Ray Dalio warns: Fears of a debt crisis are growing

Look at the stock market gains over the past six weeks, and you wouldn’t be blamed for thinking that everything is fine now.

After nearly a 20% drop from February’s highs due to trade tensions, the S&P 500 index has sharply rebounded, almost fully recovering its losses. Since April 9, the index has risen by 19%, and after this significant move, it now shows a 1.4% increase since the beginning of the year.

However, we might witness a resurgence of inflation, which could limit consumer spending, and political uncertainty might cause businesses to hold off on investments while awaiting clarity. Additionally, despite recent efforts to curb government spending, the U.S. deficit remains enormous, and the country’s debt obligations continue to grow.

The risks associated with the U.S. deficit have not gone unnoticed by market participants, including Moody’s—one of the country’s three major credit rating agencies—and billionaire Ray Dalio, founder of the hedge fund Bridgewater, which manages assets worth $112 billion.

On May 16, Moody’s downgraded the U.S. credit rating from the highest possible level, citing concerns about the debt level and budgetary spending. This move drew attention from Dalio, who has repeatedly warned over the past year about the risks associated with debt.

Dalio has extensive experience monitoring economic and market cycles since founding Bridgewater in 1975. He has lived through the 1970s inflation, the savings and loan crisis of the 1990s, the dot-com bubble in the early 2000s, the Great Recession of 2008, and the crash during the 2020 pandemic.

What he sees now deeply concerns him. Dalio believes that the mountain of debt and continuous spending are the most serious problems facing America today. If the country doesn’t address them, it may face a debt crisis.

“If you don’t do it, you’re going to have problems,” Dalio said earlier this year on Bloomberg’s Odd Lots podcast. “I can’t tell you exactly when it will happen; it’s like a heart attack… You’re getting closer. My guess is in about three years, plus or minus a year, something like that.”Bloomberg

One of the main issues is that it is becoming increasingly difficult to find buyers for debt as its total level rises—even more so amid a trade war that may make foreign investors more reluctant to finance the U.S. budget. The downgrade by Moody’s only complicates the situation.

If buyers of U.S. government bonds slow down their activity, interest rates will rise, further burdening the economy. Even worse—no matter how unlikely it may seem—Dalio suggests that the U.S. government might consider restructuring its debt if the situation deteriorates enough.

“At current rates, the U.S. will have $50 trillion in debt by 2035,” Dalio wrote on X (formerly Twitter). “Regarding the downgrade of the U.S. credit rating, you should know that ratings underestimate the real credit risks because they only assess the risk of the government not paying its debt.”

Dalio believes that Moody’s downgrade only superficially addresses the debt problem, as the agency does not consider the potential impact of inflation, which may be caused by the need to print more money to cover America’s obligations.

“They don’t include the bigger risk that indebted countries will start printing money to pay them, thereby bondholders will suffer losses from the reduced value of the money they receive (not from its reduced quantity),” Dalio wrote. “In other words—those interested in the real value of their money, the risks with U.S. government debt are greater than credit rating agencies present.”