How Countries Go Broke — Ray Dalio on why timing is everything

{"text":[[{"start":8.1,"text":"Global macro investors make bets on countries, riding the currents of exchange rates and interest rates. Their trades often require taking a much longer-term view than the typical investor, with an eye not only to a country’s monetary and fiscal policy, but often to its politics and institutions."}],[{"start":30.64,"text":"Few have been as successful as Ray Dalio, who founded Bridgewater Associates five decades ago. In his latest book, How Countries Go Broke, Dalio purports to lay bare the key elements of his uber-profitable investing strategy, especially how to look for the risks of once-in-a-generation shifts that most investors — and policymakers — are oblivious to until is it is too late."}],[{"start":56.97,"text":"Critically, he emphasises the importance of looking at very long historical data sets in order to be able to distinguish epoch waves, sometimes a century long — including what he calls the “Big Debt Cycle” — from typical cyclical business ups and downs which are smaller and less consequential."}],[{"start":78.52,"text":"“Big debt crises are inevitable,” Dalio writes in his opening chapter, pointing an accusatory finger at poor and imperfect lending decisions that result in too much credit. “Throughout history only a very few well-disciplined countries have avoided them.” Others have been destroyed by them."}],[{"start":101.3,"text":"To avoid such a fate, Dalio claims that by using metrics — which involve debt, income, interest rates, savings, growth and so on — one can go a long way to calling the timing of crises. The book is packed with charts, equations and highlighted action points illustrating just how a country might “go broke”. Data geeks will not go unrewarded. Yet it is thin on concrete case studies or statistical tests. Instead, the book largely appeals to the fact that whatever exactly the strategies are, they made the author a lot of money."}],[{"start":139.78,"text":"It is also curious that Dalio sees no need to reference well-known earlier books — including, full disclosure, my 2009 book with Carmen Reinhart, This Time Is Different — that predate his, employ extensive archival data research and reach broadly similar conclusions regarding the critical importance of looking at very long multi-country time series if one wants to assess the probability of rare debt, financial crisis and inflation events."}],[{"start":null,"text":"

"}],[{"start":173.27,"text":"It would have been interesting to know more. Indeed, a recurrent theme of the empirical literature is that financial and debt crises are hard to predict with any kind of precision until close to the event. There are some well-known indicators. In the case of a country debt crisis, these include an overvalued exchange rate, sustained large government budget deficits and current account deficits, and high indebtedness to foreigners. Even so, such indicators, which by the way all apply to the US today, do not yield the kind of precision on timing an investor needs to really score a big killing."}],[{"start":216.06,"text":"And, as readers of Michael Lewis’s The Big Short know, timing is everything, and luck plays a big role. An investor who moves too soon to bet against, say, a country’s debt, will often have to suffer losses for a long time before the big score comes. As Keynes famously quipped, “The market can stay irrational longer than you can stay solvent.”"}],[{"start":241.9,"text":"That said, even if most investors don’t have Dalio’s unique talents to time debt cycles, policymakers would do well to pay attention to his concerns when he states “by my measures the US and most major countries (the other G7 countries and China) are . . . in the late stages of their Big Debt Cycles” and if “not controlled in some way, the probability of an unwanted major restructuring/monetization of debt assets . . . is very high — something like 65 per cent over the next five years”. I broadly agree with Dalio’s bottom line for the US, even though that puts us both out of the consensus for the moment."}],[{"start":283.8,"text":"Some of the best parts of the book are where Dalio gives his macro policy views. There is, for example, a terrific chapter in which he brutally critiques Japanese policymakers for failing to force debt writedowns after the country’s early 1990s financial crisis. Instead, they allowed debt overhang to hamstring the financial system and sap two decades of growth."}],[{"start":310.03000000000003,"text":"How Countries Go Broke builds up to a critical chapter on the unsustainable US fiscal trajectory. Given the fatalistic tone of the earlier chapters, Dalio’s medicine seems surprisingly digestible. He basically argues that the ticket to stability is simply to pare the US deficit down to 3 per cent of GDP (it was 6.4 per cent in 2024.) "}],[{"start":335.42,"text":"Is this really enough? With high long-term real interest rates likely to remain, US debt seems set to continue jumping from one plateau to another each time there is a crisis. To prepare for the worst, should budgets be balanced during high growth periods?"}],[{"start":354.25,"text":"Dalio’s 2021 book The Changing World Order, which looked at why some nations succeed while others fail (another topic with a great deal of earlier literature), has made many people aware of the importance of financial history. This book, aided by well-executed TikTok videos and eventually (as the book promises) a Ray Dalio avatar, can be expected to do the same."}],[{"start":378.6,"text":"How Countries Go Broke: The Big Cycle by Ray Dalio, Simon & Schuster £30/Avid Reader Press $35, 400 pages"}],[{"start":390.59000000000003,"text":"Kenneth Rogoff is professor of economics at Harvard University and author of ‘Our Dollar, Your Problem’"}],[{"start":399.63000000000005,"text":"Join our online book group on Facebook at FT Books Café and follow FT Weekend on Instagram, Bluesky and X"}],[{"start":417.53000000000003,"text":""}]],"url":"https://audio.ftmailbox.cn/album/a_1751293125_3526.mp3"}