Ray Dalio Warns of US Debt Crisis Within 3 Years

Always a pleasure to be here.

I think it's important to understand the mechanics. That's why I wrote the book, "How Countries Go Broke." There's a mechanical process, and people don't understand it. And it's really quite simple. The way it works for countries is the same way it works for individuals, except countries can print money. But one man's debts are another man's liabilities. So what happens is when debts accumulate faster than they're paid back, then debt service costs grow. So that becomes a higher and higher percentage of one's cash flow. And when that happens, it starts to squeeze out spending. And so then you have a problem. So in the United States, we have that dynamic as it squeezes out. Then one man's assets are another man's liabilities for debt. So you have to think about what are they holding? And is it holding wealth? Is it effective? So those are the two drivers of what we're seeing now. For example, on the U.S. debt, we spend about $7 trillion a year. Think about this like a business or an individual. They spend seven, take in five, spending 4% more than they take in. And they have been doing that for a number of years. So as a result, debt and debt service payments are building. As a result, they are squeezing out the spending. So we have that kind of a dynamic going on. And then we also have one man's debts are another man's assets. So when you see interest rates rise, naturally, because of this supply-demand imbalance, it produces losses in those assets. And so, think about bonds as an asset to hold, and how bad bonds have been as interest rates rise. And that has an effect.

There's always long and short, depending on the nature of the cycle, when things get worse. But what we have now is a situation where there's the rate at which it's come in, the size of it. Why does the market go down? The market goes down because there's too much debt, and we're adding to it at that rate. And then we're approaching our limits. And then there are geopolitical changes. The United States could run large deficits, but now, because of conflicts, we also have a dynamic in which those who want to hold U.S. debt, they're holding too much already. So we have that dynamic going on. And you can see, if you were to just calculate, which is in the book I wrote, "How Countries Go Broke," they are big cycles. It shows how that debt service payment then is squeezing out spending, and so you can see that dynamic work.

Yes, I think within the next three years. What we have is that issue of that squeezing it out. And so when you take a look at literally what that means, and then what the impact of that is going to be on asset prices and interest rates matter. So you have a boom which is concentrated in one area, really that is heavily debt-financed. It didn't used to be, but you can see as that debt cycle happens that what happens is increasingly what used to be equity, now you have to go to debt. And that plays a bigger role.

You don't look at the interest rate — it'll have an effect, of course you look at the interest rate, but what I mean is you look at the amount of savings. What's the total amount of capital? What's the demand for capital? When you get that imbalance, that supply-demand imbalance, then you have to have the price of it go up until you ration that demand. So you have to ask yourself what is it that's going to be rationed? And so then we're dealing with — it's not going to be government deficits, because they're inelastic. In other words, in fact, if you had a worse economy, they would increase. So then you find out what are the sectors that are squeezed out. Is it housing? Housing would be quick. But with such a large difference in financial conditions of the wealthy and the poor, you're going to see that happening more at the lower end of that spectrum. So is it auto loans? Is it those kinds of loans that get squeezed out first? And something like data centers come later. And so that's why you start to have more of a wealth conflict, because then the people who have less get squeezed the most in that part of the cycle.

The magnitude. We're talking about the enormous magnitude. The United States now is running large deficits and it is receiving a lot of capital. However, because of the changes, foreign capital represents about a third — almost a third — of the amount of money that we're relying on in terms of debt. And that has been coming from the Chinese and the Japanese. They've constituted a high percentage of that debt. And then there are other countries, and the Middle East, and so on. But they're starting to get squeezed. And also, there are these geopolitical issues that enter into it. So the Chinese don't want to continue to accumulate. There are geopolitical issues as well as economic issues. When you have a debtor-creditor relationship and you have an adversary relationship, that's a very difficult dynamic, particularly at these sizes. And then Japan — Japan has lent a lot of money because of the desires to change their economic policies in ways that I would describe. They've lent a lot of money. Now they want to take back some of that money, a lot of that. So not only do you have the total size being very large, the size of our deficits are very large, and total financing needs is very large. It's not just the physical deficit of the government. It is also the AI and other large expenditures. So where does that saving come from? That comes from those sources which are tightening. And that's why you're seeing the changes in interest rates. In other words, interest rates change — this is like — it is the cost of money. And when there's a supply-demand imbalance, you see interest rates rise to ration credit, and that's what we're seeing.

