Did Ray Dalio Predict the Next Global Meltdown?

“It pays to look at analogous periods in history to see what was done to consider what might be done.”- Ray Dalio

What if you could predict when a country will go broke? Ray Dalio, one of the world’s most successful global macro investors, argues that these economic catastrophes follow predictable patterns - patterns that he has been carefully studying over the past 50 years.

What can you expect from this book review?

In addition to breaking down the book's core ideas, we'll explore the concepts that resonated with me personally and highlight areas where Dalio could have provided more detail.

I’ll also share several intriguing "Did you know?" facts that left me with a sense of wonder. To top it off, I’ll conclude with a bonus book recommendation that promises to be equally thought-provoking. So, let’s dive in!

How Countries Go Broke offers a perfect balance of informative yet digestible reading. It is engaging, practical, and articulate in suggesting how the creation of unsustainably large amounts of debt assets and debt liabilities relative to the amounts of money, goods, services, and investment assets in existence lead to big debt crisis and run on banks.

Through practical examples, you will learn to identify significant turning points of the financial phases and gain a deeper understanding of our current economic realities and future trends.

Dalio has divided this powerful book into four sections -

Part 1: Overview of the Big Debt Cycle

Part 2: The Archetypical Sequence Leading to Central Banks and Central Governments Going Broke

Part 3: Going Back

Part 4: Looking Ahead

Part 1: Overview of the Big Debt Cycle

Starting with Part 1 of this book, you’ll learn exactly what a big debt cycle is. If you take away one practical insight from Part 1, let it be this: By paying close attention to how central banks are intervening, you can start to piece together where we are and where we’re headed in the debt cycle. These interventions are clearly explained through insights into five distinct phases of the debt cycle and six types of actions taken by central banks throughout these phases (from MP1 to MP6).

Dalio’s framework is brilliant for spotting macro shifts. If you’re an investor, this is your survival guide. If you’re a casual reader, brace yourself for some heavy lifting—these concepts are dense, but the payoff is real.

Although primarily an introduction, this part of the book is my absolute favourite due to its clarity and practical relevance.

Prepare to discover a fresh perspective on price determination for goods, services, and assets – moving beyond the traditional “demand and supply” approach to focus on “PEOPLE and Their Reasons” approach. Furthermore, Dalio offers a fascinating insight into how astute investors choose between gold and bonds, and discern when it's advantageous to be a lender versus a borrower.

Beyond theoretical analysis, this book offers practical teachings for the future.

• You'll gain the ability to pinpoint countries vulnerable to debt defaults, and even understand potential pathways for nations like the US to stabilise their debt-to-income in the coming decade.
• Moreover, Dalio provides a valuable framework for evaluating the financial well-being of different economies, demonstrated through his examination of the US, Japan, China, France, Germany, and the UK using key indicators such as debt relative to future income and debt service relative to savings.

Did you know?

At this moment, the U.S. government’s debt service is approximately 100% of its income, projected to rise to 150% within 15 years.

My Take on Part 1:

What I absolutely loved about Dalio's approach in Part 1:

• I loved how Dalio explained the concept of “Big Debt Cycle”.
• Also the way he highlights central bank actions as key indicators. It's pure genius! It's like he is giving us secret sauce to understand macro shifts.
• His concept of “beautiful and painful deleveraging” was especially captivating.

Where it could have been better:

While the framework is brilliant, I was left wanting a bit more on the human cost of these debt cycles. How do these shifts really impact people's lives? It would be fascinating to see Dalio explore the real-world implications of specific economic policies—like interest rate changes—and illustrate how they touch the lives of ordinary people.

Understanding these personal stories would add a powerful dimension to his analysis and make the economic concepts resonate even more.

Part 2: The Archetypical Sequence Leading to Central Banks and Central Governments Going Broke

What does Dalio mean by a central bank “going broke”? It’s not necessarily defaulting, but rather being unable to cover debt service payments without resorting to massive money printing.

In severe debt crisis, governments often implement unconventional measures to stabilise the economy:

• Higher/New Taxes:

  First, they might try to squeeze more revenue out of citizens and businesses through significantly higher or entirely new taxes. Imagine suddenly having to pay a hefty ‘national recovery’ tax!

• Capital Controls:

  Next, they might put up financial roadblocks, like capital controls, to prevent money from leaving the country. For example, many European countries had capital controls during and after World War 1 and World War 2.

