As the U.S. Federal Reserve made its first interest rate cut since the early days of the Covid-19 pandemic, billionaire investor Ray Dalio highlighted the significant amount of debt still facing the U.S. economy.
The central bank reduced the federal funds rate by 50 basis points on Wednesday, bringing it to a range of 4.75% to 5%. This rate not only affects short-term borrowing costs for banks but also influences consumer products like mortgages, auto loans, and credit cards.
Dalio, the founder of Bridgewater Associates, emphasized the challenge for the Federal Reserve to maintain interest rates at a level that benefits creditors without becoming problematic for debtors. He described this as a delicate “balancing act” during an interview with CNBC’s “Squawk Box Asia.”
Recent reports from the U.S. Treasury Department revealed that the government spent over $1 trillion this year on interest payments for its $35.3 trillion national debt. This surge in debt service costs coincided with a substantial increase in the U.S. budget deficit in August, nearing $2 trillion for the year.
Dalio identified debt, money, and the economic cycle as among the top five forces influencing the global economy. He expressed particular interest in the unprecedented levels of debt being generated by governments and supported by central banks, a situation he believes has never been seen in his lifetime.
Governments worldwide accumulated record debt burdens during the pandemic to fund stimulus packages and other economic measures aimed at averting a collapse.
When asked about his outlook and the possibility of an impending credit event, Dalio indicated that he did not foresee one. He predicted a significant devaluation of debt due to artificially low real rates, which would not provide adequate compensation.
While acknowledging that the economy is currently in a state of relative equilibrium, Dalio underscored the substantial amount of debt that needs to be refinanced, sold, and new debt created by the government.
Dalio expressed concerns that neither former President Donald Trump nor Vice President Kamala Harris would prioritize debt sustainability, suggesting that these pressures are unlikely to ease regardless of the outcome of the upcoming presidential election.
He speculated that the trajectory may lead towards debt monetization, drawing parallels with Japan’s approach of maintaining artificially low interest rates, which resulted in the devaluation of the Japanese yen and Japanese bonds.
Dalio also raised the possibility of the Federal Reserve intervening by purchasing debt if there are insufficient buyers, a move he views as a significant negative event. The oversupply of debt raises questions about repayment methods, with central banks potentially monetizing the debt.
In such a scenario, Dalio anticipated a depreciation of all currencies, creating an environment reminiscent of the 1970s or the period from 1930 to 1945.
Regarding his portfolio, Dalio stated his aversion to debt assets, indicating a preference for being underweight in debt assets like bonds.
