How Countries Go Broke: The Big Cycle

Japan functions in Dalio’s analysis as the archetype of a rich, aging society trapped by debt and deflation. After its 1989-1990 asset bubble burst, Japan endured decades of stagnation and monetary experimentation, serving as a preview of challenges now facing Western economies. Dalio dissects Japan’s delayed response to its banking crisis; its reluctance to write off bad loans and its prolonged maintenance of positive real interest rates provide a warning about political inertia.

The Bank of Japan’s eventual embrace of quantitative easing (buying government bonds) and low interest rate policies under Haruhiko Kuroda in the 2010s marked a turning point. Through “Abenomics,” the government coordinated fiscal stimulus named for Prime Minister Shinzo Abe, structural reform and massive bond-buying pushed interest rates low enough to re-stimulate the economy. Dalio interprets this as a belated but necessary move toward a “beautiful deleveraging.”

In How Countries Go Broke, Japan’s experience reveals the cost of monetization: savings and pension funds bear silent losses as inflation erodes asset value. In Dalio’s global framework, Japan demonstrates both the dangers of delay and the inevitability of debt monetization for aging, highly indebted nations.

China occupies a complex position in Dalio’s debt-cycle framework—as both a rising power and a potential future victim of its own credit excesses. He credits China’s leadership, particularly under Xi Jinping, with a pragmatic ability to control capital flows and coordinate fiscal-monetary responses that resemble his ideal of “beautiful deleveraging.” The People’s Bank of China operates with a high degree of political integration, allowing swift policy interventions to stabilize markets or curtail speculative bubbles.

Dalio warns that China’s success is fragile. Rapid debt accumulation, demographic decline, and capital outflows threaten to undermine its economic stability. Geopolitical tensions with the United States are straining international relationships in trade and finance. China’s ability to maintain internal stability and external credibility will determine whether it ascends to reserve-currency status or falls victim to the same cycle of overextension that toppled past empires. In How Countries Go Broke, China serves as a competitor and mirror to the United States—demonstrating how power transitions unfold amid debt, discipline, and uncertainty.

The European Central Bank and its member governments represent Dalio’s most intricate case study. Unlike national systems, the Eurozone lacks unified fiscal policy but shares a common currency, making its crises—such as Greece’s in 2010—especially revealing. Europe’s experience shows how debt without fiscal cooperation creates structural fragility.

Under leaders like Mario Draghi and Christine Lagarde, the ECB has repeatedly intervened to preserve stability through bond-buying and lowering interest rates. These actions demonstrate both the ingenuity and limits of modern central banking. Dalio interprets Europe’s chronic low growth and political fragmentation as symptoms of a region caught between austerity and inflation—unable to reduce its debt cleanly because of competing national interests. The Eurozone, in his view, is a laboratory for the future of all advanced economies: a place where monetary policy sustains economic cohesion but cannot resolve the underlying political imbalances.

In How Countries Go Broke, Great Britain is an example of late-stage reserve-currency decline. During the 19th century, the British pound served as the global reserve currency, supported by trade dominance and colonial expansion. As with all empires in Dalio’s framework, overextension, rising debt, and military costs eroded its global competitiveness. The Bank of England’s efforts to defend the pound’s gold peg during the interwar years—tightening monetary policy even as the economy weakened—illustrate the difficulty of sustaining credibility in a period of negative growth. Dalio uses Britain’s post-World War II decline to show how reserve status fades gradually, not suddenly, as investors lose confidence and domestic living standards adjust downward. The U.S., he warns, now faces similar constraints: mounting fiscal strain, geopolitical burdens, and a world less willing to finance its deficits indefinitely.