Author: Ray Dalio
_Ray Dalio_
Reading time: 29 minutes
Synopsis
How States Go Bankrupt (2025) explains why powerful countries do not just collapse by chance. Dalio clearly shows the patterns of how countries rise, build up debt, and then fall apart. The main idea is the Great Debt Cycle. This cycle connects financial markets, politics, and global power. If you understand these movements, you will see why the world feels so weak and messy now. You will also see how we might fix things.
What’s inside for you: A full look at big economic and political changes.
Big empires rise and fall. They become powerful, control the world for some time, and then struggle. This happened to the Dutch Colonial Empire and the British Empire. This might also happen to the USA, the superpower of the 20th century. But how exactly does a country go bankrupt? If this happens again and again, what patterns can we see?
Ray Dalio is an investor and history expert on economies. He studied these patterns. He believes that political problems, social stress, and more inequality are not random. He thinks they follow cycles that happen again and again through history. Dalio calls the most important of these cycles the “Great Debt Cycle.” In this Blink, we explain how this process works over decades. It eventually causes even the strongest economies to face big problems.
Blink 1 – Small and Large Debt Cycles
Ray Dalio’s main idea is quite simple: The most important thing that causes good and bad economic times is not sales or profits. It is debt. More exactly, it is repeated debt cycles. If we understand how these cycles start, grow, and then change, we can see why economies grow, stop growing, and sometimes even crash.
Let’s first look at how lending money works. When people, companies, and countries borrow money, they have more cash right away. They can suddenly spend more than they earn. This helps the economy grow. Incomes rise, and things like houses or stocks become more valuable. People feel good about the market. That is why governments and central banks like to use this tool. Giving out more loans feels like making the economy grow quickly.
But every euro borrowed is a promise. It must be paid back later, with interest. So, a time always comes when borrowing must stop. Then the opposite happens. Those who borrowed money must save. They cannot keep spending a lot. People buy less, growth slows down, and the economy cools down.
Dalio calls this phase of borrowing a lot and then slowing down the short-term debt cycle. It usually lasts six to ten years. The idea is always the same: Low interest rates lead to more loans. This boosts spending, money flow, and growth. When prices then start to rise (inflation), the central bank steps in. It raises interest rates. The rest of the financial world reacts, and loans become more expensive. Growth slows down, and the cycle starts again.
This is clear so far. But it gets truly interesting when you put several of these short cycles one after another. They form a longer chain. About ten of these make what Dalio calls the Great Debt Cycle. This cycle lasts about 75 to 100 years. This long cycle also follows its own clear pattern: Each good period ends with more debt than the one before. Why? Because people always want more. We want to get as much as possible for as long as possible. So, we keep borrowing instead of slowing down in time.
At some point, incomes and assets are not enough to pay back the debts. Then there are only two difficult choices: Either a country cannot pay its debts and goes bankrupt, or it prints new money. Both options mainly hurt people who saved money: investors, retired people, and those with savings. Because either way, their money loses a lot of its value.
This chain of events has happened many times before. Big debt crises are found all through history. Almost no powerful country has avoided them. The reasons are not complex economic ideas. They are simple human feelings. In good times, we get excited. We ignore the risks on purpose. We keep believing that next time, everything will be better.
The better we understand these long-term cycles, the better our chances are. We can learn from our mistakes as a society and make changes. At least, this is the hope of business leaders and economists like Ray Dalio. We will look at this more in the next sections.
Blink 2 – The Nine Stages of the Great Debt Cycle
The Great Debt Cycle is like a map that governments and central banks follow into economic trouble. Ray Dalio says an economy typically goes through these nine stages. These are many money terms at once. But we will explain this cycle simply several times in this Blink.
Stage one starts when a country already has a lot of debt. This is true for private people and for the government. All the spending from borrowed money makes people feel good because the economy is growing.
In Stage two, private people and companies start to have problems. Loans become a heavy burden. More and more people cannot pay their debts. Businesses and families feel the pressure. To stop a crash, the government steps in to help. It saves banks, companies, or even whole industries. To do this, the government takes on even more debt itself.
