Ray Dalio’s US debt warning

Ray Dalio is an American billionaire investor and author. He is best known for founding the Bridgewater Associates hedge fund in 1975.

In his writings, which can be viewed on LinkedIn, he explores long term economic cycles, including rising deficits and debt as they relate to the rise and fall of financial empires. He has written two books about it with an analysis that runs from Rome to Germany’s hyper-inflation after World War I to the present day. He ientifies common factors that repeat themselves over long periods.

Now in his mid-70s, Mr. Dalio has stepped down from active roles at Bridgewater and spends a lot of time sharing his insights. He sees a looming calamity caused by ballooning US deficits which are being added to the national debt. The inability of Congress and the Senate to work together to resolve things ensures a drift towards crisis.

While many other commentators hold this view, I find Dalio’s reflections on the topic simple and clearly laid out.  

Nobody knows when – or if – a tipping point will arrive, because there are many possibilities along the way. But thinking about them now and assigning some probabilities to each, helps you devise a strategy to manage your investments.

Bridgewater is one of the world’s largest and most successful hedge funds, with US $172 billion in assets under management at the end of 2024. It has a client list including central banks, pension funds, and governments. This includes a relationship with the Canada Pension Plan Investment Board (CPPIB) where Mr. Dalio has been a guest speaker at a conference for employees. CPPIB is the investment arm of the CPP. It generates the money which CPP uses to pay our pensions.

His philosophy emphasizes facing reality and accepting the world as it is, not as you wish it to be, even when the facts make you uncomfortable. He then develops strategies to meet the challenges. The approach blends psychology with economics and takes a holistic approach to investment (and personal) thinking. 

He notes that last year, the US government spent more on interest payments on its debt than on defence. Interest payments were more than all the income tax collected from individuals, which is something like a third of total revenue. The Congressional Budget Office (CBO) says gross US federal debt (which includes intragovernmental holdings) could hit $59.2 trillion by 2035, up 54% from $36.2 trillion today. As a percent of GDP, it sits at 120%. Staggering numbers.

There are many implications for Americans and for the global financial order. In the US, social security is a big one. Unlike our system where our CPP pensions are funded by CPPIB investments, US social security is a pay-as-you-go plan. It’s a promise the government will pay. Imagine what will happen if it can’t.

Donald Trump’s One Big Beautiful Bill is projected to add $3.3 to $3.4 trillion to federal deficits over the next decade, according to the CBO. The bill has extended tax cuts without coming up with meaningful spending cuts to balance them. Will tariffs raise the revenue to fill the gap? Who knows?

Mr. Dalio expects US governments will want interest rates pushed down, which will do three things. It makes debt service easier and encourages consumption and economic activity. It also leads to rising inflation, which erodes the real value of the debt, but will also result in a falling US dollar.

The pressure to lower rates and devalue the US dollar is underway. President Trump is brow beating Federal Reserve Chair Jerome Powell to do so, threatening to fire him if he doesn’t. Practical politics is stopping him from pulling the trigger. Every time he ramps up the rhetoric, stock and bond markets sink. Wall St. wants interest policy independent of partisan politics.

Mr. Dalio says the devaluation of the US dollar is politically easier and less visible to Americans than raising taxes or cutting spending. It gives the illusion of prosperity by making US exports cheaper. It shifts the blame on rising prices to inflation rather than a weaker currency with which you can buy less.

The US dollar fell by 10.8% against a basket of global currencies between Jan. 1 and Aug. 1 the worst decline in 50 years. Gold, which is priced in US dollars, is hitting new highs. As is Bitcoin. 

Even the Canadian dollar has gained on the greenback year-to-date, rising 5.5%. This is not something we would expect, given the punitive impact of tariffs on our economy.

The flip side of rate cuts is lower returns for savers. When lower returns are coupled with expectations of rising inflation, it creates other problems. Pension and endowment funds want a higher real rate of return. This either forces interest rates up or leads to a sell-off of bonds and related products as investors go elsewhere. 

Mr. Dalio goes into some detail about all this in a recent LinkedIn post.

He suggests an allocation of 15% to gold in a portfolio. While not a fan of digital currencies he respects their potential. Another suggestion is inflation-linked treasuries. He also favours hard assets other than gold. This could include commodities and such things as Real Estate Investment Trusts (REITs) whose underlying assets will rise with inflation.

Nobody knows how this will end. The storm is avoidable, but the American political landscape is so fractured that the co-operation needed to make it happen is not possible for now. The cycle has repeated itself over long periods, not in exactly the same format but in very similar ways.

The time to be thinking about this is now. As Mr. Dalio says, you must accept the world as it is, not as you wish it to be.