Bridgewater’s founder on gold, Bitcoin and why the new administration must get to work on deficit reduction
Ray Dalio, the billionaire founder of hedge fund Bridgewater Associates, has a warning for the Trump administration: commit right now to reducing the deficit or risk a major debt crisis within three years.
“If you don’t do it, you’re going to be in trouble,” Dalio said in an interview on the Odd Lots podcast. “I can’t tell you exactly when it’ll come, it’s like the heart attack,” he added. “You’re getting closer. My guess would be three years, give or take a year, something like that.”
Dalio’s warning comes as Trump’s team is grappling with the twin goals of maintaining large tax breaks while also reducing an annual deficit that most recently reached $1.8 trillion. It also comes as Dalio promotes his latest book How Countries Go Broke, in which he explains how debt cycles work and advocates for an immediate commitment to cut the US deficit to 3% of GDP.
“If you don’t do that, then you own it, OK? You have to take responsibility for the consequences,” Dalio said. “When the economy and this heart attack of sorts comes along, then you’re going to find yourself that the voters are not going to be very happy. So you own it.”
In the podcast, Dalio discusses:
- His role in the invention of the Chicken McNugget
- How to build political consensus for reducing debt
- Portfolio diversification in an era of high debt
- Thoughts on the Mar-a-Lago Accord
- How he’s thinking of both Bitcoin and gold
- His trades during the euro-zone debt crisis
Dalio argues that an understanding of history and the mechanics of long-run debt cycles has been key to his successful career creating Bridgewater, helping him to navigate the 2008 financial crisis and make money during the euro-zone debt crisis soon after.
He worries now that the US is facing the possibility of a lack of buyers for its debt even as it needs to issue new bonds to service existing ones. He’s not the only one concerned; analysts at JPMorgan noted in late 2022 that it marked one of the first times that all three major buyers for US Treasuries — including foreign central banks, domestic US banks and the Federal Reserve — had stepped away from the market at the same time.
“When you’re putting a lot more debt on top of that pile of debt, so it’s not just existing debt that’s a problem, but you have to add more debt sales,” Dalio said. “You’ve got to sell those, you have to sell those to people or institutions or central banks and sovereign wealth funds.
“Nowadays with sanctions and too many bonds and so on, when I calculate who are the buyers and how much do we have to sell, I find a big imbalance and I know how that works.”
For Dalio, a formative moment in his early career and eventual understanding of markets was President Richard Nixon’s surprise decision in 1971 to sever the link between gold and the US dollar. Now, more than five decades later, he sees the possibility of a similar shock to the markets — the potential that at some point the US sanctions a large holder of Treasuries and discontinues interest payments, or even seeks to restructure its debt.
“You could see then the government saying that they’re going to restructure the debt, they won’t say it’s a default. They will say ‘under this policy we’re going to be better off,’” Dalio said.
When asked for thoughts on a potential Mar-a-Lago Accord — a hypothetical plan in which the the US could seek a weaker dollar while simultaneously maintaining the greenback’s “special status” in the global financial system — Dalio pushed back on the idea that the US could successfully weaken its currency against others.
“That’s a real possibility, and it’s done semi-secretively, but I want to be clear what that’s like. I don’t think it’s a depreciation of the dollar in relationship to all other currencies. I think all other currencies will depreciate with the dollar. In other words, it’s up to each central bank and pretty much in terms of other currencies. It’s an ugly contest.
“It would be very much like the 1970s, which was very much like the 1930s, in which they all go down in relation to gold or other hard assets,” he said.
When it comes to the risk of a potential “ugly” race to the bottom in currencies, Dalio said investors must ask: “What’s the alternative money that is stable in supply? Bitcoin might be a part of that, could be a big part of that, but what is the alternative money? Because debt is money and money is debt.”
What Dalio likes about Bitcoin as a safe haven, is that unlike real estate, it isn’t nailed down and can’t easily be seized or taxed, he said.
When asked if he was more bullish on gold today than in previous years, Dalio responded “Oh, yes. I think that gold — and I’m not trying to harp on gold and I don’t want people to run out and go buy … I want to restrain them. I want to say the following: what you don’t know about the future is far greater than anything that anyone knows about the future. So we always have to be humble. What you need is a proper diversification to create a portfolio.”
A “prudent” amount of gold, he added, might be somewhere in the vicinity of 10% to 15% of a theoretical portfolio. “That kind of little bit of gold, serves as a protection and diversifies the portfolio. And what I think the most important thing is, is that you don’t have much of an exposure.”
Written by: Tracy Alloway and Joe Weisenthal @Bloomberg
The post “Dalio Warns of US Debt Crisis ‘Heart Attack’ Within Three Years” first appeared on Bloomberg