The European situation is the same, because there's a lack of adequate borrowing. Imagine you've — in Europe and large parts of the United States, you've relied on the borrowing. And then, when you reach your borrowing limit, as France has done, then there's a bind, because then you cannot continue to add to that. You have to start to run budget deficits, because you almost get to the point where you have to pay back. In other words, if you borrow, you have to pay back. And when that happens, then you have a situation very similar to that. So now you see the desire for greater taxation. You see people leave. You see whether they're from France or whether parts of the United States, they leave. And then that creates a problem. So France is in that particular position, but it's a European problem too. So we can see that there's been too much of that debt. And then of course it's gone down. So when it's gone down, it's like an asset. Bonds — as interest rates rise, bonds go down. Look at the difference in the returns of bonds and equities as a result of this. They have been a negative reinforcement. So now you're seeing money wanting to leave some of these asset classes when the supply-demand imbalance is very large.

All markets are competitive. When we look at the United States, at any country, there's been losses in these bonds. All right? And so by this dynamic.

Equity — equity has always returned. So what happens is that it's quite normal for equity prices to go up. So keep in mind, when prices rise, future expected returns go down. Right? And similarly, the reverse for bonds. When bonds go down, then the expected returns for these bonds, the interest rates go up. So you've seen a convergence of that. You've seen both of those things happen. So the expected returns of equities have gone down as multiples rise. And now their expected returns are quite close to each other. It started where the expected returns of equities were much higher. So now that cushion between those two expected returns has narrowed. So when we talk about stocks seeming expensive, and we do the present value — we use these interest rates to calculate the present value of future cash flows — you can see that stocks are expensive by most of those measures. What that means is that the cushion is limited. And so now, as we're sitting here today and you see interest rates, you will see greater interest rate sensitivity to other asset classes, particularly equities.

Right now, that cushion — if you calculate the present value of future cash flows, which is what you use the interest rates for, and take the present value of — we are now at a level which is very close to those having approximately equal present values of cash flows. No one knows exactly what that is in terms of those cash flows. But you also have a highly concentrated equity risk. In other words, a limited number of stocks related to AI, particularly, and related to that future, is a dominant consideration. So this issue is not just that cushion which is now disappearing and becomes a little bit more vague. It also means that there's such a concentration on one thing, and that one thing is really AI and the implications of the growth of AI. So I think that you're seeing the hyperscalers begin to encounter issues. In other words, before they would raise equity — okay, now they need to come to debt in terms of more. And so you're starting to see those limits being hit. And then as you're going forward, those returns — I think that there's a shift in those returns more toward not only the hyperscalers, but broadening out to those entities that can make money from all of this. In other words, there's the making of AI, but there's also the using of AI, and the using of AI to make great transformations. I think we're going to see, and we're starting to see, more of the rotation to the impact to create present value. I think they've largely been overlooked.

I think, you know, you're referring to my creating Bridgewater and building Bridgewater, which is, I think, still the largest hedge fund in the world, and so on. I think that we are now entering a new era in which there's the ability to use AI to make money in the markets, right? So systemizing decision-making in terms of creating investment management systems is the future. So I think it's a terrific opportunity for everybody. Everybody is going to increasingly have the capacity to make money in different ways if they really are smarter, because it's alpha. If you are creating alpha, then you can have great results. I started Bridgewater out of a two-bedroom apartment, and it became the largest hedge fund in the world. Others are doing it. That's the normal path. I think that using AI as a tool — when I describe AI, AI began in 1956, and it's had all different forms. The idea of systemizing your decision-making, understanding the cause-effect relationships, and using AI to make money in the markets is a great equalizing opportunity for a lot of people. And so the ways it's going to happen will continue to evolve, and the basics of it is going to be the same. So yeah, I think that you're going to see that evolve, you know, in that way. The key is you've got to be competitive in that.

