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Language: en
Imagine this. You wake up, normal day.
You buy a cup of coffee on the way to
work, but by nightfall, you can't afford
bread. It's not just you. It's your
entire country. The banks are suddenly
padlocked to avoid riots. ATM blinks.
Insufficient funds despite you having
money. Police fire tear gas at a crowd
of people demanding their pensions. A
father, desperate, smashes a supermarket
window and climbs in. His kids haven't
eaten in 2 days. This isn't fiction.
It's Argentina in 2001. A once-w wealthy
country gone broke overnight. And here's
the brutal part. It didn't happen
because of war or natural disaster. It
happened because of debt. There is a
stark truth we cannot escape. But we've
been hellbent to ignore. Over the last
200 years, 98% of the countries that
have had a debt to GDP ratio of 130%
experienced economic collapse in short
order. You know what the US ratio is?
121. and climbing fast. Set another way,
America, like Argentina before it, is
going to go broke soon. It's just math.
Now, don't click away. My goal here is
not to scare you. It's to give you hope.
But first, we have to look at exactly
how debt of all things not just
predicts, but creates the massive
political division that we see in the US
right now and ultimately takes countries
down. When countries collapse
economically, it is brutal and it
happens all of the time. Argentina,
Zimbabwe, Venezuela, Lebanon. These are
just recent examples of collapsed
economies. As you look deeper into
history, the fatalities stack to the
ceiling. Imagine cash that becomes worth
less by the minute. Stores changing
prices every few hours trying to keep
up. People rioting and looting stores.
Soldiers guarding breadlines. banks
boarded up and refusing to let you
access your own money. It sounds insane,
but it's far more common than people
want to acknowledge and far closer to
happening here than people are willing
to admit. And the real horror of all of
this is that it's so predictable. Ray
Dallio has written multiple books around
how this debt cycle repeats over and
over in history with the same
predictable outcomes. And yet, no one
does anything about it. But remember,
only 98% of countries fail to avert
disaster. This video is about making
sure we're part of the 2%. I'm
attempting here to cast a spell to get
people to see the pattern before America
breaks into its second civil war.
Because that's how this pattern goes. If
you don't stop stacking debt, you end up
stacking bodies. In our time together,
I'm going to lay out the problem and the
solution in five direct parts. Do not
skip part three. That's where the magic
is. But you're only going to see the
magic if you watch the whole thing. Now,
I have a thesis and it goes like this.
The political division we see today is
driven by what Ray Dallio calls the big
debt cycle. If the big debt cycle is
left unchecked, it ends in economic
catastrophe followed quickly by violent
revolution or civil war. The cycle can
be stopped, but you have to do a very
specific set of actions that I'm going
to detail later. That's what we're going
to do here. Detail how debt destroys
countries so we understand how to stop
the cycle. Beware. According to Dallio,
the most successful hedge fund manager
of all time, who made his astonishing
fortune by understanding the cycle
better than anyone else on planet Earth,
the cycle has six phases, and phase six
is total collapse. and the US, we are in
late stage five by the numbers. So, if
we're going to stop it, we have to do it
right now. Time to rip the band-aid off,
right? Welcome to part one, the six
phases of the big debt cycle. Ray Dallio
took himself from a failed investor who
had to borrow money from his dad to keep
a roof over his kids' heads to being one
of the wealthiest men ever by
discovering that every country that's
ever gone broke has gone broke in the
same predictable way. from the Roman
Empire to the Netherlands and England.
When an economy craters, it follows a
very specific pattern. If you understand
the pattern, you can win. If not, you
end up in a bread line. For decades,
this was Ray's closely guarded secret.
But now that he's retired, he's telling
everyone who will listen so that this
critical information doesn't die with
him. Now, don't get me wrong, there's no
way that Ray's analysis is perfect.
Nothing is. But his results speak for
themselves. In 32 years, Ray's firm
Bridgewater has only lost money four
times. And in 2022, as the rest of the
market was getting obliterated,
Bridgewwater posted 32% gains. The fact
is, Ray Dallio has spent more money and
time researching economic history than
anyone else. And no one has made more
money off of what they've learned than
him. The pattern is there for anyone
who's willing to see it. These are not
the ramblings of some random author.
This is the goat spilling secrets that
have life and death consequences. Here
are the six phases of the big debt
cycle. Phase one, known as early
expansion. This is the fun part. Early
expansion is growth spurred on by easy
credit and a whole lot of optimism. This
happens when debts and interest payments
are relatively low in relation to
incomes and other assets. Said simply,
both people and the government are
making more than they spend. and they
get to enjoy all the security and peace
of mind that comes with that. In this
phase, productivity is rising, credit is
easy to come by, borrowing costs are
low, and what small debt there is, is
true leverage for fostering growth.
Phase two is where the trouble begins.
This is the phase of bubble building. In
phase two, the economy feels amazing,
but it's all a lie. This is the part of
the cycle where credit expands faster
than productivity and debt begins to
exceed income. But no one cares because
everything is going up. It doesn't feel
like a problem. It feels like a party.
Asset prices start rising, stocks,
housing, even things like crypto. But
here's the catch. Those gains aren't
coming from real productivity increases
or even income growth. They're coming
from borrowed money, from debt. Dallio
puts it plainly. In phase two, the
bubble, debt and interest payments begin
to exceed income. And yet, debt makes
the economy feel magical. People borrow
against their homes to remodel kitchens,
take vacations, and buy Teslas.
Corporations take on cheap debt to buy
back their own stock and juice their
earnings. Governments rack up deficits
with no plan to repay because the money
feels free. It feels free.
This is when leverage starts to quietly
metastasize like a cancer. You don't see
it at first, but the foundation is now
rotting. The roller coaster of the
familiar booms and busts have begun.
Here are but a few examples of bubbles
from recent memory. In the late 1990s,
the dot bubble. Companies with no
revenue got insane billion dollar and
multi-billion dollar valuations.
Investors were using margin debt to
chase tech stocks into the stratosphere.
Then the NASDAQ lost 78% in just 2
years. In the early 2000s, it was a
housing bubble. Banks handed out
subprime loans like they were going out
of style. Mortgage debt soared. Home
prices doubled. People felt rich until
they weren't. And the reality of the
math slapped everyone in the face in
2008. In the 2020s, it's the stock
market. In 2024, margin debt on US
equities hit $1.1 trillion,
a 40% increase from the 2020 peak.
