Bridgewater Associates Founder Ray Dalio says the debt burden has passed a "point of no return." He discusses the state of the bond market, the role of the US in the Iran War, and a weaker dollar driving the demand for gold. Dalio speaks with Bloomberg's Dani Burger at the Forbes Iconoclast Summit.
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What Ray Dalio said
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Ray Dalio said the US is past the point of no return on debt, comparing debt service payments to plaque squeezing out blood flow. He warned of a vulnerable period after the midterm elections and before the presidential election, with rising long rates relative to short rates, a weakening dollar, and gold moving up. He predicted financial repression, with the Fed and Treasury working together to keep yields low, possibly with foreign exchange controls and higher inflation. On geopolitics, he said Asian leaders believe the US cannot fight a war, ending the containment policy for China, and that a Chinese blockade of Taiwan's chips would crash the stock market. He called AI a bubble, with wealth creation outpacing money, and said we are approaching 2000 and 1929 levels. He was not optimistic about political cooperation.
Key takeaways
Financial repression is likely, with the Fed and Treasury working together to keep yields low.
Asian leaders believe the US cannot fight a war, ending containment of China.
AI is a bubble, with wealth creation outpacing money, approaching 2000 and 1929 levels.
4:58Do you think we head to the 1930s again where it's a Treasury that works with the Fed that some of that independence is kind of chipped away out of a necessity to keep debt servicing costs low for example?
6:26Are we heading toward a similar environment where we become Britain where if we can't control the Strait of Hormuz?
I'm Danny Berger and I'm so pleased I'm here at the Forbes event sitting alongside Ray Dalio, founder of course Bridgewater and of the Dalio family office. Ray, thank you so much for joining.
And look, you've been doing a lot of work. You've been busy with these five forces that have been shaping the global economy. Just to quickly go through them: money and debt, internal order and disorder, power conflict, acts of nature, and technology. I want to start on that first one, though, because it's a point that you've made globally, but here in the US, $7 trillion in spending, but only $5 trillion in revenue. Ray, are we already past the point of no return? That the fact we have this dynamic means that some sort of crisis is inevitable?
Yes, we're past the point of no return, meaning when debt service payments squeeze out spending like plaque in the circulatory system squeezes out the flow of blood. It's the same kind of thing, could be measured. So, we're seeing that happen. And then there's a supply and a demand issue. The supply of one budget deficit means that debt has to be sold and you have a supply demand issue and we could see it happening in the bond market. We could see that bonds have been a bad investment and that there's pressure in interest rates and there's borrowing and that's one of the five factors as you're saying but that dynamic is happening. People are treating it like if it hasn't happened before. They don't understand that like plaque in the arteries that it builds up and they have that exposure. So I think when you're looking, I think of a particularly vulnerable period is after the midterm elections and before the presidential election because as we connect these forces we have that issue, the debt issue and we also are going to have a great deal of political conflict that has implications for taxes. It has implications for all sorts of things.
So what does history tell us that this looks like when we get closer to that point? Is it yields breaching a certain level? Is it failed auctions? What would you look for to say the time is here, the bond temper tantrum is finally occurring?
Well, it could be seen, excuse me, in either the bond market, the market action. It's by long rates rising relative to short rates. In other words, they're trying to hold the short rates down and the long rates are rising. We are seeing some of that and you then you're seeing the weakening then of the dollar and then you're seeing movement such as in gold and other assets and when you see that rise in rates then that starts to affect the stock market because what's happened now is that with bonds going down and stocks going up the perspective returns now of stocks are now down low relative to the perspective returns of bonds. And so that upward pressure then starts to translate into a stock market pressure. That is the classic dynamic and something that the Federal Reserve then or any central bank is in a position of not easily being able to manage because it becomes more of a stagflationary environment. So the stagflation that we're seeing right now, the Fed wrestles with the question if it's tightening or if it's easing that also has in a economy where there is such a wealth disparity but also think about the implications of whether you own stocks or whether you don't own stocks and that difference that impact is very different that has huge political implications. So that's where that period.
Because this is an administration that has been very explicit in its desire for cuts and this is part of the reason that Kevin Warsh is now our Fed chair who of course has said I am independent. Do you think throughout history there's often been bond markets that test a Federal Reserve chair? Is Kevin Warsh about to get a big test?
One man's debts are another man's assets. Okay. And if there's not a high enough real return, then those bonds are not appreciated. Okay? So what are you holding the bond for? You're holding it for a real return. So the markets ultimately the marketplace can ultimately decide whether it owns it or not.
Do you think we head to the 1930s again where it's a Treasury that works with the Fed that some of that independence is kind of chipped away out of a necessity to keep debt servicing costs low for example?
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