The US will likely respond to its mounting debt through currency devaluation, money printing and artificially low interest rates, according to Bridgewater Associates founder Ray Dalio – a strategy he argues will push future generations to repay today's debt with cheaper US dollars.
Dalio noted in a recent interview that countries do not default like individuals or companies, instead, they "go broke" by devaluing their currency. He expressed concern over the US fiscal outlook, highlighting federal debt levels of US$36 trillion to US$38 trillion (HK$280.8 trillion to HK$296.4 trillion), an annual deficit of about US$2 trillion, and yearly debt issuance needs that could reach $12 trillion.
Social welfare spending, including Medicare, Medicaid, and veterans' benefits, accounts for about 60 percent of the federal budget and around 85 percent of revenues, he said. Interest payments and defense spending each cost nearly US$1 trillion annually, together accounting for 85 percent of the budget and 110 percent of revenue.
Although he proposed a plan to reduce the deficit to 3 percent of gross domestic product over three years through a combination of spending cuts, tax hikes, and lower interest rates, he put the odds of such a plan being adopted at just 5 percent, saying“no one dares to support it publicly.”
He compared the current macroeconomic environment to the 1970s, when the US abandoned the gold standard and entered a period of stagflation. "The biggest risk now is stagflation," Dalio said, adding that gold remains a reliable hedge during times of extreme stress.
For investors, Dalio recommends inflation-linked bonds as the safest asset class, and suggests allocating 10-15 percent of a portfolio to gold as a hedge. He remains cautious on real estate, calling it overly sensitive to interest rates and highly taxable.
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