People have borrowed over a trillion
dollars to gamble in the stock market.
We'll see how this ends soon enough, but
Warren Buffett is basically sitting in
cash because he thinks it's a bubble.
Shocking. Because asset prices have been
going up faster than the wages.
Borrowing to buy them has felt smart.
Debt feels profitable. And it always
does right before everything implodes.
And this is the trap. Easy money gets
everyone excited. And that brings us to
part three of the big debt cycle.
Euphoria and overleverage. This is where
optimism blinds people to risk and they
take on way too much debt. From inside
the bubble, it feels like everyone is on
ecstasy. Somehow, everyone convinces
themselves that this time it's
different. This time, the party is never
going to end. It's only up from here. Or
they believe that they'll be able to
time the market perfectly. In this
phase, even rational people can become
reckless. The warning signs are all
there, but when the money is flowing,
people ignore them. There's just so much
euphoria and no one wants to be the
chump that leaves money on the table.
But it never works out the way people
hope or expect and almost everyone gets
wrecked. Why? Because underneath all of
that exuberance, there's nothing but
debt. Whatever real innovation there is
gets massively overvalued like in
the.com bubble because leverage aka low
interest rates creates too much money
pursuing the same finite basket of goods
which drives their costs to the moon.
You'll hear people tell you all day that
leverage is smart. And to be fair, it
can be. But humans have a way of doing
it very, very poorly and turning
leverage into a ticking time bomb. It
amplifies gains for sure, but it also
amplifies losses massively. But, and
this is the part that begins to
accelerate political strife before
everything implodes, easy credit creates
a massive sense of entitlement and
resentment. Here's how it works. A
rapidly increasing money supply created
by low interest rate debt drives the
prices of assets like stocks, bonds,
art, crypto, and homes up up. This gives
people an even greater ability to borrow
because on paper they're worth so much,
which drives asset prices even higher.
This is part of what creates the spiral
of the rich getting richer. While times
are good, this causes the private sector
to boom. And when the private sector
booms, the government is flushed with
tax dollars. This creates a sense of
entitlement. Everybody wants their share
of the take. Politicians, as they always
do, start making big promises of
supposedly free stuff so they can get
elected and then more big promises of
even more free stuff to get reelected.
You can get away with it if the economy
is growing from true innovation that
creates more economic activity from the
same number of people. But you can't get
away with it if the economy falters
andor growth isn't based on innovation,
but instead just debt. Unfortunately,
economies go up and down, but government
spending only goes up. And with that
bitter truth, the bomb begins to tick.
If the government was forced to balance
his budget every year, debt wouldn't
become a problem. But here's a fun
historical fact. Short periods of debt
followed by rapid and pre-arranged
repayment was exactly how Alexander
Hamilton intended government debt to
work. But that's not how it actually
ended up working. Instead, we got money
printing an everexpanding debt with
absolutely no plan to pay the debt off,
only push it off into the future by
constantly raising the debt ceiling.
Sound familiar? All of this becomes
easier to understand once you recognize
that politics is a game of promising
people free stuff and then stealing the
money to cover your deficits through
inflation. Inflation is not a fact of
nature. It is very man-made and it is
designed to take your money to cover the
deficit spending. I've done a whole
video on that reality and you can watch
it here. Very few people actually
understand how our monetary system works
though. Even saying monetary, I know I'm
losing some people. So, politicians can
get away with deficit spending for a
very long time. The problem is amongst
the voting public, success begins to
feel like a law of nature rather than
the result of extremely hard work and
ingenuity coming out of the private
sector. The feeling that tax revenue
just grows on trees drives a greater
demand for voters onto politicians for
more free stuff. That demand leads to
the need for more deficit spending
because politicians will literally do
anything to get into and maintain power.
That pathological relationship between
an entitled public and a power-hungry
political class turns debt into an
addiction. And that leaves us vulnerable
to phase 4, a crisis point. The US spent
$1.13
trillion just paying interest on the
debt in 2024. That's more than defense.
And given that it's increasing rapidly,
it will shortly be the number one line
item of the US's list of expenses,
eclipsing all entitlements combined. And
that's just the government. The big debt
cycle is also about how everyone gets
overextended. Corporations, individuals,
and the government. That leaves no room
at any level of society to deal with the
next COVID or 2008 housing collapse. And
that's how countries break because bad
things are guaranteed to happen. And if
everyone is leveraged to the hilt and
saddled with debt, they'll have no way
to absorb the shock. Maybe it's the
commercial real estate bubble bursting,
maybe another pandemic, maybe it's a
geopolitical crisis sparked by a war in
the Middle East or a wave of corporate
defaults. It almost doesn't matter what
the spark is because when a country
reaches this phase, the system is
already soaked in kerosene and when the
spark hits, it's all going up in flames.
The pattern is always the same. First,
defaults begin, then asset prices
plunge, then credit markets freeze, then
the government panics. And in that
panic, central banks fire up the
printing process. They buy toxic assets,
cut rates to zero, and flood the system
with liquidity, all in a hope to
stabilize the economy. There's a
problem. The more they print, the less
each dollar is worth. The more they
intervene, the more addicted the system
becomes to free money. And here's the
part no one wants to admit. The bailout
doesn't solve the problem. At best, it
postpones the pain. By phase 4, the
economy is structurally unsound. Every
intervention comes with diminishing
returns. Every fix increases the
inevitable pain. And for better or
worse, people that understand the system
see exactly what's happening. And
confidence begins to collapse. People
start asking real questions about the
solvency of their government and the
value of their currency. And when they
do that, they start selling their
government debt and the unwinding of the
economy accelerates. People feel the
dysfunction. But given that most people
don't understand the economic system,
they just react emotionally and that
ushers in phase 5, internal disorder. In
2024 alone, the US saw more than 8,700
protests and violent events, up 35% from
just one year before. Ray Dallio
himself, the master of tracking the
country's moves through the big debt
cycle, now estimates the risks of civil
war in America to be north of 50%. This
is the tipping point. This right now,
right here, this moment. This is what
happens after the crash. After asset
bubbles start popping, after the
bailouts, after money printer go burr,
when all of the promises start to come
due, but can't be paid. This is the
stage where trust dies. People retreat
into their tribes, process the world
emotionally, and come out ready to
fight. They protest. They riot. They
start swinging on anybody near them.
