How Countries Go Broke: What Really Happens During the Big Cycle

It starts so quietly you barely notice. A new government takes over after a mess, everyone is feeling optimistic, and the currency feels like "real" money again. Then, slowly, the borrowing begins. At first, it’s for good stuff—bridges, schools, maybe a high-tech power grid. But then the cycle takes a turn. You wake up one morning and the news is talking about "liquidity injections" and "yield curve control."

Basically, the country is broke. They just haven't admitted it to you yet.

Ray Dalio, the billionaire founder of Bridgewater Associates, spent years obsessed with this pattern. He calls it the Big Cycle. In his 2025 book How Countries Go Broke, he lays out a pretty grim map of how empires and nations slide from being world-beaters to being flat-broke debtors. It’s not just a "them" problem. History shows it happens to everyone eventually—the Dutch, the British, and yeah, potentially the US.

The Big Cycle: Why Nations Don't See the Cliff Coming

Most people think a country goes broke because of one bad leader or a single war. Honestly? It's usually much more mechanical than that.

Dalio describes the Big Cycle as a 50-to-100-year arc. It has a beginning, a middle, and a very messy end. In the early stages, debt is low. People are productive. This is the "Rise." You see high levels of education and a strong work ethic. Think of post-WWII Japan or the early days of the Dutch Republic. The money is backed by something solid, and the world trusts it.

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Then comes the "Top." This is where things get tricky. Because the country is so successful, its currency becomes a "reserve currency." Everyone wants to hold it. This feels like a superpower, but it’s actually a trap. Why? Because when everyone wants your money, you can borrow it very, very cheaply.

The Borrowing Binge

You’ve seen this before. A country starts living way beyond its means. They build massive militaries they can't afford. They fund huge social programs without raising taxes. They start thinking the good times will never end.

The debt-to-GDP ratio starts climbing. For example, Japan is currently sitting at over 240%, and the US is hovering around 120%. In the "Top" phase, the wealth gap explodes. The people at the top get rich off asset bubbles—stocks and real estate—while the people at the bottom struggle with rising costs. This creates internal tension. People start getting angry. They look for someone to blame.

When the Music Stops: The 6 Stages of the Big Cycle

If you want to know where we are, you have to look at the stages. Dalio’s research into the last 500 years of history shows a pattern that’s almost scary in its consistency.

1. New Order & Low Debt: Usually follows a war or a total collapse. Everything is fresh.
2. The Bubble: Credit is easy. Everyone is "rich" on paper.
3. The Peak: The country is at its strongest, but the seeds of its destruction are sown. Overextension is the name of the game here.
4. The Decline: Growth slows down. Debt service starts eating up the budget.
5. The Financial Crash: Investors realize the debt can't be paid back. They stop buying the bonds.
6. The New Order: Usually involves a revolution, a war, or a massive wealth redistribution.

Right now, in 2026, many experts argue the West is deep into Stage 4 or 5. Look at the numbers. The IMF recently projected that global debt remains above 235% of world GDP. That is a staggering amount of IOUs floating around.

The Three Levers: How They Try to Fix It

When a country realizes it's broke, the leaders have a few moves. None of them are fun.

First, they can cut spending. This is called "austerity." It sounds responsible until you’re the one whose pension just got slashed or whose local hospital closed. Austerity is politically suicidal. It leads to riots. Just look at Greece in the 2010s.

Second, they can default. They just say, "Sorry, we aren't paying you back." This destroys the country’s reputation for decades. Russia did this in 1998. Argentina does it like it's a hobby.

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Third—and this is the favorite—is printing money.

This is the "Big Cycle" special. If you owe debt in your own currency, you can just print more of it to pay the bills. But there’s a catch. When you flood the system with new money, the value of each dollar (or euro, or yen) drops. This is how you get inflation. It’s a hidden tax on everyone who has savings.

Real-World Hits: Sri Lanka and the "Tequila Effect"

We don't have to look back to the 1700s to see this. In 2022, Sri Lanka literally ran out of fuel and medicine because they didn't have the foreign currency to buy it. Their debt cycle hit the wall.

Or remember the "Tequila Effect" in Mexico back in 1994? They devalued the peso, and suddenly the whole country was underwater. It required a $50 billion bailout from the US and the IMF just to keep the lights on. These aren't just lines on a graph; they are people losing their life savings overnight.

How to Spot the End of the Cycle

You don't need a PhD in economics to see the warning signs. You just need to look for a few specific red flags:

• Paying debt with debt: When a country borrows money just to pay the interest on the money it already borrowed. This is the "Ponzi" stage.
• The Wealth Gap: When the top 0.1% owns as much as the bottom 90%. This almost always leads to populism and internal conflict.
• Education Decline: Dalio points out that a drop in the quality of education is usually the very first sign of a long-term decline.
• Loss of the Reserve Currency: If other countries start trading in something else—like the recent move by some nations to use the Yuan or gold—it’s a sign the "Exorbitant Privilege" is ending.

Protecting Yourself in 2026 and Beyond

So, what do you actually do with this information? Honestly, panicking doesn't help. But being aware of the Big Cycle does.

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Diversification isn't just a buzzword. If you have all your wealth in one currency or one country's stock market, you are betting on that country's place in the cycle. Hard assets—gold, real estate, even certain commodities—historically hold their value better when a currency is being printed into oblivion.

Also, keep an eye on productivity. A country can have high debt and still survive if it’s incredibly innovative. The massive "AI supercycle" J.P. Morgan is tracking for 2026 might be the "get out of jail free" card for some economies. If AI makes us 20% more productive, we might actually be able to grow our way out of the debt.

Watch the bond markets. That’s where the truth lives. If investors start demanding much higher interest rates to lend to a government, it means they smell smoke. And where there's smoke in the Big Cycle, there's usually a fire that's been burning for a long, long time.

Actionable Next Steps:

• Review your exposure: Check how much of your portfolio is tied strictly to your home country's currency.
• Monitor the "Debt-to-GDP" trend: Use sites like the IMF or World Bank to see if your country’s ratio is accelerating or stabilizing.
• Focus on skills: In a declining cycle, the most portable asset you own is your own human capital. Education and "high-value" skills are the only things a government can't devalue through inflation.