How Countries Go Broke: The Big Cycle

How Countries Go Broke defines a “beautiful deleveraging” as a deleveraging, or debt reduction process, that balances austerity, debt restructuring, wealth transfers, and money creation. The term captures the book’s central policy ideal: that governments and central banks control excesses through coordination and pragmatism rather than denial or coercion. Japan’s eventual adoption of monetary expansion in the 2010s and China’s efforts after 2021 exemplify attempts at this delicate balance.

Central bank independence is the degree to which a nation’s monetary authority operates free from direct political control. In How Countries Go Broke, central bank independence is a vital safeguard against inflationary financing and currency devaluation. Threats to central banks’ independence—especially when political pressures mount—serve as early warnings of declining confidence in money and government debt. When governments compel central banks to adjust, the line between monetary and fiscal policy effectively disappears, leading to a new stage of financial decline.

A deliberate reduction in a currency’s value relative to other currencies, devaluation is typically used to restore competitiveness or reduce a country’s debt burdens. How Countries Go Broke frames devaluation as both a symptom and a tool of debt crises: it lowers real debt values for borrowers but it also erodes their purchasing power. Historical episodes—from Roosevelt’s 1933 gold suspension to the 1971 “Nixon shock”—demonstrate how devaluation marks key inflection points in the Big Debt Cycle, often signaling the end of a monetary regime.

A condition in which fiscal needs—government deficit financing and debt service—override monetary discipline. The book uses this term to describe the late stages of debt cycles when central banks must monetize government debt to maintain solvency. Under fiscal dominance, interest-rate policy loses effectiveness, inflation risks rise, and confidence in the currency weakens. Dalio warns that this dynamic often precedes the loss of reserve-currency status.

Monetary Policy 0-3 is Dalio’s framework for classifying monetary systems since 1945. MP0 refers to gold-linked systems (e.g., the West’s Bretton Woods system), MP1 to fiat regimes managed through interest rates (U.S. monetary policy post-1971), MP2 to money creation via quantitative easing, and MP3 to the coordination of fiscal and monetary policy through deficit monetization. These stages illustrate how governments adapt as each system’s limits are reached. The transition between phases signals both innovation and fragility in modern finance.

A policy in which central banks purchase long-term government and private assets to inject liquidity into the economy once short-term interest rates hit zero. In How Countries Go Broke, QE is the defining feature of MP2, used extensively after 2008 to stabilize markets. While QE postpones crises and inflates asset prices, it also deepens inequality and erodes the signaling power of interest rates. Its expansion into the 2020s blurs the boundary between market support and outright debt monetization.

A reserve currency is a national currency widely used for global trade, investment, and central bank reserves. In How Countries Go Broke, reserve-currency status is a privilege with inherent vulnerability: it grants a country borrowing power and geopolitical influence but encourages complacency and overleveraging. The U.S. dollar’s dominance, sustained since 1945, underpins the global financial system yet depends on trust in the U.S. economy. Dalio warns that losing reserve-currency status marks the final stage of national decline within the Big Cycle.

A self-reinforcing debt spiral is a feedback loop in which managing rising debt requires more borrowing, further worsening solvency. The book introduces this term to describe the tipping point beyond which debt burdens become unsustainable without inflation, restructuring, or default. In Dalio’s view, such spirals emerge when investor confidence falters, forcing governments to borrow at punitive rates. Avoiding this outcome requires early intervention through fiscal discipline or coordinated deleveraging.