Dallio calls it the violent breakdown of
trust and civility. And we're watching
it unfold right now in real time. When
faith in the system collapses, people
stop arguing about policy and they start
fighting for survival. The center
doesn't just lose influence. It
disappears and people rush to the
political extremes. This is where left
and right stop being political identity
and become tribes at war with one
another. Just in the past 2 weeks, I've
seen all of the following. Riots in the
streets, protesters clashing with
police, politicians assassinated, words
like treason, fascist, and traitor
thrown around. Cities boarded up during
unrest. Open calls to kill the
democratically elected president. This
isn't a hot take. This is just the
predictable reality of phase 5. When
inequality, which is caused by debt and
money printing, more on that later,
becomes unbearable and it becomes clear
that the promises of free stuff is
coming to an end, people revolt. It has
happened countless times in history.
Wear Germany, 1930 Spain, pre-colapse
Yugoslavia, the same in Argentina. The
debt builds, the system becomes fragile,
and then it breaks and the fighting
begins. This is where America is now,
where much of the West is quite frankly.
And the only question is, will we stop
it before we get to phase six, total
collapse? In 1923's Weimar, Germany, it
took 4.2 two trillion marks to buy a
single US dollar. That's what
inflationary wipeout looks like. And in
the end, every debt crisis ends just
like that. The money dies or the country
dies. In phase six, the country must get
out from under its debt by deleveraging.
That's a nice way of saying you.
You're not getting the money you're
owed. Also known as economic reset or
debt jubilee. They sound lovely and they
are horrible and bloody. They are also
in too many cases the prelude to
revolution or civil war. In phase six,
the country is finally forced to face
the fact that it cannot pay its debts.
Not with real money, not with real
growth, not with optimism or even spin
or even an infinite amount of money
printing. The printer can go burr all it
wants and it won't help. Money is a game
of confidence and for good reason. The
confidence is all gone. There are only a
few levers left to pull and none of them
are painless. Dallio puts it in pretty
stark terms. History gives only two
buttons here. Deflationary depression or
inflationary wipeout. Pick your poison.
And that's the cycle. Understanding its
cause and effect relationship can make
you rich and help you avoid disaster.
But ignoring it or only having a surface
level understanding leads to
catastrophe. So now that we understand
the what I want to look at, we'll get
back to the deep dive in a moment. But
first, if you want to understand the
full scope of Ray Dio's analysis,
there's one book that maps it all out.
How countries go broke. This is his
detailed explanation of the big debt
cycle, where he shows exactly how debt
problems connect to political forces,
geopolitical tensions, and what he calls
the overall big cycle. The book covers
his model for dealing with debt problems
that the US, Europe, Japan, and China
all face today. You could spend weeks
trying to digest all of that economic
analysis yourself, or you can use the
incredible Short Form. Short Form covers
this topic across multiple sources with
their master guides, so you're not just
getting one perspective on economic
cycles. Plus, their browser extension
summarizes any YouTube video, article,
or research instantly, so you can learn
faster from anything you're already
watching about the economy. Click the
link below to try it for free and get
20% off your annual subscription. And
now, let's dive back into exactly how
debt destroys nations. Part two, the
how. The mechanism by which debt
destroys a nation. In the last 5 years,
Americans have stormed the capital,
assassinated elected officials, opened
the border, tried to kill a president,
and turn protests into battle zones. All
because political extremism has taken
hold. But why? Each side will tell you
it's because the other side is full of
morons. Evil morons trying to ruin this
country. But the truth is this is a
predictable part of the cycle and it's
all tied to debt. But how on earth is
that possible? Search your feelings,
Luke. You will see this isn't politics.
It's math and human emotions. Behind
every riot, every assassination attempt,
every brick thrown through a window is
something mechanical. Debt. Debt drives
inequality. And inequality enrages
people. It's baked into our DNA. Feed
two monkeys cucumber slices for the same
task and everyone's good. Start giving
one a grape and the other still gets the
cucumber and it freaks the out.
When humans look around and see broke
people as far as the eye can see,
they're fine. The poverty doesn't
distress them. If they look around and
they see rich people as far as the eye
can see, they're fine. But if poor
people look around and see rich people,
they fling feces as hard as the monkey
getting the cucumber does. It's known as
the Jenny coefficient. And whenever it
gets too high, bloodshed is bound to
follow. I mean that literally. It's just
that no one realizes that what is
causing that resentment is debt and
money printing. Let me quickly walk you
through how money is actually created.
It's insane, but I promise this is all
real. Everything I'm about to tell you
is true. One, even in phase one of the
big debt cycle, money is created through
debt. It's created through debt. It's
something known as modern monetary
theory. Our money isn't backed by
anything like it used to be. Instead,
money is backed by fiat, which just
means it has value because the
government requires you to use it to pay
your taxes. And the government requires
other people to accept it as a form of
payment from you for all debts, public
and private. But the fundamental truth
of our modern monetary system is that
money is lent into existence by central
banks. the money didn't exist, then
someone, usually the government, wants
to borrow some and poof, they create it.
Typically, when the central bank
purchases government bonds or
treasuries, every dollar that exists
full stop entered circulation as
interestbearing debt. And that's an
important note because of that need to
pay the interest. And this is the catch.
The total supply of money in circulation
depends on continually increasing the
debt to pay the interest on the initial
money that was loaned into existence
because every dollar created is created
via debt with an interest obligation.
Let me just give you a quick example. If
you borrow $100 into existence but owe
$105 the $5 coming from the interest
due, how do you pay the extra $5 without
borrowing more money just to have the $5
to pay the interest? The answer is you
don't. Everinccreasing amounts of debt
are required by the physics of money.
And that is a big part of why the big
debt cycle is so predictable. Without
continuous deficit spending, the money
supply contracts. If governments stop
borrowing, they mathematically cannot
pay back the interest that they owe. The
catch is printing more money so that
they can service the debt inflates the
money supply. This is like adding water
to your coffee. You might have the same
amount of liquid in your cup, but at
some point all you have is a cup of
water with a dash of coffee. And that is
a very different experience than having
a shot of espresso. Where it gets super
weird, though, is that as inflation
rises and prices go up, some people
manage to escape this trap. Instead of
saving money in their bank account,
these people buy assets. Things like
stocks, bonds, crypto, art, and homes.
Without bogging us down too much,
suffice it to say that certain assets
are what's known as resistant to
inflation, meaning they go up in value
as prices go up from inflation. Your
sandwich just got more expensive. No
worries. Your house is worth more, too.
