How we can avoid going broke

“In any case, the days of borrowing much more than can be paid back to support excess consumption, by unproductive people, are coming to an end” - Ray Dalio

Reckless spending

How will our generation be remembered—as wise stewards or reckless spenders? The next decade will decide that legacy.

Ray Dalio’s recent book, How Countries Go Broke, offers powerful insights. Dalio, a veteran global investor, has studied debt crises spanning 500 years, examining 750 debt and currency markets. He found that a staggering 80% eventually went bust. Debt crises aren’t new—yet we seem destined to relearn these lessons repeatedly.

Whilst the numbers and storytelling by Dalio focuses on the US, the current debt dynamics can be applied to US, UK, France and a number of other European countries. China too has a challenging amount of debt, that it may soon need to focus on.

The Debt Trap

Debt today seems normal, even necessary. But ancient wisdom viewed it with suspicion. Most religions warned against excessive debt. Debt allows immediate consumption without immediate payment—it's a sugar rush today, diabetes tomorrow.

Most economic discussion is around short-term economic boom-and-bust cycles lasting 5–10 years. This short-term focus overlooks the deeper, stealthier Long-Term Debt Cycle of 70–100 years. Almost noone alive remembers the last major debt crisis clearly, making each generation vulnerable.

Dalio argues we are nearing a critical point in this long-term cycle. Historically, such peaks coincide with internal tensions and global conflicts—like during the World Wars. This picture is further complicated by technological disruption and events like COVID or climate change.

Religion and debt

The Five Stages of Debt

Dalio outlines five stages (and the signpost in this debt cycle):

Stage 1: Hard Money

Initially, money is backed by commodities like gold. Debt fuels growth but faces limits. In 1945, US debt was seven times its gold reserves; today, it’s 37 times.

Stage 2: Fiat Money

When governments drop commodity backing (US, 1971), money supply expands freely, debt climbs higher.

Stage 3: Debt Monetisation

Interest rates hit zero. Central banks print money, inflating financial assets but worsening inequality—seen from 2008–2020.

Stage 4: Fiscal Stimulus & Debt Monetisation

Governments increase spending dramatically (like COVID stimulus), financed by central banks printing money, ballooning debt.

Stage 5: Reckoning

This is where we are now.

Debt feels manageable with low rates but leaves economies fragile. Inflation risks rise, wages stagnate further, and higher interest rates sharply increase debt servicing costs.

Recent events illustrate this fragility:

• The "Truss Effect" in the UK: Unfunded tax cuts triggered panic in bond markets, quickly reversed by market pressure.

• US Tariffs: Trump’s tariffs led markets to reassess US debt sustainability, increasing borrowing costs rapidly.

Both examples highlight how quickly markets punish fiscal irresponsibility, spiralling into deeper crises.

What happens next?

Is it balancing the books? Or inflating the currency so the debt load loses real value? Or outright default and restructuring?

Importantly, roughly this pattern (although in cases cases the cycles maintained a hard currency until default) has occurred many times before. Whilst each time this happens feels unique and very logical, this cycle follows a basic pattern of the temptation for governments to borrow.

Escaping the Debt Trap

Dalio’s solution for stabilising debt involves a "3% three-part solution". Taking the US as an example, he recommends cutting fiscal deficits from 6% to 3% of GDP through:

1. Reducing Government Spending (~4%): Broadly mandated cuts force clearer trade-offs.

2. Increasing Taxes (~4%): Higher taxes, especially on the wealthy, and fewer subsidies spread the burden fairly.

3. Temporarily Lowering Interest Rates (1–1.5%): Eases debt burden, balancing deflationary impacts of reduced spending and higher taxes. However, this risks currency weakening.

This combined approach stabilises debt, although painful. Yet failing to act decisively now risks far worse outcomes.

What are the warning signs?

Dalio compares debt dynamics to human circulation. Properly used credit increases productivity—like nutrients flowing through arteries. Poorly used debt creates blockages, squeezing essential spending and potentially triggering an economic "heart attack." Rising debt service costs eventually become unsustainable, forcing either higher interest rates (hurting growth) or money printing (causing inflation).

Dalio identifies three warning signs:

• High debt servicing relative to revenue.

• Excessive selling of government debt.

• Central banks printing money to buy government debt.

The Current US Reality

Imagine managing the US government like a business:

• Annual revenue: $5 trillion; Expenses: $7 trillion (40% overspend).

• Debt: ~$30 trillion (6x annual revenue), about $230,000 per household.

• Interest payments: $1 trillion annually, around 20% of revenue.

• Total debt service (interest + principal repayments): ~$10 trillion, double annual income.

This trajectory is clearly unsustainable.

Our Moment of Responsibility

Fortunately, nations have resolved similar crises through shared sacrifice and transparent leadership. Ordinary citizens often sense economic decline firsthand—in shrinking wages, crumbling infrastructure, and social tensions. Transparent communication and collective action can shift perceptions from denial to shared responsibility, avoiding severe outcomes.

Hopeful but Urgent

Dalio insists this isn't doom-mongering; it's pragmatic realism. Debt crises are not inevitable—they’re outcomes of collective choices. Confronting excessive debt requires difficult adjustments, but delaying action only deepens suffering.

The responsibility rests with us. Let’s choose wisely, ensuring future generations see us as the ones who courageously secured stability, not those who drifted knowingly toward disaster.

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