This starts Stage three. Government debt grows so fast that investors get worried. They question if government bonds are really safe. If fewer people want to buy these government debts, it is a dangerous sign.
From this doubt comes Stage four. Fewer and fewer investors want to buy new government debt. Interest rates go up. Money and loans become scarce. Loans get more expensive. The economy struggles. Foreign money reserves shrink, and the country’s money (currency) becomes weaker. Now central banks face a problem: Instead of keeping prices stable, they suddenly have to make money easier to get. This is to fight the economic slowdown.
But this is the problem. Interest rates are already almost zero. So, there is little room to do anything. In Stage five, the central bank uses a strong tool: It prints new money and buys government bonds with it. This aims to keep interest rates low and help people who owe money. This might help for a short time, but it has bad side effects.
These side effects appear in Stage six. If more and more lenders sell their government bonds, even with the central bank’s help, and interest rates keep rising, the central bank itself gets into trouble. It pays more interest on the new money it created than it earns from its bond purchases. If the central bank loses money, investors finally lose trust in the economy. The central bank “prints” even more money. This makes the currency worth even less. And so, the dangerous cycle is complete.
At some point, a turning point is reached. In Stage seven, the debt burden is either changed by the government (restructured) or it loses value because of rising prices (inflation).
Hard political choices follow in Stage eight. These include new special taxes, taxes on wealth, and rules to stop investors from putting money abroad. Or other unusual steps to make the system stable.
Finally comes Stage nine. Reducing debt starts to work. The level of debt becomes small enough compared to incomes. The economy returns to a new and steady balance.
As we said, these are many economic steps all at once. But we wanted to show Dalio’s debt cycle as fully as possible. This map describes many clear warning signs. It shows what happens when obvious problems are ignored for too long. In the next part, we will add more internal and external factors to this financial view.
Blink 3 – Other Factors in Big World Events
So far, it sounds like economies exist in an empty space where everything repeats reliably for decades. But it’s not that simple. Ray Dalio describes five factors in total. Together, they shape what he calls the Big Overall Cycle. They work together like the five gears of a huge clock. The first is the Great Debt Cycle, which we have already talked about. The others are the political cycle within countries and the global political (geopolitical) cycle. This global cycle affects the world order. Natural events and human invention also play a part.
Let’s review the debt cycle again: Every economy goes through phases. Loans are taken, and then they must be paid back. Small cycles usually last six to ten years. Large debt cycles last about 75 to 100 years. It becomes dangerous when debts are larger than incomes and trust. As soon as people doubt that debts will be paid or that money will stay strong, the system fails.
This leads directly to the patterns of the political cycle inside countries. Democracies are usually stable as long as their economy is stable. But if the difference in wealth becomes too big, institutions lose trust, and political leaders become weak, people want “strong leaders.” Examples from history range from Julius Caesar in old Rome to the fall of the Weimar Republic. These power changes do not happen suddenly. They happen slowly: through problems, fear, and people tired of politics.
The global political system (geopolitical world order) is closely linked to this. We have already talked about the rise and fall of the Netherlands and Great Britain. After a long time of the USA being most powerful, China is now gaining more power. These changes mainly lead to conflicts when struggling great powers hold on strongly to their old power. For years, we have seen how the world is moving away from the post-war idea of working together internationally. AfD, Trump, and others only show that national interests are becoming stronger again.
The fourth big factor is natural events. These include pandemics, droughts, floods, and wildfires. Such disasters are no longer rare. They often hit economies without warning. Then they cruelly show what was already wrong. Climate change and changes in population (demographic change) will especially shape our future. No one can truly predict how.
The fifth factor is human invention. New technology can solve huge problems. Or it can create completely new ones. AI (Artificial Intelligence) is a good example here. The true impact of new technology depends on whether people truly want to work together. Or if they only want to help themselves.
These were many theories, cycles, and connections. It’s time to make it clear. We will now use Ray Dalio’s debt cycle model. We will apply it to the specific example of the USA and its changing history during the 20th century.