The problem is only about half of people
understand that you need assets at all.
And of the people that understand that
you need assets, very few of them know
how to invest well. So most people get
clobbered by the inflationary spiral
that a monetary system based on debt
creates. And a small number of people
end up getting super rich, pissing
everybody else off. So when you hear
that the rich are getting richer and the
poor are getting poorer, this is what
they're talking about. And that brings
us back to the monkeys. Everyone is cool
when everyone has grapes or everyone has
cucumbers. But people go apeshit when
some get cucumbers and others get
grapes. But the twist is there's no
researcher with the monkeys by
paying them differently. The very system
that allows the government to give you
free things through deficit spending
causes the rich to get richer and the
poor to get poorer. And over time, the
gap between the two groups becomes
intolerable and you wind up in phase
five of the big debt cycle where you
have political extremism and everybody
hating everybody else. And once we're
there, people are reasoning from a place
of emotion. They've regressed into
tribal mentality and they begin to fight
for survival. And when people believe
that they're fighting for their
survival, they no longer care about
fighting ethically. Mounting debt drives
the inequality. Inequality drives
resentment. Resentment drives
polarization. And polarization left to
rot turns violent. The reality is the dy
is cast the second you give the
government the ability to print money.
The debt spiral and unacceptable levels
of inequality are guaranteed. As of
2025, net interest on the US debt
consumes 16% of all federal spending.
That's double what it was just a decade
ago and it's now the fastest growing
line item in the federal budget. We
spend more just servicing our debt than
we spend on veterans, on education, on
transportation, and on national defense.
This is what Dalio means when he says
debt service eats into productivity like
a cancer. Quiet until it isn't. This is
why Dallio warns that once a country's
debt to GDP ratio exceeds its growth
rate, the game changes. You're no longer
borrowing to invest. You're borrowing to
survive. And when survival becomes the
goal, policy stops being about growth.
It becomes about triage, about picking
winners and losers, about who gets paid
and who doesn't. We've seen this movie
before and it's titled There Are No
Breaks on This Train, but that doesn't
compute for most people. For most
people, they're reasoning emotionally.
And so, familiar calls from both left
and right begin to ring out in an
emotional attempt to solve the problem
with what feels right rather than
focusing on what actually works. So, you
hear things like, "Tax the rich,
billionaires shouldn't exist. Get to
work, you lazy bum. Stop freeloading."
Let's walk through why those calls may
give politicians something to scream
about, but ultimately don't solve the
underlying structural problems that are
built into the system. As Ray Dallio
points out, at this stage, there are no
easy solutions. Every option comes with
pain. Let's take them one at a time. Tax
the rich. Yes, you can raise taxes on
the wealthy, and in moderation, it will
work. But it won't come close to closing
the gap when deficits are running in the
trillions and compounding year after
year. Taxing the top 1% even at extreme
governmental theft wartime levels barely
tweaks the trajectory towards inevitable
collapse. And the reality is, as history
shows over and over, if you push too
hard, wealthy people flee the country,
taking their knowledge and companies
with them. Now, there's a myth that
America is all old inherited money. But
the reality is that roughly 70% of
millionaires and billionaires receive
little to no inheritance. They created
their wealth through entrepreneurship.
And given that governments only have
money by taxing successful businesses
and the people they employ, those are
the last people you want fleeing a
repressive tax regime. There's only so
much you can take from makers in society
before they stop making things. Next
option, lower interest rates. This is
the other go-to. Just drop rates,
stimulate borrowing, boost growth. But
Dalio points out that by the time you're
in phase 5, you're already near the end
of that road. In the US, for example,
rates have been near zero or even
negative for years. The same is true in
many parts of the world. And what was
the result? More debt, more asset
bubbles, and more inequality for all the
reasons that I laid out previously.
Worse, Dalia warns lowering rates when
debt levels are already high increases
the likelihood of misallocating
resources, creating more bubbles. And
when rates do rise, because inflation
forces the Fed's hand, suddenly the
interest on that mountain of debt
becomes unpayable. You're just
accelerating the collapse. Okay, what
about cutting spending? It's another
classic move. It sounds great until you
realize what's actually on the table.
The US federal budget is dominated by
three things. one, entitlements. Two,
defense. Three, interest on the debt.
That's over 75% of the budget right
there. And for people that don't realize
who owns the debt, Americans own the
debt. So when people say cut spending,
what they're really saying is cut Social
Security, cut Medicare, cut veterans
benefits, or stop paying citizens who
are holding bonds. And Dallio is clear
about this. You can't cut your way out
of a debt spiral without causing deep
social and political instability, which
we already have plenty of. So, pouring
fuel on that fire seems like a terrible
idea. Cutting too fast equals riots.
Cutting too slow equals debt dust
spiral. Okay, so what about printing
more free money? This is the default
option, baby. This is what everybody
does when all else fails. Governments
print and they print a lot. And Ray
Dallio does not deny that it works
briefly. But it comes with a huge cost.
It makes every dollar worth less and
only serves to accelerate the wealth
inequality that we've been talking
about. Printing money is like giving
morphine to a terminal patient. It dulls
the pain, but it does not stop the
dying. It leads to currency debasement,
destroys savings, and transfers wealth
from the poor, who are way more likely
to hold cash, to the rich, who hold the
assets. and it only postpones the
reckoning that must eventually come. The
bottom line is every option has
consequences. Taxing the rich can't plug
the hole and will cause the people that
make things that ultimately allow the
government to tax will just leave.
Lowering rates only kicks the can and
builds bigger bubbles. Cutting spending
risks revolt. Printing money risks
accelerating the collapse and violence
as much as the revolt would. There
simply is no path forward without shared
sacrifice. And history says people don't
sacrifice until they are forced. So,
welcome to part three, the beginning of
the end. The US is already in late stage
five. Just this weekend, we had the
massive no Kings protests, riots in
major cities like Seattle, political
assassinations in Minnesota, and
massively escalating internal tensions
over how to handle the Israel Iran
conflict. I really can't believe that
was all in a single weekend, but it was.
We had insane riots across the country
in 2020. The storming of the capital on
January 6, 2021. Two assassination
attempts were made on now President
Trump. And LA has recently had several
days of violent protests against Trump's
immigration policies. The last few
presidents have run the country by
everinccreasing amounts of executive
orders. And both parties seem hellbent
to lock up their opposition. City halls
now require security briefings.