They always come together. Like, I've studied the last 500 years of history because things have happened before my lifetime, I realize, are happening now. So I needed to study that 500 years of history. What you see is, for example, think about the late 1920s, prior to the bust in the late 1920s. It was the first time you had electricity in houses. So you had refrigeration and you had lights. First time you had cars. First time you had airplanes. First time you had movies. First time you had radio. All around you, you are seeing this tremendous innovation that everybody knows is going to change the world, that everybody wants to bet on it. But you produce a dynamic as a result that everybody is excited about. They say, "I'm going to buy it, and I'm going to borrow to buy it." And that creates a big difference, because there's an important difference between wealth and money. Wealth is, in a sense, easy to create, but you can't spend wealth. You have to sell wealth in order to get money to spend it. When there's a lot of borrowing to buy those assets, or there could be even a wealth tax where you need to sell wealth in order to make money, then you have a bubble bursting. So what we see right now is that kind of a dynamic going on in terms of not looking at the price. And by necessity, it's imperfect, because there are those in this new technology where there's a lot of future that's not precisely known. You can't underinvest and compete, and you're probably going to overinvest and compete. So that dynamic goes on to create a bubble. What creates the bursting of a bubble is the fact that you need cash, and you start to convert the wealth that you have — you sell the wealth that you need to do that. Something like a wealth tax would have that effect, or having to pay back loans, traditionally, has that effect. So there's that dynamic that is going on, and we have to keep an eye on.

It's been fantastic in terms of productivity. What's also happened is they've gone beyond what their own productivity is. Then they're buying all around the world. And so they're actually taking all that money in and all that productivity, and then they're investing it all around the world, and they're having a problem with that. So those are good cases of bubbles beginning. You see the type of bubbles bursting. You see those dynamics. So yes, I think it's the nature of that beast. But that's not systemically threatening. But we do have one thing: AI, for the most part, a limited number of companies, and we entered as a very uncertain thing in terms of present values for cash flows. And it is a very, now, expensive thing. So I think the lesson there is, you know, how do you diversify well? For example, I think that those companies that are having transitions in their business models, that can do a lot better either in revenue or cutting costs, generally speaking, have been overlooked. But you know, I think it's that kind of risk.

Throughout history, and certainly today, technology is both an economic battle and also a military and geopolitical battle. So we have that. In other words, you have to be a winner of that technology war. And there's two different approaches to this. The Chinese are picking certain things, like robotics. And they're just a little bit behind in the development of them from frontier models.

Just six months, or it depends on the models. But many of them are open source, and because they're very inexpensive, there's much greater usage of AI in China. In fact, in the United States now, we have the issue of whether there's going to be putting a brake on the development of that. So there's the competition. That competition is to some extent, or significantly, restricted between those two countries, but not in the rest of the world. So yes, I do think that there's an AI war in terms of the economic war.

I know, but the rest of the world — most of the rest of the world is not being forced to choose those. Okay. Most of the rest of the world can pick essentially what it wants. It depends. But you're seeing the world basically break into these domains. There's the Americas. Okay. Think about the Americas. And that's becoming very much like the tribute system. In other words, that is the American domain. And then there's more and more the Asia domain. Okay. With the dominant power being China, and so on, with the United States then receding from those relatively different domains. While there's world competition, you have that particular dynamic working. So we see the change in the political or the geopolitical orders. Here we are in Asia. Okay. And we understand, in a sense, that it won't be the same. It won't be like it was, where there was a belief that the United States will be a countervailing influence to China in the region. And so that dynamic means that there's going to be much more regionalization. And then there are some domains where they'll compete, like in Europe or the Middle East, and each will make that. But that domain in terms of — so you're going to see the Chinese being very competitive.

I don't know.