Ray Dalio’s Warning: “Something Worse Than a Recession Is Already Coming” – The U.S. Debt Crisis and Its Consequences

Ray Dalio – the founder of the world’s largest hedge fund, Bridgewater Associates, who predicted the dot-com bubble in 2000, the Great Crisis in 2008, and the COVID bubble in 2021, is now warning that the United States is heading full speed toward a debt crisis. Currently, the country’s budget deficit is reaching $1.9 trillion, which is the eighth highest level in history. Due to this enormous deficit, the U.S. is unable to fully service its debt and will have to refinance about $9 trillion by March 2026. This means the government is forced to flood the market with new debt in order to meet its obligations.

Ray Dalio warns that this wave of new debt will trigger a “supply shock,” with a real risk that there won’t be enough buyers, as the prolonged deficit may have eroded investor confidence. Signs of this are already visible – major holders of U.S. debt securities, such as Japan and China, are significantly reducing their reserves. Although the United Kingdom is attempting to fill this gap, it cannot make up for the loss of the big buyers.

The economic environment in the U.S. further complicates the situation. Since 2023, the Federal Reserve has been keeping interest rates high and shrinking its balance sheet to control inflation, with new tariffs also having an impact. This makes investors hesitant to accept low yields on government bonds. They see two possible actions from the Federal Reserve – cutting interest rates to lower bond coupon payments, or directly entering the market to purchase government debt. However, both scenarios are inflationary in the long term, which further reduces investors’ willingness to accept low yields. This fear is also reflected in the rise of the term premium, which is near its highest levels in the past decade.

The rise in yields also increases the government’s cost of servicing the debt, which in turn leads to even higher interest burdens and rising future expenses. This creates a vicious cycle, known as a “debt death spiral.” If this continues, the situation could become catastrophic – other countries may begin massively selling U.S. debt and start viewing the U.S. dollar as an inflationary asset, threatening its status as the world’s reserve currency. Ray Dalio describes this process as “the breakdown of the global monetary order.”

There is already a trend of replacing the dollar with gold in global reserves, with the share of the U.S. currency reaching its lowest level in the past 30 years during the last quarter. With the increase in spending outlined in Trump’s “Big Beautiful Law” plan, the dollar is expected to become even more inflationary. In this context, Ray Dalio advises investors to reduce their exposure to fiat currencies and shift toward real assets by diversifying their portfolios. For equity investments, he recommends selecting companies with pricing power, which can raise prices and maintain profitability under tough economic conditions. Although these measures will not solve the fundamental problems, according to Dalio, they are the best defense in the current situation.