• This part of the book is instructive and well-organised, allowing for a better understanding of how concepts interrelate. You'll learn how a debt crisis can force central banks to take unconventional actions like QE (Quantitative Easing), which carries the risk of inflation.
• Dalio doesn’t just explain what happens—he shows why it happens, using historical charts and patterns that reveal how gold, commodities, and real assets typically outperform. Trust me, economic chaos has rarely been made this readable—or this engaging.
• Elaborating further, the author describes the final stage of a big debt crisis, which involves the reduction of debt through restructuring and devaluation. This stage is often accompanied by significant losses for those holding devalued assets.

Did you know?

The U.S. has a very high Government Interest Service to GDP Ratio (a higher proportion of the country's total economic output that is used to pay the interest on its outstanding government debt). Thus, its financial burden may eventually rise indefinitely if no interventions are made. Other countries like Europe, Japan, and China currently have lower Government Interest Service to GDP Ratios due to factors like low debt levels or long-term low interest rates.

My Take on Part 2:

What I absolutely loved about Dalio's approach in Part 2:

• What I truly loved about Part 2 is how Dalio masterfully breaks down the reasons and sequence of how countries go bankrupt.
• In this section, Dalio shares another gem: key metrics to watch for signs of crisis, by illustrating how financial players respond to currency stress.
• I really appreciated his visual representations of historical scenarios where central banks of various countries experienced significant cash flow losses, leading to dramatic currency devaluation.

Honestly, I have no complaints about this part. Dalio strikes a fantastic balance between providing thorough explanations and not getting too much in detail.

Part 3: Going Back

Before you delve into this part of the book, remember two rules of thumb:

Understand Cause and Effect: Everything happens for a reason. Identify the cause-and-effect relationships driving changes to create a universal template for explaining past and present developments across all time frames and countries.

Focus on the Big Picture: Don't get lost in minor details; keep sight of the major shifts and how significant events unfold.

“The main thing is to keep the main thing the main thing.” - Stephen R. Covey

"Looking Back" isn't your typical history recap. It is Dalio's interesting and valuable unconventional perspective on past events and their underlying causes. He urges us to apply the theoretical framework and the archetypal sequence to real world history over the past 80 years.

Debt Dilemma of U.S.:

• Zooming in on the U.S., Dalio reveals how the US government got itself into more debt to support massive private sector debt, which pushed its debt-to-GDP ratios to new highs.
• Big red flag for U.S.: Debt servicing could soon outpace income, putting serious pressure on the system. This section isn't just about historical analysis; it's a crucial warning and a guide for the future.

China's Rise from "Poor/Weak Country" into "Global Superpower":

• Dalio skillfully breaks down how China transformed into the world's leading trading and manufacturing powerhouse. After Deng Xiaoping took charge, China began producing an astonishing array of goods at prices that left other nations in the dust. This book explores the fascinating story behind this remarkable rise. The author highlights a striking evolution in monetary policy over just 27 years, from 1981 onward. It witnessed a dramatic shift from interest-rate-driven monetary policy (MP2) to a bold new approach known as quantitative easing (MP3). But that's not all.
• The book also introduces MP4—a scenario where the central government and the central bank work hand-in-hand. Picture a situation where the government runs massive deficits, and the bank steps in to monetise them, especially during crises like the COVID pandemic. This intriguing strategy often emerges when both MP2 and MP3 fall short of expectations.

Japan: A Cautionary Tale of What Not to Do When Debt Bubble Bursts

• Dalio's examination of Japan offers a stark and technically rich case study – a strong example of what not to do after a debt bubble bursts.
• He carefully details how Japan's failure to aggressively restructure debt and keep interest rates above inflation and nominal growth - which he calls beautiful deleveraging, led to long-lasting economic stagnation.
• He reveals the surprising statistic of much lower dollar incomes for Japanese individuals compared to their U.S. counterparts, showing the real-world effects of sustained deflation. This section serves as a critical lesson in economic management, highlighting the possible dangers of inaction when facing a major financial crisis.

Did you know?

Since 2013, wages in Japan have barely increased—only about 0.8% per year in yen.

So, Japanese workers didn’t get much of a raise. At the same time, the yen weakened significantly (i.e., its value fell compared to other currencies), and wages in other countries, like the U.S., rose faster. This combination made Japanese labour much cheaper in comparison. For instance, it became 58% cheaper to employ a Japanese worker compared to an American worker over that time. And it wasn’t just labour—other costs in Japan also dropped relative to costs abroad. This made Japanese goods and services more competitive globally, because they became cheaper for other countries to buy.

