Ray Dalio, Co-Chairman and Co-Chief Investment Officer of Bridgewater Associates, speaks at the Skybridge Capital SALT 2021 New York Conference.
Brendan McDermid | Reuters
Billionaire investor Ray Dalio said the U.S. economy still faces “massive debt” as the Federal Reserve cuts interest rates for the first time since the early days of the coronavirus pandemic.
The central bank decided to cut the federal funds rate by 50 basis points to a range of 4.75% to 5%. The rate not only determines banks’ short-term borrowing costs, but also affects a variety of consumer products such as mortgages, car loans and credit cards.
“The challenge for the Fed is how to keep interest rates high enough to benefit creditors but not so high that they cause trouble for debtors,” the founder of Bridgewater Associates told CNBC’s “Squawk Box Asia.” ” on Thursday, pointing out the difficulty of this “balancing act.”
The U.S. Treasury Department recently reported that the government has spent more than $1 trillion this year on interest payments on the $35.3 trillion national debt. The increase in debt servicing costs also coincided with a sharp rise in the U.S. budget deficit in August, bringing the full-year budget deficit to nearly $2 trillion.
On Wednesday, Dalio listed debt, currencies and the economic cycle as among the top five forces affecting the global economy. He expanded on his views on Thursday, saying he was generally interested in “the huge amounts of debt created by governments and monetized by central banks. These are scales that have never existed in my lifetime.”
During the pandemic, governments around the world have taken on record debt burdens to fund stimulus packages and other economic measures to prevent economic collapse.
When asked about his outlook and whether he sees a credit event imminent, Dalio responded that he does not.
“I don’t think you’re going to be compensated for the significant depreciation in the value of the debt because of artificially low real interest rates,” he said.
Dalio noted that while the economy is “relatively balanced,” there is still a “significant amount” of debt that needs to be rolled over and new debt created by the government needs to be sold.
Dalio’s concern is that neither former President Donald Trump nor Vice President Kamala Harris will prioritize debt sustainability, meaning these pressures are unlikely no matter who wins the upcoming presidential election. alleviate.
“I think over time the path to debt monetization will increasingly be very similar to Japan’s path,” Dalio said, noting that the Asian country has kept interest rates artificially low, causing the yuan to depreciate. yen and lowered the value Japanese bonds.
“The value of Japanese bonds has fallen by 90%, so artificially lowering yields every year will generate huge taxes,” he said.
For years, the Bank of Japan has insisted on a negative interest rate regime and embarked on one of the world’s most aggressive monetary easing policies. The country’s central bank only raised interest rates in March this year.
Additionally, when there are not enough buyers in the market to take on the supply of debt, there could be a situation where interest rates have to rise or the Fed may have to step in and buy, which Dalio believes they will do.
“I’ll check [the] “The Fed’s intervention is a very significant bad event,” the billionaire said. The oversupply of debt also raises questions about how to pay it off.
“If we measure it in hard currency terms, then you’re going to have a credit event. But in fiat currency terms, central banks will buy these debts and monetize the debt,” he said.
In this case, Dalio expects the market to see all currencies fall as well, since they are all relative.
“So I think you’re going to see an environment very similar to the 1970s or the 1930-45 period,” he said.
Regarding his own portfolio, Dalio claimed that he doesn’t like debt assets: “So if I were to tilt, it would be underweight debt assets like bonds,” he said.
