How Countries Go Broke summary

To get a clearer picture of how a country goes broke, let’s look at the typical chain of events, one step at a time. This is the overall Big Debt Cycle, and it’s actually a nine stage process. It shows how governments and central banks slide into financial ruin, in a sort of slow-motion trainwreck fashion, before finding a way to hit the reset button.

Stage One starts when a country has accumulated a ton of debt – both in the private sector and the government. In this first stage, everyone’s riding high on borrowed money.

Now that we have a clearer understanding of the debt cycles at the core of it all, let’s zoom out and explore the other forces that shape economies. After all, an economy isn’t just a series of random events – it’s a complex, interconnected system, much like a giant perpetual motion machine.

In addition to the economic debt cycles, there are four other major cycles that drive change over time. When you look at these five factors all together – this zoomed-out view is called the Overall Big Cycle. It’s kind of like looking at history as one big engine, with five powerful gears turning together: there’s the debt cycle, internal political order, external geopolitical order, acts of nature (including pandemics and disasters), and, finally, technological advancements.

In this section and the next, we’re going to turn back the clock and look at how all the cycles and factors we’ve talked about have shaped the US economy for the past hundred years or so. Then, in the final section, we’ll wrap things up by looking at the author’s forecast for what lies ahead.

Following the American Civil War, the country lacked a central bank, so every crash, like the Panic of 1907, hit hard and lasted long. To fix this, and make the financial system less fragile, the government created the Federal Reserve in 1913. Around the same time, just as World War I was breaking out, tensions between capitalist and socialist ideologies were flaring up. While the US emerged from the war as the world’s top creditor, the global economy was still fragile, and the wild speculation of the Roaring ‘20s, fueled again by debt, led right into the Great Depression. This pattern – rising debt, growing inequality, followed by a major crash – is something we’ve seen again and again.

Since 2020, we’re now in Monetary Policy 3, or MP3. Ushered in by the COVID pandemic, which flipped the world upside down, we’ve seen economies tank, people lose jobs, supply chains freeze, and governments panic. Yeah, it’s been a wild ride.

Now, up until this point, central banks tried to stay pretty independent from political leaders. Their job was to control inflation and support steady economic growth, not to play politics. But in times of crisis, those rules get bent – and sometimes completely broken.

To be frank, things don’t look great from a financial perspective. The US debt – measured in both how much the government owes and how much it has to pay just to stay afloat – is at historic highs. As the author puts it, we’re "nearing the point of no return." What that means is, if those debt numbers keep rising, the government might get stuck in a nasty feedback loop – borrowing more than its earning just to pay interest – and rising interest rates could really push things over the edge.

But, oddly enough, the Federal Reserve’s short-term risks seem low. The economy is fairly balanced – growth, inflation, interest rates – all looking stable on the surface. But it’s all a bit of an illusion because the government’s debt is like a growing cancer under the surface. If interest rates rise, the Fed’s losses would balloon, and confidence levels could plummet once again. If the public or politicians start doubting the Fed’s ability to manage the money supply fairly and independently, it could trigger a serious loss of faith in the value of US currency itself.

There’s an old saying that goes: “He who lives by the crystal ball is destined to eat ground glass.” Basically, if you hope to foresee the future perfectly, you’re setting yourself up for a painful surprise.

That said, you can make sound bets on the future by focusing on cause and effect – things we can reasonably expect to happen because history, human nature, and economics tend to follow patterns. Remember the five parts of the Big Cycle: debt cycles, internal and external political shifts, technological inventions, and natural events – these are the things that repeat over centuries and shape the economy and power structures.