Blink 4 – The Three Money Policy Stages of Our Time
After the Civil War, the USA had no central bank for decades. The economy suffered badly and for a long time from money crises, like the “Panic of 1907.” In 1913, the Federal Reserve was created to make the system stronger. But the next decades were also full of change. The First World War began and made the world’s deep differences even worse. Later, the spending boom of the Roaring Twenties, built on loans, ended with the stock market crash of 1929. This led to the Great Depression. This time alone was a clear example of a cycle of growing debt, more inequality, and a sudden collapse.
After the Second World War, the “Bretton Woods System” created a new world order. The main industrial nations agreed to link the US dollar to gold. This made the dollar the most important part of the world’s money system. It worked for some time. But the Vietnam War made debt reach record levels in the 1960s. There was also social tension, new global political groups, and slowly rising prices (inflation). More and more countries wanted to exchange their dollars for gold. This put pressure on the USA’s own gold reserves. In 1971, President Nixon took action. He ended the link to gold. That was the end of the Bretton Woods System.
This started a new time. From then on, the value of money was no longer based on gold. It was based on trust. Dalio divides this period into three money policy stages. With the end of the gold standard, GP1 began. This was about guiding the economy through interest rates. But the central bank increased the amount of money each time to fight debt. This led to rising prices (inflation) for the dollar. There were also oil crises in the 1970s, global tensions, and strong unions that won higher wages.
So, the 1980s saw a different approach. Ronald Reagan and Margaret Thatcher fought rising prices (inflation) with high interest rates. They also carefully reduced the power of workers’ unions. The economy got better. But the dollar grew so strong by 1985 that it caused problems for many developing countries. These countries had borrowed a lot of money in dollars.
In the 1990s, the next new stage began. This included globalization, the end of the Soviet Union, China opening up, and the internet boom. This small debt cycle also ended suddenly with the Dot-com bubble bursting in 2000.
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Between 1981 and 2008, interest rates were slowly lowered over four short debt cycles. By the time the financial crisis started, they were almost zero.
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This turning point marked the end of the first money policy stage. It started GP2. From this time, central banks no longer just tried to guide the economy with interest rates. They took direct action. They printed money to buy government bonds (debts) and make the system stable. This stopped a crash. But it had dangerous side effects. Asset values grew very quickly. And with this, social inequality grew too. People who owned stocks or houses gained money. But others lost out. The strong dollar meant cheap imports and low price rises (inflation). But this also hurt local production. These changes and the fast spread of automation weakened the middle class. People became more frustrated. This led to protest movements like Occupy Wall Street and the Tea Party.
All these tensions finally affected politics. Donald Trump becoming US President in 2016 was a turning point. It marked a move away from global trade and working together with many countries. Instead, there was populism, nationalism, and economic protectionism. This led to tougher immigration rules, bitter trade wars, and breaking old international friendships. Then, nature also added a lot of trouble. The climate crisis and the Corona pandemic finally overloaded the system. By 2020 at the latest, GP2 had also reached its limits.
In the next section, we will look at the world’s current money policy stage. We will also look at the warnings Dalio gives for the future.
Blink 5 – Where the USA and Many Western Countries Stand Now
The Corona pandemic in 2020 caused huge problems for almost the whole world economy. Production stopped. Supply chains broke. Millions of people lost their jobs. And confused politicians broke an unwritten rule: that central banks should act freely from politics. So, what is special about GP3 is that governments and central banks work very closely. Countries take on huge new debts to save their economies from crashing. And central banks print the money needed to buy these government bonds (debts). This does not sound very lasting, does it? It isn’t.
Yet, this method is common near the end of a Great Debt Cycle. This happens when lower interest rates and other usual steps no longer work. Since 2020, GP3 has had two parts. First, the Democratic Biden government put large amounts of money into big recovery plans. These plans helped families and businesses. They fought joblessness and built new roads and bridges. This was meant to save the struggling economy. But it led to huge budget deficits and new debts.
