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Dalio Sounds the Alarm: Averting Default, Yet Headed for Financial Turmoil?

In a recent online post, billionaire investor Ray Dalio shared his thoughts on the ongoing political dance around the U.S. debt limit. Although confident that a default scenario will be averted, he warns of the persistent inability of lawmakers to forge a lasting solution to the burgeoning debt problem, which could potentially lead to a financial crisis.

Dalio, the founding mind behind Bridgewater Associates, anticipates that legislative negotiations may result in vows to shrink future deficits. However, he suspects these promises may not ultimately materialize.

Dalio notes, “The recurrent approach of raising the debt limit by Congress and presidents — a likely scenario this time as well — essentially nullifies any serious constraint on debt. This could pave the way for a catastrophic financial breakdown in the future.”

President Joe Biden and House Speaker Kevin McCarthy have expressed optimism about striking a debt limit deal to prevent a default. But Dalio perceives a larger issue lurking.

Dalio highlights a fundamental issue: persistently spending beyond means and relying on debt to foot the bill — a trend that the U.S. has been guilty of for years — is not a sustainable choice. If the decision were his to make, he would opt for a different route.

In the long run, according to Dalio, this choice will culminate in a situation where it becomes unfeasible to offer investors high enough interest rates to hold debt assets, while also maintaining low enough interest rates for borrowers to manage their debts.

He explains, “When the sale of debt surpasses the demand for debt, central banks are confronted with a decision: they can either permit interest rates to rise to equilibrate supply and demand — a move detrimental to debtors and the economy — or they can engage in money printing and debt purchase — an inflationary tactic that motivates debt holders to offload their debt, thereby exacerbating the debt imbalance.”

Both possible outcomes, he believes, set the stage for a debt crisis, with government bonds being liquidated on a large scale. Simultaneously, failure to elevate the debt limit could also trigger financial chaos and social unrest.

Breaking this deadlock calls for a bipartisan strategy that eventually overhauls the financial system, Dalio asserts.

He cautions against deferring the problem with temporary solutions, as has been done 78 times previously. This has to be carried out in conjunction with a “thoughtfully designed bipartisan plan that will require sufficient time to be formulated,” he insists.

“I am hopeful of seeing prudent bipartisan moderates uniting to resist the hardliners in both parties,” Dalio expresses. “I believe that any leader(s) who champion this intelligent bipartisan approach should receive widespread bipartisan backing. Otherwise, the lack of such an approach is sure to steer us towards catastrophe.”