Debt, Destiny, and Dalio: A Review of ‘How Countries Go Broke’

Ray Dalio speaks onstage during TechCrunch Disrupt San Francisco 2019 at Moscone Convention Center in San Francisco, Calif., on Oct. 2, 2019. Kimberly White/Getty Images for TechCrunch

Commentary

Famed investor Ray Dalio makes the case in “How Countries Go Broke” that the U.S. government is too heavily indebted and that significant changes to spending, taxes, and interest rates all need to be made, and soon, to save us from looming fiscal catastrophe.

This position is mostly uncontroversial outside of the halls of Congress, and practically the conventional wisdom in most economic policy circles today. Yet Dalio’s approach to making this argument is prefaced by almost 400 pages of intellectual empire-building and chart-making. This approach turns what could have been a tightly argued Substack essay into a quasi-memoir/manifesto.

Dalio’s business thought-leader status is currently quite secure. He has written multiple books on similar themes over the last several years, including “Principles: Life & Work” (2017), “Principles for Navigating Big Debt Crises” (2018), and “Principles for Dealing with the Changing World Order: Why Nations Succeed and Fail” (2021). He also maintains a website, principles.com, which collects his various writings, a recording of his 2017 TED talk, a series of 30-minute animated videos based on his writings, and the Dalio Market Principles self-study course, among other materials. He clearly considers himself to be a principled guru of sorts, and he has the stats to prove it—his books have been bestsellers, translated into multiple languages, and widely reviewed and discussed. His testimonials page overflows with praise from former cabinet secretaries, CEOs, and fellow celebrity authors.

His body of work is based on the principles that guide the management and business practices at his investment firm, Bridgewater Associates, as well as his own related theories about world history, culture, and economics. This is an unusual blend in the world of business publishing. Most successful CEOs who write books tend to stick to self-help advice for young professionals and aspiring entrepreneurs rather than branching out into master theories covering thousands of years of world historical dynamics, but Dalio is nothing if not an ambitious thinker.

His status as the enlightened despot of Bridgewater has generated its own share of myths and legends over the years, with many journalists, investigators, and former employees using terms like “cult,” “cult-like,” and “cult leader” to describe Dalio’s management style. He has extremely specific ideas about how things should be done and has an almost unlimited ability to impose conformity with those ideas within the firm that he founded. Bridgewater reportedly has highly specific and aggressively enforced standards for workplace conduct and subjects its employees to idiosyncratic surveillance and accountability practices.

Dalio and Bridgewater have plenty of defenders, of course, and the firm has been extremely successful. Forbes estimates Dalio’s net worth to be over $14 billion. Dalio’s much-remarked-upon internal management theories inform an understanding about his systematic thinking on public affairs in “How Countries Go Broke.”

The tone of his latest book takes some getting used to. It ricochets between the absolute certainty of a messiah figure who has discovered the innermost secrets of the universe to the shrugging dismissal of a guy who is just asking questions. Dalio emphasizes his long study of historical cycles in economic affairs. He claims to have identified certain patterns that can help us understand our current times and even predict the future. His certainty is sufficient for him to refer, several times, to his theories with phrases like “timeless and universal truths” and “timeless and universal mechanics and principles.” Dalio is, in general, very confident that he has identified important patterns in human affairs that have eluded lesser observers and that readers would be foolish to ignore.

At other times, however, he yields his status as knower of timeless and universal truths, with statements like “... what I don’t know is much greater than what I do know.” He offers a detailed analysis, for example, of the global power dynamics between the United States, the People’s Republic of China, and Taiwan, only to sum it up with the statement “Keep in mind that while that is what I think about the world’s geopolitical order, I’m not sure of anything.” That may be an admission of admirable modesty, but it rather undermines the urgency of some of his claims.

