Ray Dalio, co-chairman of Bridgewater Associates and co-chief investment officer, speaks during the Skybridge Capital SALT New York 2021 conference.
Brendan McDermid | Reuters
When the US Federal Reserve began cutting interest rates since the start of the Covid pandemic, billionaire investor Ray Dalio warned that the US economy is still facing “a huge amount of debt.”
The central bank’s decision to cut the federal funds rate by 50 basis points to 4.75% to 5%. The rate not only determines short-term borrowing costs for banks, but also affects various consumer products such as mortgages, auto loans and credit cards.
“The Federal Reserve’s challenge is to keep interest rates high enough to be good for the lender, while keeping them so low that they become a problem for the borrower,” the founder of Bridgewater Associates told CNBC’s “Squawk Box Asia”. ” on Thursday, noting the difficulty of this “balancing act.”
The U.S. Treasury Department recently reported that the government spent more than $1 trillion this year on interest payments on its $35.3 trillion national debt. This increase in debt service costs also coincided with a significant increase in the US budget deficit in August, which is approaching $2 trillion annually.
On Wednesday, Dalio listed debt, currency and the economic cycle as one of the top five factors influencing the global economy. Expanding on his point on Thursday, he said he was interested in “the huge amount of debt that governments create and the big banks make money out of. Those figures have never existed in my lifetime.”
Governments around the world took on record debt during the crisis to finance stimulus packages and other economic measures to prevent collapse.
When asked about his opinion and whether he sees a debt event looming, Dalio replied that he did not.
“I see a significant decrease in the value of that debt due to the combination of low real rates, so you will not be compensated,” he said.
Although the economy is “in balance,” Dalio noted that there is a “massive” amount of debt that needs to be issued and sold, new debt created by the government.”
Dalio’s concern is that neither former President Donald Trump nor Vice President Kamala Harris will prioritize debt recovery, meaning the pressure is unlikely to ease regardless of who wins the next presidential election.
“I think that as time goes on, the way to monetize that debt, we’re going to follow a very similar path to Japan,” Dalio said, pointing to how the Asian nation has kept interest rates illegally low, which has driven down the price level. Japanese yen and reduce the value of this Japanese ties.
“The value of the Japanese bond has fallen by 90% so that there is a huge tax on giving you an illegally low yield year after year,” he said.
For years, Japan’s central bank has held on to its reign of negative rates as it embarks on the world’s most aggressive monetary easing exercise. The country’s central bank recently released interest rates in March this year.
Additionally, when markets don’t have enough buyers to take on debt, there may be a situation where interest rates have to rise or the Fed may step in and buy, which Dalio thinks it will.
“I will watch [the] Fed intervention as a worst case scenario,” said the billionaire.
“If we had hard money, you would have a debt event. But in terms of money, you bought that debt through the big banks, they made money from the debt,” he said.
In that case, Dalio expects that the markets will also see all currencies go down as they are all related.
“So I think you’re going to see a lot more like a 1970s environment, or a 1930s to ’45s type of environment,” he said.
In his own portfolio, Dalio says he doesn’t like debt assets: “so if I’m going to say tilt, it’s going to be underweight debt assets like bonds,” he says.