Hola Libertinus,

Dalio’s back, baby! And he’s up to his usual—masquerading as Nostradamus for the macroeconomic crowd, slow-leaking chapters of his new book, How Countries Go Broke.

The TL;DR? The U.S. dollar might be king, but to the master goes the knife.

And when it happens, it’s about as pretty as a “Florida Man” headline.

(I say that with all due respect, as a former Floridian.)

This week, West digs into Dalio’s debt cycle framework and what it means for your portfolio when the music stops, and Zack explores why the Great Deleveraging might not look like you think—and why deflation could be the plot twist no one sees coming.

Grab a drink, settle in, and let’s get weird.

⛓️‍💥 “How Countries Go Broke”

How YOU Go Broke

In case you don't follow Dalio on X, he's been slow dripping chapters of his upcoming book "How Countries Go Broke" to all of us macroeconomic junkies.

And what a sweet drug it is.

In one of the first sentences of the book, Dalio poses the question "Can a big, important country that has a major reserve currency like the US go broke—and, if so, what would that look like?"

Spoiler alert, the answer is: Yes, and it doesn't look pretty.

Dalio views the world through the lens of debt cycles.

Here is what these debt cycles look like:

1. "The Sound Money Stage: When net debt levels are low, money is sound, the country is competitive, and debt growth fuels productivity growth, which creates incomes that are more than enough to pay back the debts. This leads to increases in financial wealth and confidence."

2. "The Debt Bubble Stage: When debt and investment growth are greater than can be serviced from the incomes being produced."

3. "The Top Stage: When the bubble pops and there is a credit/debt/market/economic contraction."

4. "The Deleveraging Stage: When there is a painful bringing down of debt and debt service levels to be in line with income levels so that the debt levels are sustainable."

5. "The Big Debt Crisis Recedes: When a new equilibrium is reached, and a new cycle begins

But how do we know where we are at in one of these debt cycles?

Dalio tells us that the canary in the coal mine is monetary policy.

Cycle changes necessitate central banks managing money supply in certain ways to account for the realities of shifts in the cycle.

Here are the monetary policies that central bankers implement in each phase of the debt cycle:

1. A Linked (i.e., Hard) Monetary System

2. A Fiat Money, Interest-Rate-Driven Monetary Policy

3. A Fiat Monetary System with Debt Monetization

4. A Fiat Money System with Coordinated Big Fiscal Deficit and Big Debt Monetization Policy

5. A Big Deleveraging

6. The Return to Hard Money

Now, I'm no economist, but within Dalio's framework the US clearly entered monetary policy phase 4 right around when COVID happened.

Central banks and the government had to take some pretty dramatic action to keep the economy afloat - mainly in the form of buying up bonds and dropping interest rates lower than a stripper with an overdue car payment.

And I'm no mathematician, but I can count to (monetary policy phase) 5, and see that what comes next doesn't look good.

In a big deleveraging there must be a "big reduction in debt and debt service payments through a debt restructuring and/or a debt monetization."

And this, dear reader, is what I really want to talk about today.

How can you position yourself to be protected from, and possibly even benefit from, a big deleveraging when it comes?

To answer that, we have to understand how central bankers will react in the event of a big deleveraging.

Central bankers can do two things in a big deleveraging: 1) restructure debt, which is deflationary in nature, and 2) monetize debt, which is inflationary in nature.

Now, sometimes central bankers can pull both of these levers juuuuust right and achieve what Dalio dubs a "beautiful deleveraging," but we can't stake our financial futures on bureaucrats being good at their jobs.

Instead, we have to plan as if they'll screw things up and leave us with either high inflation or high deflation.

There's been enough news about inflation over the past few years, you're probably already aware that hard assets, such as gold, generally hedge against the detrimental impacts of inflation, so it’s probably a good idea to have some hard assets in your portfolio.

The US hasn't had to deal with high deflation in a long time, so you may not be as familiar with it.

In periods of deflation, the value of the dollar increases relative to the cost of goods and services.

Now, you could just hold dollars to guard against deflation, but you can actually get substantially larger gains through long term US treasuries.

Long term treasuries effectively act like "leveraged" dollars, and would likely spike in value in a deflationary phase.