In brief, from 1945 through 1990, Japan rebuilt itself to become the second greatest economic power in the world and in the process built up a huge debt burden that burst in 1989-90, which has had a huge weakening effect on Japan ever since.

Beyond the core analysis, Dalio offers valuable insights into nations like the UK and more countries, making this section particularly strong.

My Take on Part 3:

What I absolutely loved about Dalio's approach in Part 3:

• What I really loved about Part 3 is how Dalio brings history to life. While many people find history dull, his approach—what he calls "Going Back"—is anything but dry. It serves a purpose: to help us recognise patterns that can inform our understanding of the present.
• It’s reassuring to hear someone who has both lived through and researched various crises assert that major political events, like war threats and sensational headlines, are often less significant than we think. He encourages us to focus on “What Truly Matters” to the markets, and I won’t spoil it by revealing those insights here; I want you to experience them in his own words.
• Dalio further discusses how he made significant profits by observing recurring cycles. He highlights how he predicted the 2008 crisis, which was informed by his historical study of 1929-33 crisis and the utilisation of just 2 key metrics, which is truly fascinating.

Where it could have been better:

I felt there was a missed opportunity in the limited coverage of rapidly growing economies like India, Vietnam, and Singapore. While he does analyse the top 24 countries—including India, Argentina, Turkey, and Russia—in his Great Powers Indices, I would have appreciated a more in-depth examination of these nations, similar to the thorough analysis he provides for the US, Japan, UK, and China. That additional context could have enriched this part even further.

Part 4: Looking Ahead

"Looking Ahead" can be seen as Dalio questioning, "Should We Be Worried About the U.S. Economy?" (Spoiler: Dalio says yes).

This part isn't just another economic forecast; it's a strong warning and, crucially, a proposed method for the U.S. to successfully pass a difficult financial period.

Here are few reasons why you should definitely read this part:

• Dalio's Economic Dashboard:

  You'll get to see Dalio's created economic dashboard, similar to credit scores for countries, which can be used to spot financial red flags.

• The U.S. Dollar's Future:

  You'll learn Dalio's thoughts on whether the U.S. dollar's reign is guaranteed and the global consequences if it weakens.

• Practical Advice for Policymakers:

  You'll gain practical insights from Dalio's advice to U.S. policymakers, including his "3% solution," which aims to prevent an economic disaster in the U.S. He provides a step-by-step guide on how to survive a U.S. debt crisis.

My Take on Part 4:

What I loved about Part 4:

• What I absolutely loved about Part 4 was the logical structure. The overall structure of Part 4 is logical: He first lays out his indicators, then applies them to different countries, and finally discusses potential solutions for the U.S. This step-by-step approach makes it easier to follow his reasoning.
• Also, Dalio's writing style is direct and frank. He doesn't sugarcoat and definitely doesn't shy away from expressing his opinions! This directness can be refreshing and helps to drive home the urgency of the issues he is discussing.

Where I feel he could have done better:

• Dalio's 3% solution is no doubt really good; however, what he has not included in his analysis is how factors like political polarisation, lobbying by special interest groups, and public opinion can significantly influence whether and how policies are implemented. He could have dived deeper into giving potential strategies for overcoming opposition to implementing his proposed solution.
• Not only that, after I read his deep-dive solution for the U.S. to survive its debt crisis, I got an idea: Why can't we get his perspective on how various other countries can solve any potential crises that they are more vulnerable to face going forward, and a step-by-step solution for that? However, considering the already existing length of the book, he has done quite well in explaining the key context that was needed.

Broader Conclusion and Bonus Recommendation

"How Countries Go Broke" is a must-read – it's the kind of book that changes how you see the world. One standout feature is its accessibility; if you're not keen on reading every word, you can easily scan the main ideas by reading the bolded text, gaining a solid understanding of Dalio's insights without feeling overwhelmed. Dalio has a gift for making complex economics feel both understandable and urgent.

If you're looking for a similar book with greater depth, I recommend checking out his "Principles for Dealing with the Changing World Order". This book offers a historical look at the rise and fall of empires, providing an invaluable framework for understanding the big picture of global economics.

How Countries Go Broke, Principles for Navigating the Big Debt Cycle, Where We Are Headed, and What We Should Do. 2025. Ray Dalio.