Legislators are hiring bodyguards. And
this isn't just in America. In Canada,
in 2022, thousands of truckers, the
Freedom Convoy, paralyzed Ottawa for 9
days, freezing 3.6 billion Canadian
dollars in trade. Trudeau acted like a
maniac, triggered the Emergencies Act
for the first time since 1970, and froze
the bank accounts of people that merely
contributed money to the convoy. In
Europe, farmers have blockaded highways
and government buildings with over
10,000 tractors. First in the
Netherlands, then Germany, then France,
protesting fuel cuts and looming
austerity. Fuel rationing followed in
Brandenburgg. In the UK, climate
extremist occupations and storm protests
paralyze city centers while a drift
towards authoritarian policing continues
at a pace that would make Orwell blush.
And in the last 10 years, two members of
British Parliament have been
assassinated while in office. This is
what Ray Dalio warned about. The moment
when winning matters more than fairness.
When truth breaks down, when ethics
decay, and every disagreement feels like
an existential threat, we're not
debating policies anymore. We're picking
sides in a slow motion cold civil war.
Elected officials need body armor.
Protesters are calling for revolution.
Presidents are dodging bullets. And
every institution is seen as corrupt by
half of the country. And no one trusts
anyone anymore, not even people
supposedly on their own side. Look how
quickly even staunch allies like the IDW
turned against each other. or how the
left purges its own when they inevitably
fail a purity test. And the part that
kills me, no one agrees on how to spend
money. They just all agree that we need
to print more of it. It is absolutely
insane and entirely predictable. And
anyone on a team who is just absolutely
convinced of their moral superiority of
the team that they're on is precisely
who you have to ignore. There is no
right and wrong at this point. There is
only the physics of money and the
cascade of problems that our current
monetary system creates in culture. Once
you understand that it's debt that
drives this spiral, it suddenly all
becomes clear. This isn't the beginning
of the end. This is the middle of it.
The only question now, the one we'll
answer in the next section is the one
Dalio has been openly asking for years.
Can a country this divided actually pull
itself back from the edge before it's
too late? or is civil war already priced
in? Welcome to part four. Will America
actually end in civil war due to debt
mechanics? In Cypress, in 2013, the
government seized 47.5%
of anyone's bank account that had over a
hundred,000 euro in it. We're not
talking about billionaires. We're
talking about people that save their
money over 30 or 40 years. Imagine it.
Imagine overnight the government steals
half of your life savings. money you
save for retirement, to put your kids
through college, to pass on to your
grandkids, gone in a single night. Now,
imagine waking up in a country where all
of your savings are worthless, stolen
through deficit spending, money
printing, and hyperinflation. Your
neighbors are now your enemies, and your
government is arming itself for domestic
stabilization. Meaning, they're going to
hammer down descent. None of this is
happening because you were
irresponsible. It's happening because
the government was because the voters
demanded them to be and politicians were
only too happy to comply. Imagine how
mad you'd be. Imagine how hard you'd be
willing to fight to get your savings
back, to get your country back. Well,
many people throughout history have not
had to imagine it because it's the
predictable outcome of the big debt
cycle. For Germany, Spain, Yugoslavia,
and countless other countries at
different times throughout history, this
is exactly what it looked like right as
everything broke. Why? Because even when
an outcome is mathematically certain,
humans going to human, we can't stop
ourselves from doing dumb until the
pain is so extreme, we are forced to
respond. Churchill had a quote far more
eloquent about this brutal truth. Want
for foresight, unwillingness to act when
action would be simple and effective.
Lack of clear thinking, confusion of
counsel until the emergency comes. Until
self-preservation strikes its jarring
gong. These are the features which
constitute the endless repetition of
history. End quote. That's how nations
still managed to collapse economically
even though they're staring directly at
the pattern that predicts the collapse.
This isn't happening in secret. The
signs are everywhere. The math is
public. The history is loud and playing
on repeat. And still 98% of the time, we
fail to act. We're just not wired to.
Humans don't respond to slow motion
catastrophes. We respond to fire alarms,
to screaming and violent protests, to
the jarring gong Church Hill talked
about. But even then, the best we can
hope for is emotional reasoning. And so
we sleepwalk forward. 56% of Americans
say the federal government is wasteful
and inefficient. And yet Doge was
reviled. People will give you their
reasons, but they're all emotionbased.
It's simply self-evident that you can't
spend more than you make without
creating a problem. The most bipartisan
issue of all time should be a balanced
budget. But that's not how tribalism
works in phase 5. According to a Pew
Research poll in 2024, only 34% of
adults say most people can be trusted.
And that's down from 50% in 1990, an
already horrible number. Congress
debates social grievances while the debt
clock spins past $36 trillion.
The number is just so big it seems
impossible that we've gotten here. But
yet, here we are. We argue about surface
level drama that feels important but
ultimately means nothing. It's Tik Tok
outrage, dunk contest moves on X, empty
virtue signaling that does nothing to
address the obvious mechanisms that
drive inequality, political polarization
and economic collapse. We should be
arguing about the utility of debt and
how to keep it manageable. Political
incentives, money and politics for the
love of God, our energy needs for AI,
how to avoid a war with China, radically
improving education, yes, please, and
institutional trust among many other
things. But instead, we argue about
taxing billionaires, race, gender,
ideology, and getting more free stuff
because that's easier. It feels right.
It's emotional. We look for villains,
and we find them. But if the US is going
to avoid a hot civil war and economic
collapse, we've got to turn our
undivided attention to the mechanisms of
debt and money printing that drive the
vast majority of our problems. We've
become economically illiterate as a
population and it's killing us. Most
people do not understand what debt
service is. They don't understand
compound interest. They don't know what
debt to GDP means. They don't realize
their pensions, their savings, their
paychecks are all linked to a system
that they've never been taught how to
question or even that they should
question it at all. And into the gaping
m that that ignorance creates comes the
media. click-driven, algorithmfed,
outragepowered. They don't explain how
debt works. They just pick sides and
tell you who to blame. They frame the
collapse as a scandal, not as a system
designed to fail. And every angry
headline pushes us farther apart. Over
time, we become more tribal, more
reactive, more vulnerable,
and we have less and less mental energy
to understand the system and how it
works. And that understanding alone will
help us avoid the total collapse of
phase 6. We have to develop it. But
instead, we ignore the math. We ignore
the patterns until the emergency crashes
through the front door. We have so much
energy around never falling for CO again
or insert your favorite government
conspiracy here. But we don't join
forces and talk about how to create a
system that doesn't end brutality,
theft, and failure. To drive the point
home with some math, let's compare the
US with some previous failed states. I
think you're going to see the pattern
devoid of any of my emotional plea. Wear
Germany 1923. Debt to GDP approximately
160%.
