Ray Dalio, Co-President and Co-Chief Investment Officer of Bridgewater Associates, speaks at the Skybridge Capital SALT New York 2021 conference.
Brendan McDiarmid | Reuters
As the US Federal Reserve implements its first interest rate cut since the start of the Covid pandemic, billionaire investor Ray Dalio noted that the US economy still faces a “massive amount of debt.”
The central bank's decision to cut the federal funds rate by 50 basis points to a range of 4.75% to 5%. This rate not only determines short-term borrowing costs for banks, but also affects many consumer products such as mortgages, auto loans, and credit cards.
“The challenge for the Fed is to keep interest rates high enough to be good for the creditor, but not so high that they become a problem for the debtor,” the founder of Bridgewater Associates said in an interview with CNBC’s “Squawk Box Asia” on Thursday, noting the difficulty of this “balancing act.”
Recently, the US Treasury announced that the government has spent more than $1 trillion this year paying interest on its $35.3 trillion national debt. This increase in debt service costs also coincided with a sharp increase in the US budget deficit in August, which is approaching $2 trillion for the year.
On Wednesday, Dalio listed debt, money and the business cycle as among the top five forces impacting the global economy. Expanding on his discussion on Thursday, he said he was generally interested in “the enormous amount of debt that governments are creating and central banks are investing in. I’ve never seen that much in my lifetime.”
Governments around the world have taken on record debt burdens during the pandemic to fund stimulus packages and other economic measures to prevent collapse.
When asked about his expectations and whether he sees an imminent credit event, Dalio replied that he does not.
“I see a significant reduction in the value of that debt through a combination of artificially low real interest rates, so you’re not going to be compensated,” he said.
While the economy is “in relative balance,” Dalio noted that there is a “massive” amount of debt that needs to be rolled over and sold as well, new debt created by the government.
Dalio's concern is that neither former President Donald Trump nor Vice President Kamala Harris will prioritize debt sustainability, meaning these pressures are unlikely to ease regardless of who wins the next presidential election.
“I think over time, the path will increasingly be toward monetizing this debt, following a path very similar to Japan,” Dalio posited, pointing to how the Asian country has kept interest rates artificially low, which has led to a devaluation of the local currency. Japanese Yen And the value decreased Japanese bonds.
“Japanese bonds have fallen by 90%, which means a huge tax by giving you an artificially lower return every year,” he said.
For years, the Bank of Japan has stuck to a negative interest rate regime, embarking on some of the world’s most aggressive monetary easing. The BOJ only recently raised interest rates in March of this year.
Furthermore, when markets don’t have enough buyers to sustain the supply of debt, a situation may arise where interest rates have to rise or the Fed may have to step in and buy, which Dalio believes will happen.
“I see the Fed intervention as a very bad thing,” the billionaire said. The debt overhang also raises questions about how it will be paid off.
“If we're talking about hard money, we're going to have a credit event. But in terms of paper money, we have central banks buying that debt, converting that debt into money,” he said.
In this scenario, Dalio expects the markets to also see all currencies fall, because they are all relative.
“So I think you're going to see an environment very similar to the 1970s, or the period from 1930 to 1945,” he said.
As for his investment portfolio, Dalio insists that he doesn't like debt assets: “So if I were going to invest in debt assets like bonds, I would focus on light-weight debt assets like bonds.”
