Iconic investor Ray Dalio says the US government is headed toward a “debt death spiral” due to chronically large deficits.
In a new interview on CNBC, the Bridgewater Associates founder says that in healthy credit cycles, all parties including the debtor, creditor and market can benefit from the flow of new money in the system.
[adinserter block="1"]However, Dalio says that the US government is issuing so much debt that it’s likely overpowering buy-side demand, raising the potential that it will need to begin borrowing money to service existing debt, triggering a death spiral.
The billionaire likens it to a human’s circulatory system.
“The credit system, I think of like being the circulatory system in your body that, like blood brings different parts of your body, it brings these nutrients, the buying power. And if it’s used well so that it produces income, then everybody prospers. The lender gets paid back, and the person who borrowed it used it to be productive. It’s great. At those times, you don’t see debts rise relative to income.
However, when debts rise relative to incomes on a chronic basis for a long time, it’s like plaque in that system accumulating. Think of it this way: the more debt and debt service you have, the less money you can spend out of your income. So as it rises right now, for the US government it’s almost a trillion dollars a year that goes to interest payments, so it’s sort of like plaque that narrows that and it’s a problem.
There is also a supply/demand issue for credit, like every other market. So that when we have run a large deficit – and now the deficit is projected to be about 7.5% percent of GDP – when you run a large deficit, you have to sell the debt to do that and the quantity of debt sold has to come up against how many buyers are there.
And when I calculate it, the quantity of debt to be sold is much greater than the buying power or the inclination to buy…
Now in the private market’s credit markets, we talk about a ‘debt death spiral.’
A ‘debt death spiral’ is that part of the cycle when the debtor needs to borrow money in order to pay debt service, and it accelerates and then everyone sees that and they don’t want to hold the debt. That’s what we’re approaching.”
To avoid the death spiral, Dalio says that the US should move to cut its deficit from 7.5% to 3% of GDP – which he dubs “the 3% solution” – something that can be achieved largely through cutting spending and lowering interest rates.
“If it’s not done this time, I really worry. I think that everyone who is responsible for that, from the president to the Congress, should recognize… That if they don’t get it down to that, that they are responsible for the consequences that will follow.”
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