Currency collapse one US dollar equals
4.2 trillion marks. Timeline from debt
to GDP imbalance to open violence
roughly 18 months. What started as debt
from World War I ended in street
battles, paramilitary units, and
eventually your favorite mustachioed
psychopath and mine, Hitler. Spain 1930s
debt to GDP approximately 130%. Currency
collapsed. The Pacetta lost
approximately 40% of its value. Timeline
from debt to GDP imbalance to open
violence roughly 3 years. Polarization
and a failed political center triggered
a full civil war over a half a million
dead. Yugoslavia late 1980s debt to GDP
290%.
Hyperinflation out of control. The diner
effectively became worthless. Literally
just rectangles of paper. Timeline from
debt to GDP imbalance to open violence
just two years. Economic collapse,
amplified ethnic divisions leading to a
decade of war and literal genocide. Not
a lot of time between that debt to GDP
balance and open warfare in each of
those cases. Now, let's look at the
United States in 2025. Our debt to GDP
is at 122% projected to exceed 130% by
2034. That's only 8 and a half years
from now. The US dollar has lost 25% of
its purchasing power in the last 5 years
alone. Time to open violence? Unclear
and hopefully never. But we've already
had riots, assassinations, and armed
political standoffs. Not to mention the
fact that modern monetary theory allows
the government to steal your money at
will through deficit spending. And there
is no sign that any political party is
going to stop the deficit spending. Ray
Dalio isn't being pessimistic. And nor
am I when he says we've got a more than
50% chance of civil war. He's just
acknowledging the historical pattern
that repeats. Every indicator that
signals collapse is flashing red.
Exploding debt, deep political
polarization in tribal thinking, rapidly
declining trust in institutions, rising
political violence, military
increasingly pulled into domestic
policing. So the question isn't could
this happen here? It's what could stop
it. Now, Dalio says there's a narrow
window to act, a chance to engineer what
he calls a beautiful deleveraging, a way
to deflate the bubble without blowing up
the country. But the clock is ticking
and the system is brittle. The only
question left is, do we hit the brakes
or do we brace for impact? And that
brings us to part six. Where do we go
from here? How do we hit the brakes?
After World War II in 1946, the US debt
to GDP ratio had soared to 119%, almost
exactly what it is today. But by 1957,
we'd managed to steer away from the
cliff and get it down to roughly 50%. No
riots, no collapse, just discipline,
restraint, and leadership. But most
countries don't avoid the cliff. After
World War I, for instance, Weimar
Germany had a similar debt load to the
post-war US. But instead of pulling
back, they printed money, crushed
savers, collapsed their currency, and
tore themselves apart from the inside,
ushering in fascism and dragging the
planet into another world war. Similar
starting points, dramatically different
outcomes. We now face a choice. We've
already begun to tear ourselves apart
here in the US, but there is still a
path forward. What Ray Dallio calls a
beautiful deleveraging. A beautiful
deleveraging is a controlled process of
reducing an economy's debt to GDP ratio
in a way that minimizes economic
disruption. The goal is to avoid severe
economic collapse, excessive inflation,
or a prolonged depression. And you do
that by hurting everyone, but hopefully
in just the right ways and in just the
right amounts such that you keep the
economy from imploding and you keep
people from literally killing each
other. A beautiful deleveraging is
simply put the optimal method from going
from a high debt to GDP ratio back down
to a sustainable debt to GDP ratio. It
is a hateful process, but it's the least
terrible of the options when calamity is
your only other choice. A beautiful
deleveraging is executed using the
following four levers that policymakers
have at their disposal. One, austerity,
spending cuts. reducing spending by
individuals, businesses, and governments
to pay down debt. Two, debt
restructuring, defaults or write downs.
Essentially reducing debt obligations by
forgiving, extending, or lowering
interest rates on loans. Three, wealth
redistribution, fiscal transfers,
shifting resources from wealthier to
poor segments via taxation or government
programs. and four, debt monetization,
aka money printing. Central banks
creating new money to stimulate spending
and offset credit contraction. All of
the above are used in balanced ways so
that the debt to income ratio falls
without causing unacceptable economic
and social stress. And I give all of
that to you in a blunt way, not so that
I can poke fun at it, but rather so that
nothing gets lost in jargon because I
believe this is our future. This is the
thing we must do. and the confused mind
says no. And we're going to need a lot
of people to say yes if we're going to
get on the other side of this without
economic collapse. All right. When done
well, a beautiful deleveraging achieves
three key outcomes. One, the burden of
debt decreases measured as debt payments
relative to income. Two, the economy
grows in real terms adjusted for
inflation. and three, inflation remains
moderate, preventing hyperinflation or
destabilizing price spirals. Dalio
contrasts this with an ugly deleveraging
where imbalances in policy lead to
either severe deflationary depression
from excessive austerity and debt
defaults or runaway inflation from
reckless money printing or capital
flight where the wealthy and successful
flee or simply stop producing. A
beautiful deleveraging is beautiful
precisely because it navigates these
extremes, restoring economic balance
without catastrophic consequences. To
understand exactly how a beautiful
deleveraging works, we need to break
down each tool, its effects, and how
they interact. Dalio's framework is
rooted in his view of the economy as a
machine driven by transactions, credit,
and cycles. All right, let's look at
each tool individually. Tool number one,
austerity, the spending cuts. Austerity
involves reducing expenditures by
households, businesses, and the
government to free up income for debt
repayment. For individuals, this means
tightening the belt. For governments, it
means cutting budgets and reducing
deficits. The economic impact is varied.
It's partly deflationary. Cutting
spending reduces demand as one person's
spending is another's income and this
leads to falling incomes, lower economic
activity, and declining asset prices, eg
stocks, real estate, etc. But it also
increases the debt burden. Because
incomes fall faster than debt payments,
the debt to income ratio often worsens.
