In my book How Countries Go Broke: The Big Cycle, I laid out a template for understanding what happens when a country continuously spends more than it takes in, accumulating debt and debt service payments that rise relative to incomes. My perspective is that of an experienced global macro investor, and my understanding of this dynamic, which I will now explain, was what led me to anticipate the 2008 Great Financial Crisis and the European debt crisis that followed.
The debt dynamics of governments are analogous to those of individuals and companies with two important differences. First, when the demand for debt falls short of the supply, governments can create money through their central banks and hand it out to make it easier to pay debt (which also lowers the value of their money). Second, governments can get money from others through taxes.
First, debt service payments grow relative to incomes until they crowd out spending. Think of credit as being like blood in the economy's circulatory system. When credit circulates well and is used productively, it generates income that can service the debt that created it, which is healthy. But when debt service grows faster than the income needed to pay for it, debt-service costs accumulate like plaque in arteries, gradually crowding out other spending until eventually there is a financial heart attack. That is now happening in the U.S., but the U.S. isn’t alone. The United Kingdom, the European Union, China, and Japan all face too much debt relative to income and fiscal imbalances their governments haven’t solved.
The Big Debt Cycle degenerative process that follows these dynamics can easily be seen and understood by studying historic cases across many countries and is as predictable as demographic changes. Anyone who has studied monetary history should know that all monetary orders have eventually broken down, and it was this dynamic that led to the declines of previous reserve currencies and the empires behind them, most recently the British and, before that, the Dutch. Yet the process is not well understood and typically ignored until it is too late because, like unhealthy practices such as smoking and eating fatty foods, it takes place over a long time—typically over about a lifetime of around 80 years. The exact timing of the financial/economic heart attack is not easy to predict until the final symptoms appear. In my 2025 book, I estimated that it would take place in 2027, give or take two years. So far, the progression has been consistent with my estimates. It is certainly time to understand and pay attention to these dynamics.
More specifically, the key red-flag indicators to watch out for are:
The supply of government debt becoming too large relative to demand for it, causing long-term interest rates to rise faster than short-term rates.
The currency weakening, particularly relative to hard asset storeholds of wealth such as gold.
Central banks "printing" money and credit, purchasing bonds, and guaranteeing debt.
Late in the cycle, governments adopting more extraordinary measures to manage the growing mismatch between their debt offering and debt service obligations and their available financing. These measures can take the form of: shutting down banks or forcing bank mergers because the banks' losses and lack of liquid funds make fully paying their depositors' withdrawals impossible; unusual financial supports for systemically important companies; the establishment of capital controls to prevent money from leaving the country; and the outlawing of hard asset monies such as gold.
In all these scenarios, bondholders do poorly until debt and currency values are devalued enough to restore demand or the debt is restructured. Quite often these cycles end with a return to hard currencies and hard monetary policies to reestablish confidence in debt as an attractive, real-returning asset.
The U.S. situation in a nutshell
To understand the U.S. position today, imagine that you are running a big business called the U.S. government.
In addition to interest payments, roughly $10 trillion of maturing principal must be refinanced. As a result, total debt-service requirements today amount to roughly $11 trillion, or about twice annual revenue.
Looking forward, it appears most likely that things will get worse, and I estimate that projected deficits will cause the federal debt to rise to roughly $55 to $60 trillion over the next decade, requiring an additional $25-$30 trillion of debt sales. If that occurs, debt-service burdens will continue rising while increasing pressure is placed on investors to absorb ever-larger supplies of government debt assets. In addition, similarly large increases in debt and equity in supply in the U.S. private sector and in other countries that have to fund their increasing military and other expenditures will greatly add to the overall supply of debt and other financial assets.
History shows that this kind of solution is possible. The most comparable U.S. example occurred between 1991 and 1998, when the budget deficit was reduced by roughly 5% of GDP while economic outcomes remained favorable. But because of the lack of dealing with this debt issue earlier and the resulting current level of indebtedness, plus the increased needs for capital to fund AI and military expenses, we may be past the point of no return.
What this means for investors
Even though these debt dynamics have occurred repeatedly throughout history and are logical, they still surprise people. The key is recognizing them early enough to act before they become unmanageable. The warning signs are measurable, and the necessary adjustments are obvious based on the lessons of history. The question is whether political leaders and policymakers will understand this and act while they still can—and whether you and others will protect yourselves if they don't act.
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