While Dalio holds forth on a broad range of topics relating to history, government, economics, and culture, “How Countries Go Broke” is primarily about government debt, and students of monetary policy will no doubt be very interested in the analysis presented. He points out that in many previous cases of rising government debt, central governments and finance ministries around the world have had recourse to the same tools for debt management. Total indebtedness has frequently risen over multiple decades, until a crisis emerges and the existing regime for issuing, valuing, and monetizing debt breaks down. Post-crisis, a new system emerges.

Governments tend to shortsightedly load up on debt until they eventually default. Dalio presents many data points and charts showing parallel examples through the last few hundred years that suggest a more predictable cycle than most observers might initially imagine. Because the cycle of debt and default (and the attendant financial pain that comes with that process) is reasonably predictable, the book’s warning comes at a particularly timely moment. According to the Dalio timeline, we’re dangerously close to the moment we should be expecting a US debt-overload meltdown.

As with many public intellectuals outside government, the real purpose of Dalio’s book seems to be to persuade those with power—the Federal Reserve chairman, the president, and members of Congress—to adopt a wise course of policy action before the looming disaster strikes. He advises higher taxes, lower spending, and lower interest rates. There are many books with such a formula. The odd angle with “How Countries Go Broke,” though, is that Dalio’s own eccentric theory of human civilization might make his entire book moot.

The reader is repeatedly reminded that cycles of government debt, which Dalio calls the Big Debt Cycle, as well as the grand civilizational cycle by which empires rise and fall, which he terms the Overall Big Cycle, are something akin to iron laws. They are detectable and predictable precisely because they do not vary once they have begun. By the end of the book, Dalio reveals that he actually believes in a highly deterministic universe in which relatively little responds to the will of individual human beings.

He considers the forces that govern human society to be a kind of “perpetual motion machine” that functions the same across the centuries and around the globe. By the final chapter, he pushes this view even further, saying that “everything (other than the quantum world) is predestined” and that the only thing stopping human beings from essentially knowing the future is an insufficiently detailed model of causes and effects—something he expects to “get much closer to achieving” using the tools of artificial intelligence.

Dalio believes that economic affairs are basically “mechanical”—moving forward in a fixed way, like a set of interlocking machine parts. But if the Big Debt Cycle is literally inevitable (as discovered by Dalio’s own scholarship), then why write a book about how the United States needs to avoid public debt in the first place? When giving his specific policy recommendations about taxes, spending, and interest rates, he seems to suggest, like most policy advocates, that his preferred policies can make the difference between prosperity and disaster. But that seems to be at odds with his fatalistic assumptions about how the boom-and-bust rollercoaster of government debt actually works.

Presumably, Dalio’s theory of free will extends to his own smart investing choices that have made him, and many of his clients, rich. But a world that actually worked in the way he describes it would seem to leave little room for guiding major world historical events like currency collapses and global recessions. One also wonders how often Dalio’s galaxy-brain theorizing is challenged by those closest to him, since his most frequent collaborators are his own employees, whose professional futures are subject entirely to his managerial discretion as Bridgewater’s founder.

No commentary on “How Countries Go Broke” would be complete without mentioning the book’s unusual layout. In a strategy that seems inspired by modern productivity-maximizing tools, the book’s text is sometimes presented as normal, sometimes in blocks of bold, and sometimes (for the most important insights) in passages that are bolded, italicized, and preceded by a red dot. Unlike most authors who restrict their formatting emphasis to a single bolded or italicized phrase, Dalio’s text often runs to entire paragraphs in bold, sometimes with multiple pages almost entirely set off with emphatic formatting. Each chapter also comes with specific advice for engaging with it, with readers alternately advised to skip, browse, or attend closely, depending on their expectations and education levels. While obviously meant to be helpful, this overload of visual and narrative cues is ultimately a distracting gimmick that retards, rather than enhances, the reader’s focus.

Then again, it’s possible that effect was simply part of the inevitable mechanism of history at work.

From the American Institute for Economic Research (AIER)