Billionaire investor Ray Dalio says that the US is already in the latter stages of a debt crisis and predicts that the government will find it difficult to seek sufficient buyers for newly issued bonds. In a new Bloomberg interview, Dalio says one reason why there could be a shortage of US debt buyers stems from the fact that institutional investors who bought treasuries a few years ago got burned by the Fed’s rapid interest rate hikes.
When interest rates rise, the value of older bonds that offer lower yields declines as the government issues new bonds that pay higher interest. Dalio also mentions that some countries are afraid to accumulate the country’s debt after seeing how the US and its allies froze about $300 billion worth of Russian assets since the onset of the war in Ukraine.
“We are at the beginning of a very classic late big-cycle debt crisis when the supply-demand gap – when you’re producing too much debt and you have also a shortage of buyers.
What’s happening now is we have to sell all of this debt, [but] do you have enough buyers? There are changes now in terms of the quantities that are being held by large investors around the world that have lost money in these treasury bonds and so on.
And then there are geopolitical changes, which are having an effect. Some countries are worried about sanctions, and then there’s this geopolitical shift.
So when I look at the supply-demand issue, there’s a supply-demand issue for that debt. There’s a lot of debt. It has to be bought. It has to have a high enough interest rate.
If we continue down this path, in terms of what’s likely over the next five and 10 years, then you would reach a point that that balancing act becomes very difficult.”
Dalio goes on to say that there are three aligning factors that he finds concerning. The first is the rapid increase in interest rates, which he says could lead to the second factor: an economic slowdown. For the third variable, he says that the country is also witnessing internal conflict in the form of large wealth gaps.
“On this short-term debt cycle – I call it the seven-year cycle – we’re about halfway through. In other words, interest rates are now at a level that they’re probably going to stay at, but they’re probably not going to rise much from here and there’s tightness.
The consequences of that are going to be a weaker economy going forward. It doesn’t have to be a big downturn… Things are going to get worse in the economy. There’s a financial issue, at the same time as you have this internal conflict.”