For example, if a household cuts
spending by 10%, its income may fall by
15% due to reduced economic activity
across the economy, making debt harder
to service. It also has a depressing
effect. Austerity can spiral into a
deflationary depression as seen in
Greece during the Eurozone crisis in
2010 through 2015 where austerity
actually deepened the economic
contraction. Now despite being a mixed
bag, austerity is necessary to curb
excessive borrowing and restore fiscal
discipline, but it has to be done in a
controlled fashion. Dalio warns that
overreiance on austerity is too painful
and counterproductive as it has a
tendency to exacerbate deflation without
significantly reducing the debt to
income ratio if it's the only tool
deployed. It needs to be in the mix as
fiscal discipline is critical to getting
things back on track, but it should be a
small part of the mix applied gradually
to avoid shocking the economy. One
should definitely expect massive social
resistance to austerity as a PSA.
Spending cuts, especially to public
services, spark protests and political
backlash. Everyone wants to avoid a
crisis, but no one wants to tighten
their belt. Now, timing with austerity
is also critically important. Austerity
is often the first response to a debt
crisis, but must be phased out quickly
in favor of stimulative measures. All
right, tool number two, debt
restructuring. Basically, intentionally
defaulting or writing down debts. Debt
restructuring reduces the debt
obligations by the following mechanisms.
Intentionally defaulting, creditors just
receive no repayment, eg, it's a
bankruptcy. Writing down principal, the
total amount of the loan due is
negotiated and reduced. Extending
maturities, so spreading the payments
out over a longer period. Lowering
interest rates, reducing the cost of
servicing the debt. Now, the economic
impact of this is mixed as most of these
tools are. It's partly deflationary
because defaults and write downs destroy
wealth as creditors lose money and asset
values when debt owed to them is reduced
or eliminated through bankruptcies.
Their asset portfolio is reduced and
this reduction reduces their lending
capacity which contracts credit further.
It also has a depressing effect because
falling asset prices and bank losses can
trigger a financial crisis as seen in
2008 when layman brothers collapse froze
the credit markets. On the plus side, it
reduces debt burden because
restructuring directly lowers debt
levels easing repayment pressures for
borrowers. Now, this plays a critical
role in a beautiful deleveraging because
debt restructuring is what you use to
clean out bad debts. It has to be done
carefully though. Dalio emphasizes that
it should be targeted, eg, it should be
aimed at insolvent borrowers or specific
sectors like real estate that are in
trouble and paired with stimulative
policies to offset the crisisled
deflationary effects. For example,
restructuring mortgage debt in the US
post 2008 helped stabilize housing
markets when combined with Federal
Reserve interventions. There's some
challenges though because the financial
system becomes very fragile. Largecale
defaults can bankrupt banks or pension
funds as seen in Argentina's 2001
default. There will be a ton of
political resistance as creditors like
banks and bond holders are going to
lobby like mad against write downs while
debtors are going to be screaming for
relief creating this tension between the
two. There's also the possibility of
creating a moral hazard because
widespread debt forgiveness encourages
future recklessness. We have seen this
so clearly with bank bailouts. Once
banks believe that they're going to get
saved when they fail, they take bigger
and bigger risks. And this applies to
everybody. All right. Tool number three,
wealth redistribution. Fiscal transfers.
Redistribution involves transferring
resources from wealthier groups to
poorer groups through higher taxes on
the rich, increasing taxes on income,
capital gains or wealth. Government
spending programs, providing
unemployment benefits, stimulus checks
or subsidies to low-income households.
Social safety net expansion, expanding
things like health care, housing, or
food assistance. The economic impact of
all of this though runs the gamut. It's
stimulative, which is wonderful because
transfers boost spending in the lower
inome households that receive the funds
and those are the people that have a
higher propensity to spend and consume.
This increases broadspectctrum demand
across the economy. It's also socially
stabilizing. Redistribution reduces
inequality and mitigates the social
unrest that comes from people being very
angry at the wealth discrepancy.
However, it has very little impact on
the debt burden because transfers do not
directly reduce debt and rely on
borrowers to voluntarily pay down their
debt, which they do not always do. The
role that this plays in a beautiful
deleveraging is that redistribution is a
supporting tool to maintain social
cohesion and stimulate demand. Dio
notes, however, that deleveraging
periods can increase social tension due
to the wealth gaps. So transfers like
stimulus checks during CO 19 need to be
designed to help borrowers without going
so far that it collapses asset values.
Redistribution alone is insufficient. It
is very important to note that as it
rarely provides enough funds to
meaningfully reduce debt burdens unless
it's accompanied by revolutionary
measures like wealth seizures. And Dalio
does not recommend that however as it
can backfire by triggering capital
flight or massive reductions in output
from the makers in society. The
challenges to wealth redistribution are
numerous. It can dramatically increase
political polarization. Taxing the
wealthy often, I'll even say always, is
going to face resistance as seen in the
US debates over just a progressive
taxation system. It creates fiscal
strain as well because governments are
facing rising deficits during
deleveraging. And as tax revenues fall
and spending rises, for example, the US
deficit grew to $3.1 trillion dollars in
2020 when CO forced money printing to
increase social safety net coverage.
There's also inefficiencies to wealth
transfers because the transfers are
rarely targeted enough to reach the debt
distress borrowers directly. It just
gets diluted across everybody
essentially. So the impact of the
redistribution becomes weakened. Tool
number four, debt monetization, aka
money printing. Debt monetization is
when central banks create new money out
of thin air. And they do that to do the
following. Purchase assets, buying
government bonds or other securities.
This is known as quantitative easing.
Fund deficits effectively financing
government spending by magic money
printing. Stimulate credit by lowering
interest rates to near zero or negative
to encourage borrowing. The economic
impact of money printing is a little bit
up and a little bit down. This is though
the first line of defense. This is what
everybody does. But you have to
understand that it is inflationary.
Printing money increases the money
supply by raising demand because people
have more money. And when you've got
more money chasing the same number of
goods, prices go up. But it's also
stimulative. New money boosts asset
prices like stocks and bonds and creates
the illusion of rising incomes which
encourages spending and thus stimulates
economic activity. It also reduces the
debt burden by increasing nominal
incomes and GDP. Debt monetization
lowers debt to income ratios. Printing
money plays a key role in a beautiful
deleveraging money. Printing as I said
is by far the most common and most
powerful tool. It directly counters
deflationary pressures from austerity
and defaults. Dio stresses, however,
that it must be calibrated to offset
credit contraction, but without sparking
excessive inflation. For example, post
2008, quantitative easing in the US, the
Federal Reserve bought 4 trillion in
assets, managed to stabilize markets
without causing hyperinflation because
much of the new money actually remained
in bank reserves rather than immediately
entering circulation. If it had gone
immediately into circulation, it could
have dramatically impacted prices. All
right, debt monetization certainly has
its challenges. First of all, there is a
massive inflation risk. As we've been
discussing, overprinting can lead to
hyperinflation as in Weimar, Germany
1920s, and in Zimbabwe in the 2000s.
