Ray Dalio, co-chairman and co-chief investment officer of Bridgewater Associates, speaks at the Skybridge Capital SALT New York 2021 conference.
Brendan McDermid | Reuters
When the US Federal Reserve does its first interest Despite cuts since the start of the Covid pandemic, billionaire investor Ray Dalio warned that the US economy still faces “a massive debt load”.
Central bank decision cut the federal funds rate by 50 basis points between 4.75% and 5%. This interest rate not only determines the short-term borrowing costs for banks but also affects a variety of consumer products such as mortgages, auto loans and credit cards.
“The challenge for the Federal Reserve is to keep interest rates high enough to benefit creditors, but not so high that they make it difficult for debtors,” the Bridgewater Associates founder told CNBC’s “Squawk Box Asia” on Thursday, noting the difficulty of this “balancing act.”
The US Treasury Department recently reported that the government has spent more than $1 trillion this year paying interest on the $35.3 trillion national debt.. This increase in debt servicing costs also coincided with a significant increase in the US budget deficit in August, which is approaching $2 trillion for the year.
On Wednesday, Dalio listed debt, money and economic cycles as some of the top five forces impact on the global economy. Expanding on his views on Thursday, he said he is often concerned about “the enormous amounts of debt being created by governments and monetized by central banks. That scale has never existed in my lifetime.”
Governments around the world have taken on record debt burden during the pandemic to fund stimulus packages and other economic measures prevent collapse.
When asked about his outlook and whether he sees a credit event coming, Dalio said no.
“I see the value of that debt being significantly devalued due to a combination of artificially low real interest rates, so you’re not going to get compensated,” he said.
While the economy is “in relative balance,” Dalio noted that there is a “huge” amount of debt that needs to be rolled over and sold, meaning new debt created by the government.”
Dalio’s concern is that neither former President Donald Trump nor Vice President Kamala Harris have prioritized debt sustainability, meaning these pressures are unlikely to ease. whoever wins upcoming presidential election
“I think over time the path will be more and more towards monetizing that debt, in a very similar path to Japan,” Dalio hypothesized, pointing to how the Asian nation has kept interest rates artificially low, which has devalued Japanese Yen and devalue the Japanese bonds.
“Japanese bond values have fallen by 90%, so there will be a huge tax imposed through the deliberate reduction of bond yields every year,” he said.
For years, the Bank of Japan has maintained negative interest rates as it embarked on one of the world’s most aggressive rounds of monetary easing. The country’s central bank only recently interest rate hike in march this year.
Additionally, when there aren’t enough buyers in the market to absorb the debt supply, there could be a situation where interest rates have to rise or the Fed might have to step in and buy back, and Dalio thinks they will.
“I will see [the] “The Fed’s intervention was a very significant bad event,” the billionaire said. The excessive supply of debt also raises questions about how to pay it back.
“If you look at it from a monetary perspective, you’re going to have a credit event. But if you look at it from a monetary perspective, you’re going to have central banks buying that debt, monetizing that debt,” he said.
In that scenario, Dalio predicts that the market would also see all currencies fall because they are all relative.
“So I think you’re going to see an environment very similar to the environment of the 1970s or the period from 1930 to 1945,” he said.
As for his portfolio, Dalio insists that he doesn’t like debt assets: “so if I’m going to invest, I’m not going to invest heavily in debt assets like bonds,” he said.
