Ray Dalio, founder of the world's largest hedge fund Bridgewater Associates, is preparing to publish a book titled "How Nations Fail." One possible translation of the title is "How America Will Fail." Dalio has shared a draft of the book on his social media, outlining its general content. Let’s take a brief look at what he has written.

Core: The Great Debt Cycle

Ray Dalio indeed aims to adopt a broader perspective to address the issue of "national bankruptcy." In his view, there exists an often-overlooked big debt cycle. This major cycle has repeated itself throughout history—seen in the Bible and in the rise and fall of Chinese dynasties over thousands of years. However, people generally have little understanding of the big debt cycle, recognizing only the short debt cycle. This is because the short cycle spans roughly a year (or years), while the big debt cycle extends over decades (or years), making it unlikely for individuals to grasp it based solely on their personal life experiences. Moreover, major debt crises, such as the global financial crisis of 2008 or the debt crises in European countries (Portugal, Italy, Ireland, Greece, and Spain), tend to fade from memory. We might feel that we have weathered these crises, and many even believe policymakers have learned how to manage them, failing to see these events as warnings of larger crises yet to come.

Ray Dalio is a global macro investor who, over the years, has experienced multiple debt cycles in many countries, forming the foundation of Bridgewater's investment bets. Driven by his interest in debt cycles, he "carefully studied all major debt cycles of the past years and briefly examined more debt cycles from earlier periods." In his book, he presents a case study template, comparing the performance of major debt cycles from past years to the present to see how these patterns align with the template. This includes brief case studies of debt cycles in countries like China and Japan. Thus, Dalio's thinking spans both history and a global perspective. However, the foundational economic framework he relies on is rooted in the U.S. and is more suited to the American context. His consideration of "national bankruptcy" stems from his concerns about the future of the U.S. economy. The book's primary focus remains on the United States. Dalio has publicly written about the possibility of a civil war in the U.S. Therefore, translating his book as *How the U.S. Will Go Bankrupt* is not inappropriate.

The logic of short-term debt cycles

Ray Dalio's big debt cycle is based on a simple economic process. He believes the sequence unfolds as follows—first, credit infusion stimulates economic activity, leading to increased income and spending among people, along with rising asset prices. This is the phase everyone enjoys. However, credit includes debt that must eventually be repaid. When the time comes to settle these debts, the situation reverses: people spend less, income declines, and asset prices drop, leading to dissatisfaction. In other words, borrowing allows people to spend more than their income and savings in the short term, but when debts must be repaid, they end up spending less than what they actually have.

To promote economic development, the central government and central bank tend to create a large amount of credit—this is how it works. When economic activity and inflation rates are lower than expected, and interest rates are relatively low compared to inflation, money and credit are easily provided. The result of encouraging borrowing for consumption and investment is rising asset prices, increased economic activity, and inflation rates climbing until they exceed expected levels. At this point, money and credit become restricted, and interest rates rise relatively higher. Higher interest rates lead to reduced borrowing for consumption and investment, causing asset prices to fall, economic activity to slow, and inflation rates to decline. This, in turn, results in lower interest rates and looser monetary and credit policies—and the cycle begins again.

Short debt cycle becomes big debt cycle

Ray Dalio believes that short-term debt cycles often do not receive much attention, which allows them to accumulate into large debt cycles. Why? Because credit acts like a stimulant. People tend to desire more credit and lean toward creating it. This results in each short-term debt cycle surpassing the previous one, ultimately stacking up into a large debt cycle. In the early stages of a large debt cycle, the debt burden is relatively light, and credit/debt can fund industries with greater potential and higher profitability. However, in the later stages of a large debt cycle, the debt burden becomes heavier, leaving lenders with fewer productive options. This diminishes their ability to take on more debt, making the situation unsustainable. Thus, borrowing can be enjoyable, but if not managed carefully, debt can grow like a cancer, eventually eroding people’s purchasing power.

