I just finished Ray Dalio’s newest book, How Countries Go Broke, and Chapter 18 should be required reading for every American. Seriously: print it, post it, and share it with everyone you know (and those you don’t if you have distribution). It’s that important.
The short version? We’re flirting with financial disaster. The U.S. is on an unsustainable debt path, and if we don’t change course fast, we risk losing our dominant position in the global world order.
But here’s the good news: Dalio lays out a simple plan to fix it.
The 3% 3-Part Solution
The U.S. budget deficit is projected to be around 6% of GDP, but we need to cut that in half to 3% of GDP to stabilize our financial future. According to Dalio, that’s entirely doable. It just takes political will and a bit of math.
The plan is based on three levers:
- Spending Cuts
- Tax Increases
- Interest Rate Reductions
And no, this isn’t some extremist austerity play. Dalio isn’t saying we have to rely on just one of those levers. Instead, he proposes a balanced fallback plan:
- 4% cut in spending
- 4% increase in taxes
- 1% real interest rate reduction
Spread over three years. That’s it. Manageable. Measured. Bipartisan (if we still believe in that word).
Here’s the Impact of That Plan:
If enacted, the 3% plan would result in:
- $9 trillion less debt in 10 years
- $26 trillion less debt in 20 years
Compared to our current path, that’s monumental.
Why It Matters—Now
Dalio makes it crystal clear: interest rates—not Congress—are the most powerful tool in managing the deficit. A 1% rate cut is 4x more effective than a 1% tax increase. And a 1% tax increase is still more effective than a 1% spending cut.
If we want to solve this, we need a coordinated effort between Congress (fiscal policy) and the Fed (monetary policy). Fiscal tightening + monetary easing = sustainable course correction.
The Real Enemy? Inaction.
The challenge isn’t figuring out how to fix the debt trajectory. The challenge is getting politicians to stop bickering and do something.
Dalio’s fallback plan?
If Congress can’t agree on specifics, default to equal-percentage spending cuts and tax increases across the board. Then negotiate improvements. At least we’ll have a baseline.
No more kicking the can. We are out of road.
Even If We Act… It’s Not Risk-Free
Let’s be honest: even if we follow this plan, we’re not in the clear. Dalio outlines several real risks:
- Political dysfunction: a divided Congress may not be able to implement anything, even a default plan.
- The Fed may not cooperate: Monetary easing is critical to offsetting fiscal tightening, but the Fed is independent.
Dalio notes:
“Of course, the Fed can’t openly say that it will go along with this plan (though deals between the Fed keeping interest rates low while the government was cutting the deficit have been made in the past)…”
Translation: It’s been done before, quietly, but there are no guarantees this time.
- Extension of the 2017 tax cuts (as Trump has promised) could add another 1.5% to the deficit, requiring an even bigger adjustment, closer to a 4.5% of GDP cut.
- Economic shocks (recession, war, natural disasters, etc.) could throw off even the best-laid plans.
In other words, we’re not just up against math—we’re up against politics, timing, and luck.
History Is on Our Side—If We Act
This kind of fiscal tightening has worked before, especially in the U.S. between 1993–1998, when the deficit went from 4% of GDP to a 1% surplus. That would be like cutting $1.5 trillion from the deficit today. Dalio’s plan is less aggressive, but just as meaningful.
His core principle?
“When large government debts are growing quickly… the most important things to do are to:
- Cut the deficit by enough to fix the problem
- Do it when economic conditions are strong
- Pair it with monetary easing to cushion the impact.”
Final Thought
This chapter isn’t just a policy proposal—it’s a wake-up call.
We are at a financial crossroads. One road leads to sovereignty and strength. The other? Decline and disorder.
If you care about your family, your business, your freedom, or your country, you should care about this. And you should demand that your representatives do, too.
Because the time to act is now.
– Gen Y Finance Guy
P.S. I’m an optimist but periodically I use 1% of my energy to acknowledge and prepare for risks. The last time I was concerned was back in 2017 when I wrote: Can These Good Times Last Forever? What Happens If The Music Stops?
P.P.S. See the latest All In podcast, especially around minute 46.
P.P.P.S. This post was written before the Big Beautiful Bill passed. Now Elon Musk is looking to create a new political party and Ray Dalio isn’t optimistic that either current party will do what this country needs to be done to stay number ONE.
