Why Default Is an Inevitable Stage of the Long Cycle: Dalio's Analysis

Ray Dalio, billionaire and founder of Bridgewater, views the current moment not as a unique chaos but as a predictable historical process. According to his model of major cycles, default is not a single event but a logical result of the accumulation of systemic contradictions. At the same time, three orders are being destroyed: monetary, political, and geopolitical. This is not a conspiracy theory — it’s the mathematics of debt and history.

The monetary system on the brink: how debt becomes default

Any fiat currency system, by design, accumulates debt. Governments borrow to finance expenses, and with each cycle, debt grows faster than the economy can service it. At this point, debt servicing begins to pressure economic growth, creating a vicious circle.

Faced with such a choice — default or money printing — history almost always shows one outcome: governments choose printing. But printing money without corresponding production leads to inflation and currency degradation. Default is not an event that happens suddenly — it’s a process that unfolds gradually through currency disorder and loss of trust in the monetary unit.

The dangerous phase occurs when demand for government debt stops growing. Then interest rates begin to rise, the government has to print more money to buy back its bonds, and the currency weakens. This looks like the system collapsing from within.

Reserve currency losing trust

For a long time, the US enjoyed the privilege of being the reserve currency — the entire world held dollars, and therefore the US government could borrow almost without limits. But excess debt combined with sanctions policies began to undermine this foundation.

When Washington froze the reserves of other countries — it was a shock to the global financial system. Many central banks realized: the dollar is not a guarantee, but a weapon. They began diversifying reserves, seeking alternatives to American assets. Simultaneously, the number of agreements for settlements in other currencies is growing. Default is not just a numerical problem — it’s a trust issue in the currency that serves as the global standard.

Gold returns as protection against systemic crisis

Amid declining trust in fiat, gold is once again becoming a hedging instrument. Gold is not someone’s obligation — it’s an asset that retains value regardless of political decisions.

Central banks worldwide have increased gold reserves. The rising gold price reflects not speculation but a systemic shift: money is seeking refuge in tangible assets. Dalio recommends holding 5–15% of your portfolio in gold — not as a speculative move, but as insurance against currency collapse.

Political polarization as a sign of order collapse

The growing wealth gap destroys social compromise. When a small elite concentrates the overwhelming share of assets, the middle disappears, and a fight for power begins on a “win at any cost” basis. History shows: such phases of division inevitably lead to centralization of power and authoritarian structures.

Political polarization is not just a social conflict — it’s a precursor to system reformatting. Institutions lose trust, democratic compromise is replaced by the logic of the strong, and the ground is prepared for radical transformations. In such moments, capital seeks refuge in protective assets.

The US at a critical point: stage 5 as a precursor to default

According to Dalio’s cycle model, the US is in the fifth of six stages of a major cycle. This is not the final collapse stage but a pre-crisis state. At this stage:

• Demand for government debt weakens
• Long-term interest rates rise
• The government actively prints money to buy back its bonds
• The currency gradually weakens
• Capital migrates into hard assets and foreign currencies

Default is what awaits at stage six if systemic contradictions are not resolved through structural reforms. Currently, the system is in a managed decline mode, but this mode’s time may be running out.

CBDC and the control problem instead of salvation

Central banks are developing digital currencies as a solution to financial problems. CBDC promises full transaction transparency and payment system efficiency. But behind the scenes, another question looms: is full transparency a tool for management or control?

CBDC is unlikely to become a global store of value in its centralized form. People and companies seek assets they truly own, not digital IOUs that can be frozen or reprogrammed. This will accelerate the migration of capital into physical assets.

How to protect yourself during the epoch transition

Transition periods always redistribute capital. Those who understand this dynamic can protect their interests. Simple recommendations:

• Live below your means, accumulating real assets
• Diversify your portfolio: gold, foreign currencies, real sector assets
• Keep part of your funds in protective instruments, not only in nominal obligations
• Invest in education and skills that remain valuable under any scenario

Default is not the end of the world — it’s a reformatting. Value endures through crises, but its form changes. In financial history, every major crisis destroyed some assets and created opportunities for others. The current transitional period is no exception.