When faced with a debt crisis, central banks typically have only two options: debt default or printing large amounts of money to devalue the currency. Generally, the central government will choose to print money. Credit rating agencies assess the central government's ratings based on the risk of debt default, never on the risk of currency devaluation. In other words, the risk of devaluation is hidden. But for wealth holders, both default and devaluation represent a loss of wealth. What is the main difference between short-term debt cycles and long-term debt cycles? Ray Dalio believes it lies in the central bank's ability to reverse them. For short-term debt cycles, the contraction phase can be reversed through substantial monetary and credit expansion, pulling the economy out of a depressed, deflationary state and creating another phase of non-deflationary growth. However, the contraction phase of a long-term debt cycle cannot be reversed by increasing money and credit.

The development process of the big debt cycle

Ray Dalio outlines the process of a major debt cycle— 1. The private sector borrows but can repay. 2. The private sector overborrows, incurs losses, and faces repayment issues. 3. The government steps in to help, overborrows, incurs losses, and faces repayment issues. 4. The central bank attempts to assist by printing money and purchasing government debt, leading to repayment problems and prompting the central bank to monetize more debt when possible.

Therefore, the process of a large debt cycle becomes a recurring loop of various phases: 1. **Sound Money Phase**: Low levels of net debt and stable currency. 2. **Debt Bubble Phase**: Debt and investment grow faster than the capacity to service them from productive income. 3. **Debt Peak Phase**: The bubble bursts, leading to contractions in credit, debt, markets, and the economy. 4. **Deleveraging Phase**: Painful reductions in debt and debt servicing levels to align with income, making debt levels sustainable again. 5. **Large Debt Crisis Cycle**: Once a new equilibrium is reached, a new cycle begins.

In alignment with the process of the debt supercycle, Ray Dalio analyzed the major debt cycle of the United States as follows: 1. **From [Year] to [Year]**: A hard currency monetary system was in place, where the supply of banknotes was constrained by gold. 2. **From [Year] to [Year]**: A fiat currency system driven by interest rate-based monetary policy, regulated through interest rates, bank reserves, and capital requirements, until interest rates hit [specific level], signaling the failure of regulation. 3. **From [Year] to [Year]**: The central bank's ability to create money and credit to purchase assets emerged, with the drawback being the ineffective distribution of funds to those most financially strained. 4. **Coordinated large fiscal deficits and debt monetization under a fiat currency system**: Fiscal policy by the central government and monetary policy by the central bank must be coordinated to direct funds and credit to the individuals or entities most in need. While this can alleviate debt, it does not fundamentally resolve the issue. 5. **Significant deleveraging**: Debt restructuring (deflationary) and debt monetization (inflationary), which essentially means the central bank goes bankrupt by printing money to repay debts, marking the end of a debt cycle. 6. **Return to hard currency**: The central government takes action to restore the soundness of its currency, credit, and debt. This occurs after reducing debt through defaults, restructuring, and monetization.

Ray Dalio's corresponding description only aligns with the post-war period in the United States, specifically when the country entered a phase of massive fiscal deficits and debt monetization policies. Part of this is predictive, suggesting that the U.S. will rely on coordination between the central government and the central bank to alleviate debt. However, he believes this still cannot fundamentally solve the problem, ultimately leading only to bankruptcy. What does bankruptcy mean? "For major nations, the end of a debt supercycle signifies the demise of their dominant status." The U.S. heading toward bankruptcy—this aligns with Ray Dalio's global research findings from previous years. At the same time, however, Dalio also argues that supercycle debt crises are difficult to predict and cannot be determined by observing a single indicator or data point. Even in the case of a major debt crisis, economic policymakers can still manage and slow the process through restructuring and monetization. For example, if the debt-to-income ratio needs to decline by about % to make the economy sustainable, it can be addressed through debt restructuring at a pace of % or % per year, gradually absorbing the impact over time. This approach would far outweigh the traumatic shock of a % collapse in a single year.