Consumer confidence when you're printing
money is key. If consumers and
businesses remain scared and hoard the
money that's being printed instead of
spending as they did during the Great
Depression, the effectiveness of
printing is completely neutralized. The
knock-on currency devaluation caused by
excessive printing can also weaken the
currency, raising import costs and
inflation as seen in emerging markets.
All right, you've got all the tools.
Now, let's put it together and see what
a beautiful deleveraging actually looks
like. Rayalio strategy is a coordinated
policy mix executed by central banks and
governments tailored to the economy's
specific conditions. There is no
one-sizefits-all here. And it's going to
work over a few steps. Step one, you
diagnose the debt problem by assessing
debt levels, calculating the debt
service, and determining whether the
economy is in a deflationary
contraction, falling incomes and asset
prices, or inflationary spiral, rising
prices, and currency devaluation. Then
you structure the policy mix
accordingly. Dalio's core prescription
is to balance the four tools we just
walked through to achieve positive
nominal growth, which is income growth
above debt growth, without excessive
inflation. His specific recommendations
include enact limited austerity,
restructure bad debts specifically in
distressed sectors, and enact moderate
wealth redistribution by temporarily
increasing taxes on high earners. Then
you use calibrated money printing and
debt monetization to stimulate without
spilling into hyperinflation. Dalio also
suggests raising nominal growth by
setting interest rates below nominal GDP
growth rates. For instance, if GDP
growth is 4%, rates should be between 2
and 3% to reduce debt burdens. Then you
monetize the debt. buy government bonds
to fund deficits as the Federal Reserve
did during CO 19 providing liquidity
without immediate inflation. For
economies with domestic currency debt
like the US, you can also devalue the
currency as needed to reduce the real
value of debt. Step two, next you
coordinate monetary and fiscal policy.
There are some actions that central
banks need to take. They need to lower
interest rates to near zero or even
negative rates to reduce borrowing costs
and encourage spending. Dalio notes this
option is limited if rates are already
low. They need to use quantitative
easing to purchase bonds to inject money
directly into the markets, raising asset
prices and confidence. Then they need to
be prepared to helicopter money in as
needed via direct cash transfers to
individual households like was done
during the CO 19 crisis to boost
spending without relying on the banks.
There are some actions the government
needs to take. They need to create
fiscal stimulus by increasing spending
on infrastructure, health care and/or
education to create jobs and demand. The
US New Deal is a classic example of this
and it was done back in the 1930s. They
also need to deficit spend through bond
issuance if needed, which the central
banks can then monetize. And this is
exactly what Japan has been doing since
the 1990s. All right, step three,
monitor and adjust. The odds of you
getting this right out of the gate are
virtually zero. So, you're going to want
to track key metrics, namely debt to
income ratios. Aim for a decline. We
want to go, let's say you're at 200%,
you want to get that down to like 150%
of GDP or even lower would be ideal.
nominal GDP growth. You want to ensure
growth exceeds interest rates. So if
you're at 4% growth, then you got to be
at say 2% rates. Inflation, you got to
keep consumer price inflation at 2 to 3%
to avoid hyperinflation or deflation.
You got to watch your asset prices.
Stabilize stocks, bonds, and real estate
markets to restore confidence. Then
adjust policies dynamically. If
deflation persists, increase money
printing and stimulus. If inflation is
on the rise, tighten your monetary
policy. If social unrest grows, which
hopefully it doesn't, expand
redistribution, but avoid populist
measures that scare investors as that
will kill everything. Step four,
finally, foster confidence and
productivity. The government has to work
to restore public confidence. People
must feel confident about the future. If
they don't, they're never going to
spend. Instead, they're going to hoard
their money. Clear communication from
policymakers and visible policy
successes like a rising stock market are
going to be critically important. Make
sure productivity is boosted. Long-term
growth depends on innovation and
education and investment. Dio recommends
structural reforms such as deregulation
and labor market flexibility to
complement deleveraging. You got to get
the engine restarted. Maintain private
sector vitality. It is critical to
preserve the vitality of the private
markets which tend to get clamped down
on in these moments of extreme division.
But if you don't understand that
entrepreneurship drives the economy and
you've got to do things to foster that,
you're going to be in real trouble. The
only thing that generates money for the
federal government to tax is
entrepreneurs. So anti- capitalist
policies will ultimately stifle growth.
They might feel good, but they are going
to stifle growth. All right, you guys
have been with me on an incredibly
important journey. In closing, you know
the cycle now. We've gone over it from
several different angles, and the
pattern is always the same. Debt,
division, disorder, collapse. You now
know how it ends if we don't change. And
98% of countries don't. They cannot
bring themselves to change until a
national emergency forces them to do
something drastic because the pain is so
intense. But remember, 2% do make the
change. So in the immortal words of Jim
Carrey, I'm saying there is a chance. So
you're telling me there's a chance? This
isn't about right or left. This is about
pattern recognition. Countries can and
do go broke right now, today. It is
happening and it is brutal and
avoidable. It's going to take more than
outrage, more than another protest. It's
going to take discipline and sacrifice
and finding each other in the middle,
focusing on the physics of money. We
have to develop a shared understanding
of the game we're actually playing, how
economies work, and choose
sustainability over collapse. This is
the moment right now in the story where
every empire either resets or falls. The
pattern of the big cycle Ray Dalio
outlines and how countries go broke is
just human psychology and math at scale.
Neither of those are changing anytime
soon. So, if we stay on autopilot, we
know exactly how it will play out. We
have a path forward with Ray's beautiful
deleveraging, but it means we have to
act now before the jarring gong of
history tells us it's already too late.
All right, if you guys want to engage
with me as I explore ideas like this in
real time, be sure to join me for my
lives on YouTube Wednesday and Fridays
at 6:00 a.m. Pacific time. I'll see you
there. Till next time, my friends, be
legendary. Take care. Peace.