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Ray Dalio, the billionaire founder of hedge fund firm Bridgewater Associates, said the UK was in a “debt death spiral” where it had to borrow more and more money to pay off rising interest costs. I warned you that this is a possibility.
Mr Dalio told the Financial Times that the recent fall in the value of the British pound and the onset of a weaker pound suggested that the market was struggling to absorb the UK’s increased borrowing needs since last October’s budget. He said he is doing so.
He said rising annual interest payments, which are already over £100bn a year, combined with the need to roll over debt at higher borrowing costs, were creating the risk of a self-reinforcing cycle.
Dalio said in an interview that this would create a “debt death spiral because it would either require more borrowing to pay off the debt that needs to be repaid, or it would put pressure on other spending, or it would require more taxes.” It appears to be underway.”
He said the market turmoil “reflects the supply and demand issue” for pure gold. “Why would long-term (yields) rise when there is (monetary policy) easing, the exchange rate is depreciating, and the economy is weak?”
He also said the U.S. is showing “signs” that markets could start to struggle to absorb borrowing demand, and that getting a handle on the country’s debt burden will be a major challenge during President Trump’s second term in office. He said that this is the “first big challenge” towards the future.
The global bond slide in recent months has pushed up borrowing costs in large economies such as Britain and the United States, even as central banks continue to cut interest rates.
Britain’s 10-year borrowing costs rose from 3.75% in mid-September to a 16-year high of 4.93% earlier this month, amid a global bond slide and concerns about the UK economy. The yield has since recovered somewhat to 4.66% on Monday.
The yield on the US 10-year Treasury note reached 4.62%, an increase of 1 percentage point over the same period. Yields move inversely with prices.
A key factor is stronger-than-expected inflation, with markets pricing in smaller interest rate cuts, but some large investors have expressed concerns about rising borrowing levels by already highly indebted countries. are.
“When you get to the point where you have to borrow money to pay off your debt, and interest rates rise and your debt service increases, and you need to borrow more money to pay it off, you get what the market calls a situation. . It’s a death spiral,” Dalio said. This month, Dalio published the first part of his new analysis of the sovereign debt crisis, “How Nations Fail.”
“As these risks increase, everyone focuses on the need to borrow more money at higher interest rates, which creates a self-reinforcing cycle of debt deterioration.”
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The fall in the pound and gold brought back memories of the market crisis that followed former chancellor Liz Truss’ ill-fated 2022 “mini” budget. At the time, Dalio wrote that the market’s plunge “suggests incompetence.”
Investors have largely ignored the comparisons, partly because the selloff has not been particularly large or sharp, but the government was forced to defend its economic plans this month as borrowing costs hit post-crisis highs. Meanwhile, Prime Minister Rachel Reeves faced calls for her resignation.
A Treasury spokesperson said the government’s “commitment to fiscal rules and sound finances is non-negotiable” and added: “A spending review to root out waste is underway and tough decisions on spending will be taken. The Minister of Finance has already indicated that this is the case.”
Dalio called for the US and UK government deficits to be reduced to 3% of gross domestic product (GDP). The US budget deficit is expected to remain above 6% of GDP this year, while the UK budget deficit is expected to reach 4.5% this year.
Some analysts warned that deep spending cuts and new taxes would hurt countries’ economic growth and hit their public finances.
Dalio acknowledged that “deficit reduction is bad for growth and inflation, but it also leads to lower interest rates, and lower interest rates have a significant stimulatory effect at the same time as deficit reduction.”
Dalio, who stepped down as Bridgewater’s chairman in 2021 but remains on the company’s board, has previously warned investors in U.S. debt of the dangers of rising U.S. debt. He did not give a timeline for when what he called a “debt bomb” would explode on debtor countries.
“This is like someone who has a large amount of plaque building up rapidly in their arteries,” he says. Debt payments are “piling up and weighing down other expenses, creating a risk that some of the plaque will come off. We can’t say exactly when that will happen, but the risk is very high and growing.” I can say that.