And since the US government can always print more money to service its debt payments, there is a very low risk of default (but the asset suffers during inflation).

And remember, with all of these rapid shifts in monetary policy, markets will be going nuts.

Stocks will be soaring and crashing faster than Liz Truss's term as prime minister.

For this reason, you also want to have exposure to stocks to profit from the highs, and a good store of cash to buy with during the lows.

So basically, to weather a big deleveraging, you want to have a good mix of hard assets, long term government treasuries, stocks, and cash.

But guess what?

That is the same portfolio you would want to have to weather any phase of the debt, business, market, or any other kind of cycle.

You will always have a loser in your portfolio with this strategy, but the winners will pull your net worth up over the long term.

And when something unexpected happens, those "loser" assets will suddenly become the primary drivers of your portfolio's returns.

Accept the limitations of your predictive capacities, embrace risk management, make money, and actually be able to sleep at night.

But, you don't have to do that.

You could try to guess whether the central bank will err on the side of inflation or deflation in a big deleveraging.

You could speculate on whether the newest round of stimulus will drive up markets, or signal the Fed's impotence to effectively steer the economy.

You could hang on every word uttered from the lips of Dalio and every other great investor so that you can beat the market (even when these great investors have contradictory takes).

You could do any of these things, but don't spend so much time speculating on when nations will go broke that you go broke in the process. ~West

These Fragments I Have Shored Against My Ruins

Summer, 1929.

New York City.

It's hot. The streets are deafening. Everyone’s dressed dapperAF—three-piece suits, pocket watches, fedoras tilted just right.

It's Peaky Blinders, with skyscrapers.

Enter our main character...

Joseph Patrick "Joe" Kennedy Sr.—future patriarch of America’s most glamorous political dynasty, current stock market shark; notorious for insider trading, market manipulation, and pump-n'-dump schemes.

Real swell guy.

One day, Joe’s strolling down Wall Street, plotting his next scheme, when he spots a shoeshine stand.

His wingtips could use a polish, so he plops himself down.

That’s when it happens.

The kid shining his shoes is a pint-sized hustler.

Newsboy cap pulled low, socks yanked high, and an attitude twice his size.

Let’s stick with the Peaky Blinders vibe and call him "Seamus," because, c’mon, every hypothetically Irish street kid should be named Seamus.

So, as Seamus buffs Joe’s Oxfords, he pauses, leans in, and with a thick accent goes...

"Oy, guvna, 'ave ya heard of Consolidated Ice? It's goin’ to tha moon… and we're still early, innit?"

That was it.

Reality hit Joe like a moonshiner’s hot rod careening through a speakeasy window...

If even shoeshine boys are slinging stock tips, the market wasn’t just hot... it was a tinderbox soaked in guzzoline.

So, Joe did what any self-respecting shark would do: he pulled his chips and cashed out.

Completely.

He dumped his entire portfolio and shorted the market, betting that Wall Street’s Jazz-Age joyride was about to crash and burn.

And sure enough, by the time October rolled around, the market… well, you know the story.

Black Monday. Black Tuesday. The Dow lost almost half its value in a matter of weeks.

(It wouldn’t recover until 1954.)

Meanwhile, Joe walked away with $150 million—about $3.5 billion in today’s dollars—and the Kennedy dynasty was born.

Now, I might have taken a few creative liberties with the classic "shoeshine boy" story, but let's be honest...

The original is probably BS anyway.

Wall Street’s full of these oft-repeated anecdotes—little ditties that get traded at cocktail parties because they sound clever.

But I couldn't pass up this segue into what I want to discuss today...

The deflationary Great Depression.

Here's my thesis:

Inflation is the "default setting" of our economic instincts, because for our entire lives, inflation has been the norm.

The idea that the dollar loses value over time, that prices rise, and that assets like real estate and stocks appreciate—it’s all baked into how we think about the economy.

And when permabears and doomers predict the next big crash, what do they point to?

Hyperinflation.

Weimar. Zimbabwe. Venezuela.

These stories dominate the collective imagination.

Inflation is the monster under the bed.

But that's not the only direction a deleveraging can take.

Let's talk deflation.

Deflation is like inflation’s evil twin—the doppelgänger no one talks about at family gatherings.

And unlike inflation, which can be tamed (to some extent) by tighter monetary policy, deflation is much trickier.

