee impending problems. I have used this diagnostic method in investing without public disclosure until now, but I will detail it in my book (How Nations Go Broke: The Big Cycle) because it is now too important to keep secret.
More specifically, one can see the rise in debt and debt repayment costs relative to income, where the supply of debt exceeds demand. The central bank initially stimulates by lowering short-term interest rates, and then responds by printing money and buying debt. Eventually, the central bank incurs losses and has negative net assets. The central government and the central bank pay interest on the debt through borrowing, and the central bank monetizes the debt. All of this leads to a government debt crisis, akin to an economic 'heart attack,' as the limitation of debt-financed spending obstructs the normal flow of the circulatory system.
In the early stages of the final phase of the big debt cycle, market behavior reflects this dynamic through rising long-term interest rates, the depreciation of currency (especially relative to gold), and the central government's treasury shortening debt issuance periods due to long-term insufficient demand for debt. Typically, in the later stages of this process, when the dynamics are most severe, some seemingly extreme measures will be taken, such as implementing capital controls and exerting immense pressure on creditors to buy rather than sell debt. In my book, I explain this dynamic more comprehensively with a lot of charts and data.
A Brief Overview of the Current State of the US Government
Now, imagine you are running a large business called the US government. This will help you understand the financial condition of the US government and the choices made by its leadership.
This year’s total income is about $5 trillion, while total expenditure is about $7 trillion, resulting in a budget gap of approximately $2 trillion. This means that your organization's spending this year will exceed income by about 40%. And there is almost no capacity for expenditure reduction, as almost all expenses are pre-committed or necessary. Due to your organization’s long-term excessive borrowing, it has accumulated a massive debt — about six times the annual income (approximately $30 trillion), which translates to about $230,000 of debt per household. The interest bill on the debt is approximately $1 trillion, representing about 20% of corporate income, which is half of this year’s budget gap (deficit), and you will need to borrow to fill this gap. But this $1 trillion is not all you have to pay to creditors, as besides the interest, you also have to repay the due principal, which is about $900 billion. You hope that your creditors or other wealthy entities can lend to you again or lend to other wealthy entities. Therefore, the cost of debt repayment — in other words, the principal and interest that must be repaid to avoid default — is about $1 trillion, which is about 200% of income.
This is the current situation.
So, what will happen next? Let’s imagine. No matter how large the deficit is, you have to borrow money to cover it. There is much debate about the specific amount of the deficit. Most independent assessment agencies predict that, in ten years, debt will reach about $50 - $55 trillion, approximately 6.5 - 7 times the income (around $3 - $5 trillion). Of course, in ten years, if there is no plan to address this situation, the organization will face greater pressure to repay the debt, thereby squeezing spending, and faces greater risks: the debt it must sell will have insufficient demand.
This is the whole picture.
My 3% Three-Part Solution
I firmly believe that the government’s financial situation is at a turning point, as if this issue is not addressed now, the debt will accumulate to an unmanageable level, leading to significant trauma. It is especially important that this operation should be done when the system is relatively strong, not when the economy is weak. Because during economic contractions, the government’s borrowing needs will increase significantly.
Based on my analysis, I believe this situation needs to be addressed through what I call the '3% Three-Part Solution.' That is, balancing the budget deficit down to 3% of GDP through the following three methods: 1) cutting expenditures, 2) increasing tax revenue, 3) lowering interest rates. These three need to happen simultaneously to avoid any one adjustment being too large, as any excessive adjustment could lead to traumatic consequences. These adjustments need to be achieved through sound fundamental adjustments rather than being forced (e.g., if the Federal Reserve unnaturally suppresses interest rates, it would be very unfavorable). According to my projections, expenditures and tax revenue will each increase by about 4% relative to current plans, with interest rates dropping correspondingly by about 1 - 1.5%, leading to a future decline in interest expenditures averaging 1 - 2% of GDP, stimulating asset prices and economic activity, thus generating more revenue.
Here are some common questions and my answers.
The content of the book far exceeds what can be covered here, including descriptions of the 'overall big cycle' (including debt/money/credit cycles, domestic political cycles, external geopolitical cycles, natural behavior, and technological advancement), which drive all significant changes in the world, my views on possible future scenarios, and some insights on investing during these changes. But now, I will answer some frequently asked questions that come up during discussions of this book and invite you to read the complete book for in-depth understanding.
Question 1: Why do large government debt crises and major debt cycles occur?
The occurrence of large government debt crises and major debt cycles can be easily measured by the following: 1) the ratio of government debt repayment amounts relative to government income rises to unacceptable levels, thereby squeezing the government’s basic spending; 2) the amount of government debt sold relative to demand is excessive, leading to rising interest rates, which in turn causes market and economic downturns; 3) the central bank responds to these situations by lowering interest rates, which reduces demand for bonds, leading the central bank to print money to buy government debt, thereby devaluing the currency. These usually accumulate gradually over a long-term cycle of decades until they can no longer continue because: 1) the cost of debt repayment excessively crowds out other expenditures; 2) the supply of debt that needs to be purchased is excessive relative to the demand for purchase, leading to a significant rise in interest rates that severely impacts the market and economy; or 3) the central bank prints a large amount of money and buys government debt to compensate for insufficient demand, leading to a significant decrease in the value of the currency. In any case, bond yields will be poor until they become cheap enough to attract demand or the debt is restructured. These can all be easily measured, and it can be seen that they are heading towards an impending debt crisis. When the constraints of debt-financed spending occur, economic 'heart attacks' similar to those caused by debt will arise.
