Billionaire investor Ray Dalio has issued a harsh warning about the US economy, suggesting that the country is heading towards a dangerous “debt death spiral.”
In an interview with CNBC, the founder of Bridgewater Associates explained that a healthy credit system benefits all participants, from borrowers to lenders, as long as it is used productively to generate income.
However, he believes the US government is currently renting at an unsustainable pace and borrowing at potential demand that could outweigh the demand from buyers. This allows the government to take on more debts just to cover existing obligations. This is a scenario where Dario could spiral out of control.
He compares the situation to a choked circulation system. There is an excessive debt function like plaque that restricts blood flow. With interest payments alone approaching $1 trillion per year, the ability to allocate funds elsewhere is increasingly constrained.
Dario also highlights the imbalances in critical supply and demand in the credit market. With the US deficit projected at around 7.5% of GDP, the government must sell significant debt to cover the shortfall. However, if investors’ appetites cannot maintain their pace, the situation can get worse quickly. He describes this as a classic debt cycle. There, borrowing becomes self-past, investors lose confidence, government debt, and bring the system closer to collapse.
To prevent a full-scale crisis, Dario argues that the US must take critical action by reducing its deficit to 3% of GDP, a strategy it calls the “3% solution.” Achieving this, he says, would require both spending cuts and lower interest rates. He warns that not implementing these measures could lead to disastrous consequences and could encourage political leaders to take responsibility before it’s too late.