At first, markets reacted with great excitement. Asset values quickly shot up, and loans stayed cheap. By 2024, private wealth in the USA had tripled compared to 2009. But new financial bubbles also formed, mainly in the technology sector. And finally, what had to happen, did happen: rising prices (inflation). The “Fed” (Federal Reserve) changed its direction. It let old government bonds expire without buying new ones. It also raised interest rates. Suddenly, the good times were over. Assets like stocks and bonds lost a lot of value. This slowed down inflation, even though prices were still high. The central bank then eased its policy again. The economy became stable just as the AI (Artificial Intelligence) hype started the next boom.
Meanwhile, political tensions grew stronger. By 2024, rising prices (inflation) and people’s uncertainty opened the way for Donald Trump’s return. With him came the chance of more nationalism and global political doubt back to the White House. Today, the political and economic balance feels weak. Old systems are shaking, and new ones are not yet in place. What happens next depends on how this stage of the Great Cycle ends. And that is what the next section is about.
Blink 6 – A Possible Solution for the Debt Problem
The situation in the USA shows what late capitalism is like. Financially, things do not look good for the USA right now. Government debt is higher than ever. Dalio says it is close to a dangerous turning point. This is when the government has to borrow more new money than it earns, just to pay the interest on its old debts.
It is surprising that everything still seems quite stable now. This includes economic growth, rising prices (inflation), and interest rates. But this calm is misleading. Under the surface, the debt load grows like a problem that won’t go away. If interest rates rise again, the central bank will lose a lot of money. This would make people trust its ability to act less. And if politicians or the public ever doubt the central bank’s freedom or skill, then the entire value of the US dollar is at risk.
According to Dalio, the USA and the global community should watch for two early warning signs. First, if the central bank again prints a lot of new money and buys government bonds. Second, if politicians put pressure on the central bank. Both would be clear signs that the USA is deep in a very dangerous part of the Great Debt Cycle.
As a way out, Dalio suggests his “three-part 3-percent solution.” The government’s budget deficit would need to be cut from six to three percent of the country’s total income (GDP). This would happen through three big saving steps: less government spending, higher taxes, and lower interest rates. Only this way, Dalio says, can a debt crisis be avoided.
This is not impossible. In the 1990s, the USA already made a similar change. Their budget deficit even turned into a surplus. The problem is less about money (economics) and more about politics.
Blink 7 – A Final Look at the Big Picture
Let’s take a final look at the big picture. The Great Debt Cycle is affected by five main factors. These are debt cycles, political changes within countries, shifts in global power, new technology, and natural events. These forces always affect countries and the world again and again over centuries.
This model helps explain why the world feels so tense and unstable right now. The current world order has mostly been in place since 1945. This means that 80 years later, it is in its late stage. Simply put, 90 percent of a big overall cycle is over. At the same time, within this big cycle, the USA is deep in a smaller debt cycle. The problem with the government’s budget is almost too big to manage. Loans and mountains of debt are growing faster than income. And this situation has never lasted long in history.
At the end of this stage, a break almost always happens. This leads to economic, political, or global political upsets. There are ways to make changes – Dalio mainly focuses on the USA in his analysis. But right there, since Donald Trump’s return to the White House, there has been great political and economic uncertainty. Looking at history shows that economic crises often weaken democracy. They give strength to leaders who want more power. Or, to say it more simply: When wealth seems to be in danger, national interests become more important. And this then causes new conflicts. These can even lead to military fights.
This is exactly what we see worldwide right now: more nationalism, protectionism, and global political tensions. We are nearing the end of a Big Overall Cycle. This cycle has shaped the global order for 80 years. If Dalio is right, then we face difficult years until a new order is formed.
Conclusion
His analysis is not a magic crystal ball. It is mainly a call to action: an invitation to learn from the past, clearly, for the future. If you know the big cycles of capitalism, you can react more carefully to its problems. You can also prevent them in the best case. So, the main message is simple, but also uncomfortable: Debt, power, and global political problems follow clear patterns. If we keep ignoring them, we will pay a price. If we take them seriously, we will at least have some room to act again. In uncertain times, this kind of knowledge is not a luxury. It is a need. The question is not if the next big change will come. It is if we are ready for it.
Source: https://www.blinkist.com/https://www.blinkist.com/de/books/wie-staaten-bankrott-gehen-de