Throughout history, almost every country has experienced such debt cycles, often occurring multiple times, so there are hundreds of historical cases to refer to. In other words, all monetary orders will collapse, and the debt cycle process I describe is the underlying reason for these collapses. This situation can be traced back to recorded history. It is the process that led to the collapse of all reserve currencies (like the pound and the previous Dutch guilder). In my book, I present 35 recent cases.
Question 2: If this process occurs repeatedly, why is the dynamic behind it not widely understood?
You are correct; this is indeed not widely understood. Interestingly, I cannot find any dedicated studies on how this process occurs. I speculate that the reason it is not widely understood is that in reserve currency countries, this process typically only occurs about once in a lifetime — when their monetary order collapses — and when it occurs in non-reserve currency countries, people think reserve currency countries won’t encounter such problems. I found the only reason for this process is that I have seen it happening in sovereign bond market investments, which prompted me to research many similar historical cases to be able to respond adequately (e.g., I have dealt with the 2008 global financial crisis and the European debt crisis from 2010 to 2015).
Question 3: How worried should we be about the US experiencing a 'heart attack' style debt crisis while waiting for the US debt problems to explode? People have heard a lot about impending debt crises that never occurred. What’s different this time?
I believe that, given the aforementioned situation, we should be very concerned. I think those who worry about a debt crisis when conditions are not as severe are correct because if measures are taken early on, such as warning people not to smoke and eat poorly, the situation can be prevented from becoming so dire. Thus, I believe that the reason this issue has not gained broader attention is both due to a lack of deep understanding and because premature warnings have led to much complacency. It’s like a person with a lot of plaque in their arteries, consuming a lot of high-fat food and not exercising, saying to their doctor, 'You warned me I’d have problems if I didn’t change my lifestyle, but I haven’t had a heart attack yet. Why should I believe you now?'
Question 4: What could be the catalysts for a debt crisis in the US today, when might it happen, and what would the crisis look like?
The catalysts will be the convergence of the various influencing factors mentioned earlier. As for timing, policy and external factors (such as significant political changes and wars) could accelerate or delay its occurrence. For example, if the budget deficit decreases from about 7% of GDP, as I and most people predict, to about 3%, the risk will be greatly reduced. If a major external shock occurs, the crisis may come sooner; if not, it may come later or not at all (if managed properly). My guess — which may not be accurate — is that if the current path does not change, the crisis will occur within three years, plus or minus two years.
Question 5: Are you aware of any similar cases where budget deficits were significantly reduced in the way you described, and achieved good results?
Yes, I know several cases. My plan will reduce the budget deficit as a percentage of GDP by about 4%. The most similar and successful case was the reduction of the US fiscal deficit from 1991 to 1998, which reduced GDP by 5%. My book also lists several similar cases in other countries.
Question 6: Some people believe that due to the USD's dominance in the global economy, the US is generally less susceptible to debt-related issues/crises. What do you think those who hold this view are overlooking or underestimating?
If they believe this, they are overlooking the understanding of the mechanism and the lessons of history. More specifically, they should examine history and understand why all previous reserve currencies are no longer reserve currencies. Simply put, money and debt must be effective tools for storing wealth; otherwise, they will be devalued and discarded. The dynamics I describe explain how reserve currencies lose their effectiveness as wealth storage tools.
Question 7: Japan — with a debt-to-GDP ratio of up to 215%, the highest among all developed economies — is often cited as a typical example of 'a country that can sustain high levels of debt without experiencing a debt crisis.' Why can't Japan's experience bring you comfort?
Japan's case exemplifies the issues I describe and will continue to serve as a testament to it, practically validating my theory. More specifically, due to the Japanese government’s excessive debt, Japanese bonds and debts have consistently been poor investments. To compensate for the lack of demand for Japanese debt assets at low interest rates, the Bank of Japan has printed massive amounts of money and bought large quantities of government debt, leading to a 45% loss for Japanese bondholders relative to USD debt since 2013 and a 60% loss relative to gold. Since 2013, the cost of Japanese workers has decreased by 58% relative to American workers. My book contains an entire chapter dedicated to discussing the situation in Japan, providing a thorough explanation.
Question 8: Which regions of the world appear particularly tricky from a fiscal perspective, and where might people underestimate these areas?
Most countries face similar debt and deficit issues. The UK, the EU, China, and Japan are all in this situation. That’s why I expect most countries will undergo a similar process of debt and currency devaluation adjustment, which is also why I anticipate that non-government-issued currencies, like gold and Bitcoin, will perform relatively well.
Question 9: How should investors respond to this risk, and how should they position themselves for the future?
Everyone's financial situation varies, but as a general recommendation, I suggest diversifying investments in asset classes and countries with strong profit and loss statements and balance sheets, and without significant internal political or external geopolitical conflicts, while reducing allocation to debt assets like bonds, and increasing holdings in gold and a small amount of Bitcoin. Allocating a small amount to gold can reduce the risk of the portfolio, and I believe it could also enhance the portfolio's returns.
Finally, the views expressed here are solely my own and do not necessarily represent the views of Bridgewater Associates.
