How Countries Go Broke: The Big Cycle

Chapter 17 explains the risks of long- and short-term debt for governments and central banks using a broad set of balance-sheet indicators. The chapter presents these metrics as a “dashboard” that summarizes each country’s financial health, focusing on debt levels, reserves (liquid foreign-currency assets), and reserve-currency status. The table Dalio references compares major economies in 2025 and highlights how reserve-currency nations enjoy greater safety because their money is widely accepted worldwide.

Dalio uses the United States, Japan, China, and smaller nations to illustrate how assets, liabilities, and currency structures shape risk. He notes that the United States carries exceptionally large central-government debts and low reserves—serious vulnerabilities partly offset by the dollar’s global dominance. Japan’s heavy debt burden is mitigated by domestic ownership and large reserves. China’s debts are substantial but mostly in its own currency, and although it holds significant reserves, declining foreign investment erodes that protection. By contrast, countries such as Singapore, Norway, and Saudi Arabia maintain strong net-asset positions and ample reserves.

He likens long-term debt risk to a chronic illness (conditions that build slowly) and short-term risk to a sudden heart attack (triggered by shocks such as war or pandemic). Dalio judges U.S. long-term risk “very high,” warning that self-reinforcing debt spirals could emerge if borrowing costs rise, though he considers short-term risks relatively low for now because growth, inflation, and credit conditions remain stable.