When prices fall, money becomes scarce, and the value of cash increases, it creates a positive feedback loop:

As prices drop, people and businesses hoard cash instead of spending (because it'll be worth more tomorrow), which causes demand to collapse, economic contraction, and a crisis of liquidity.

It’s a death spiral for the economy.

Deflation is ugly:

• Stocks, real estate, and commodities lose value as cash becomes scarce.

• Businesses cut costs, lay off workers, and wages drop.

• Debts don't shrink. They grow. The real value of the debt increases because you’re paying back loans with more valuable dollars.

• Banks fail. And with each failure, the money supply shrinks even further.

• People and businesses hoard cash, worsening the crisis and creating a liquidity death spiral.

Between 1929 and 1933, prices plummeted nearly 30%, and over 9,000 banks folded. Unemployment hit 25%, and breadlines wrapped around multiple city blocks.

Now, if you think deflation is just some dusty relic of the past, let me introduce you to the excesses of 1980s Japan.

Asset prices skyrocketed, Tokyo real estate became pricier than all of California, and the stock market hit dizzying heights.

Then the bubble burst in the early '90s.

Instead of the inflationary chaos we’re so conditioned to expect, Japan experienced deflation.

The government slashed interest rates, printed money, and did everything by the Keynesian playbook.

But nothing worked. Consumers stopped spending, businesses stopped investing, and prices kept falling.

It was a "Lost Decade." (That streeetched on for three.)

For thirty years, Japan’s economy flatlined. Asset prices never recovered. Wages stagnated. And despite throwing the kitchen sink at the problem, Japan couldn’t reignite growth.

Their stock market? It still hasn’t hit its 1989 highs.

And sure, Japan isn’t the U.S., but their experience is a flickering neon sign in a rain-soaked alley...

Casting ominous, electric shadows over our economic future.

Let's talk Dalio.

As West points out, when the debt bubble bursts (and it always does), governments have two options:

1. Restructure Debt (deflationary)

2. Monetize Debt (inflationary)

Dalio leans toward inflation—and sure, that’s historically been the path of least resistance.

Print more money, kick the can down the road, let tomorrow’s politicians deal with it.

What if we can’t inflate our way out of this one?

Remember the '30s? Remember Japan?

Let's talk strategies.

If deflation comes knocking, here’s what you can expect:

• Cash ain't trash anymore, and suddenly, hoarding dollars isn’t just safe—it’s smart.

• Debt becomes a noose, as fixed obligations get harder to service as incomes shrink.

• Hard assets like real estate, commodities, even gold might not be the safe havens you expect.

• Long-term treasuries shine, because in a deflationary world, government bonds, believe it or not, are king.

In short, everything you’ve been conditioned to believe about fail-safe investing could get flipped on its head.

So don’t get too complacent or distracted by the "shoeshine boys" on TikTok, pumping sh*tcoins and meme stocks.

When the narrative of "asset prices go up forever" feels like the new quantitatively-eased normal, that’s probably your cue to be skeptical.

As always, the real winners won’t be the ones who bet on the consensus narrative—they’ll be the ones who prepared for the unexpected. ~Zack

That’s it for this week.

At Libertas, we don’t play crystal ball economics. We’re not here to predict the future—we’re here to prepare for all possible futures.

Dalio’s right: debt cycles matter.

But don’t get too cozy thinking you’ve got the ending figured out.

We’ve seen inflation. But deflation is the black swan most aren’t watching out for.

So diversify like your financial future depends on it—because it does.

• Cash is boring, but boring is beautiful in a deflationary crash.

• Long-term treasuries are the unsung heroes when everything else tanks.

• Inflation’s still a threat, of course, so don’t ditch gold and real estate, but make sure you manage your debts.

At the end of the day, the winners aren’t the ones who ‘predict’ the future—they’re the ones who are ready for any future.

Stay flexible, my friend.

Sic semper debitoribus,
~ West & Zack

👍 Enjoy this email? Please consider moving it to your primary inbox, and if you’re really feeling generous, hit “reply” and let us know what you think. Even one word will suffice. These steps will ensure you actually get the newsletter and email providers like Gmail don’t relegate us to your spam folder.

First time reader? You can sign up right here.