I’m undertaking a 1000-day reinvention project, blogging here daily to track my progress. In Tuesday Book Club, I share an idea from a book.
In How Countries Go Broke (2025), Ray Dalio, investor and founder of Bridgewater Associates, argues that countries tend to go broke not all at once, but through a recurring cycle in which rising debt, widening inequality, political conflict, and money printing interact over time until trust in the system breaks down.
In other words, countries don’t fail because of a single bad decision (or a single bad leader). They fail because a familiar cycle plays out again and again until confidence erodes.
A classic example of this cycle is the late Roman Empire. Rome didn’t collapse overnight. For centuries, it financed expansion through conquest, then shifted to borrowing and currency debasement once growth slowed. As military costs rose and tax burdens increased, inequality widened and civic trust eroded. Political infighting intensified, populist leaders promised restoration without sacrifice, and the government engaged in an ancient form of money printing. It repeatedly reduced the silver content of its coins to meet obligations. External pressures mounted as the internal system was already dysfunctional. The empire didn’t fall because of a single invasion or single poor political leader or movement. It failed because financial strain, social division, and a loss of confidence in the government compounded over generations.
We could look at the U.S. for an example of a country (really an empire) facing debt-fueled decline. But let’s take a look at an example that’s a little further from home and also further along in the debt to disaster cycle: Japan.
After its 1980s asset bubble burst, Japan chose stability over a total reset. Instead of letting bad debts clear, the government ran persistent deficits, requiring the issuance of enormous amounts of debt. Today government debt is about 250% of GDP (compare to the U.S. government debt-to-GDP ratio of a little more than 120%).
So why hasn’t Japan collapsed or gone broke? Instead, it managed its way into stagnation. The Bank of Japan owns a huge share of its own debt. Interest rates have been held near zero for decades, and were even negative at times. The Bank of Japan implemented yield curve control, explicitly capping government bond yields. The cost was that growth stagnated.
This seems paradoxical, and hard to understand. If interest rates were at zero, why didn’t businesses borrow and create growth? Why didn’t households borrow and drive the economy to greater heights as consumers?
Cheap money is necessary for growth, but not sufficient. In the late 1980s, Japan experienced one of the largest asset bubbles in history, as ultra-easy credit and speculative fervor drove stock and real-estate prices to levels wildly disconnected from underlying economic value. After this, Japanese companies were overleveraged. They paid off their debt instead of taking out more and investing. This was a balance sheet recession. Meanwhile low rates and government support meant that weak, unproductive firms didn’t fail. Capital stayed stuck in low-return uses. Labor and resources didn’t reallocate to more dynamic sectors. This reduced productivity growth.
Meanwhile, Japan’s population aged rapidly and shrank. Consumers delayed spending in the midst of deflation and stagnation. Businesses delayed investment. This mindset became self-reinforcing.
A Twitter thread today from macroeconomist Brad Setser provides another view of Japan’s situation. He notes that while it does have significant domestic debt, it is also a “massive global creditor.” Japan’s public sector holds a tremendous amount of foreign assets which throw off enough interest income to offset domestic interest payments. “Net interest is tiny,” Setser writes. And if the public sector marked its gains on these assets to market, that would reduce its gross debt to something more seemingly reasonable.
He concludes:
So to my way of thinking, heavily influenced by the strength of Japan’s external fx balance sheet, some of the concerns about Japan’s proposed fiscal loosening are overdone. Takaichi isn’t proposing half of what Trump has tweeted out … and her starting point is better….
And Japan has options that most countries with lots of fiscal debt don’t have, as most countries with a large stock of domestic fiscal debt aren’t also massive external creditors with big flow earnings on their offshore assets.
In other words, it seems that Japan is not about to go broke or fail, Dalio’s theory and their apparently enormous government debt notwithstanding.