When Empires End—Ray Dalio on the Current State of the Big Debt Cycle and What Investors Should Do Now
"This has happened repeatedly throughout history. I am not making this up," says Ray Dalio. As the founder of Bridgewater Associates, who has studied 500 years of historical cycles, his words about the current state of the United States are quiet, but their implications are heavy. Fiscal deficits, social polarization, geopolitical conflict, and concerns over an AI bubble—they are all converging into what he calls the 'fifth stage of the cycle.'
1. The Five Forces—What Drives the Big Cycle
Dalio lists the following five factors as determinants of the rise and fall of nations.
The debt and financial cycle, internal inequality and the breakdown of values, geopolitical conflict between great powers, technological innovation, and natural disasters or pandemics. He points out that these five are always occurring simultaneously, and the fact that all of them are manifesting in the U.S. today creates a severity that differs from past cycles.
2. The Current State of U.S. Fiscal Policy—The Reality of a '40% Deficit'
2-1. The Fiscal Structure in Numbers
Dalio explains the U.S. fiscal situation by comparing it to a company.
"The government spends about $7 trillion and collects only $5 trillion. In other words, 40% of its spending is a deficit. And as a result of continuing this for many years, debt equivalent to six times its annual revenue has accumulated."
At present, the fiscal deficit-to-GDP ratio is about 6%. This is double the 3% level that Dalio has indicated as 'necessary to stabilize the situation.' Moreover, of the approximately $2 trillion annual deficit, half is accounted for by interest payments. In addition, the refinancing of $9 trillion in existing debt will be required.
2-2. The Buyers of Government Bonds Are Changing
What makes the problem more complex is the change in the supply and demand structure of government bonds. Foreign investors hold about one-third of the outstanding U.S. Treasury balance, but there is a movement to reduce holdings in consideration of geopolitical risks and the possibility of sanctions. Conflict with China, friction with Europe—Dalio states that the risk of creditors and debtors clashing is a pattern that has been repeated throughout history.
3. Why DOGE Did Not Work
"Making an inefficient government efficient, and doing it quickly"—Dalio speaks frankly about the difficulty of this challenge.
There is an election cycle, criticism is constant, and building a national consensus is not easy. Even small changes, such as cuts to school lunch programs, generate political backlash.
"In a society where you are criticized no matter what you do, can the democratic system produce leaders who can make government efficient in a way that is acceptable to everyone?"
Dalio described this as 'structurally difficult.' He expressed the view that the reason the DOGE attempt did not work was not so much a problem with individual measures, but because we have entered a stage in the current cycle where reform itself is difficult.
4. Gold and Bitcoin—What Is a 'Truly Safe Asset'?
4-1. Why Gold Has Risen 80%
In about a year since the last interview, the price of gold has risen from about $2,900 per ounce to nearly $5,200 (an increase of about 80%). Dalio explains this movement as follows.
"Gold is not a speculative precious metal as many people think. It is the second-largest reserve currency held by central banks."
Amid rising economic and geopolitical risks, central banks around the world are structurally increasing their gold holdings. Dalio stated, "Even without a special view, you should allocate 5-15% of your portfolio to gold." The rationale is that gold has low correlation with other assets when they decline, providing a strong diversification effect.
4-2. Why Bitcoin failed to become a 'gold substitute'
During the same period, Bitcoin fell by approximately 25%. Dalio cites several reasons for this.
First, all Bitcoin transactions are traceable, giving central banks little incentive to hold it. There are also concerns regarding security due to quantum computing. Furthermore, it has a high correlation with tech stocks, and tends to be sold off when tech stocks are sold.
"Gold is the only long-term historical asset. Nothing else compares to it yet," is Dalio's assessment.
5. Tariffs and the Economy—What Economists Overlooked
5-1. Viewing tariffs as a form of inflation
Many economists have argued negatively about tariffs, labeling them as "a consumption-suppressing factor that increases inflation." However, Dalio questions this view.
"If taxes go up, that is inflation. Why is the rise in housing costs included in inflation, but tax increases are not?"
Historically, there were long periods when tariffs were a primary source of government revenue. While Dalio evaluates tariffs as having a certain legitimacy as a means to improve fiscal balance, he stated that they should not be viewed in isolation, but rather positioned as part of a larger strategy for rebuilding manufacturing and achieving economic self-reliance.
5-2. The geopolitical challenge of reducing external dependence
"Now that we are transitioning from a multipolar world to a confrontational world order, having dependencies is a risk," Dalio points out. From that perspective, tariffs are also a means to ensure geopolitical independence. He says the key is achieving the 3% target—stabilizing the budget through a balance of tax revenue, spending cuts, and interest rates.
6. The Essence of the AI Bubble—Technology survives, but companies disappear
Regarding technology investment, Dalio draws an important lesson from history.
"People think they are betting on technology while investing in stocks or companies. That is wrong. Technology survives, but most companies do not."
The 2000 dot-com bubble is a classic example. The technology of the internet became a reality, but the vast majority of companies at the time disappeared. He sees a similar structure with AI.
Furthermore, he points to the asymmetry of competition with China. China treats AI not as an object for profit-seeking, but as "public infrastructure like electricity," and is attempting to provide it for free via open source. In contrast, the U.S. is developing it on a monetization model.
The warning that "AI might eat itself—in a way that does not generate enough profit" comes from this context.
7. 'Stage 5'—The current location indicated by the cycle
Dalio states that the U.S. is currently in what he calls the "fifth stage of the cycle." Deteriorating fiscal conditions, large gaps in wealth and values, irreconcilable conflicts, and external threats—this combination has historically been repeated as a precursor to major upheaval.
"We are in a war that is heading toward a choice between left or right, socialism or fascism. We are right in the middle of it now."
However, Dalio is not a pessimist. History also shows that nations are rebuilt after crises. He states that the fundamental principles remain unchanged: any country can prosper if three conditions are met—education, civic solidarity, and avoiding internal and external wars.
Conclusion
Ray Dalio's perspective provides a time horizon that is difficult to obtain from daily market news. A 6% deficit-to-GDP ratio, a 600% debt-to-GDP ratio, and an 80% rise in gold prices—these are not isolated events, but data that should be interpreted as a single point within a 500-year cycle. The question for investors and business people is, "Do you recognize where you are in this cycle?"
