Ray Dalio, Co-Chairman and Co-Chief Investment Officer of Bridgewater Associates, speaks at the Skybridge Capital SALT New York 2021 conference.
Brendan McDermid | Reuters
As the US Federal Reserve implemented its first interest rate After cutting interest rates since the start of the Covid-19 pandemic, billionaire investor Ray Dalio stressed that the US economy still faces a “massive amount of debt”.
The central bank on Wednesday cut the federal funds rate by 50 basis points The interest rate ranges from 4.75% to 5%. This rate not only determines banks’ short-term borrowing costs, but also impacts various consumer products such as mortgages, car loans, and credit cards.
“The challenge for the Federal Reserve is to keep interest rates high enough to benefit the creditor, but at the same time keep them at a level that is not problematic for the debtor,” the Bridgewater Associates founder told CNBC’s “Squawk Box Asia” on Thursday, noting the difficulty of this “balancing act.”
The U.S. Treasury Department recently reported that the government has spent more than $1 trillion this year in interest payments on its $35.3 trillion national debtThis increase in debt servicing costs also coincided with a significant increase in the US budget deficit in August, which is approaching $2 trillion for the year.
On Wednesday, Dalio cited debt, money and the business cycle as one of the The five main forces He said Thursday that he was generally interested in “the enormous amount of debt that is being created by governments and monetized by central banks. Such amounts have never existed in my lifetime.”
Governments around the world have taken up the baton Record debts during the pandemic to finance stimulus packages and other economic measures prevent a collapse.
Asked about his outlook and whether he sees a credit event imminent, Dalio said he does not see a credit event.
“I see a sharp depreciation in the value of this debt through a combination of artificially low real rates, so you will not be compensated,” he said.
While the economy “is in relative equilibrium,” Dalio noted, there is a “tremendous” amount of debt that needs to be rolled over and also sold, new debt created by the government.
Dalio is concerned that neither former President Donald Trump nor Vice President Kamala Harris are prioritizing debt sustainability, meaning those pressures are unlikely to ease. no matter who wins the next presidential election.
“I think that over time the path will be increasingly oriented towards the monetization of this debt, following a path very similar to that of Japan,” Dalio said, noting how the Asian nation has kept interest rates artificially low, which has depreciated the dollar. Japanese Yen and lowered the value of Japanese Bonds.
“The value of a Japanese bond has fallen by 90%, which is a huge tax by artificially giving you a lower yield every year,” he said.
For years, Japan’s central bank has stuck to its negative rate regime as it embarked on one of the world’s most aggressive monetary easing exercises. The country’s central bank has interest rate hike in March This year.
Additionally, when markets don’t have enough buyers to absorb the supply of debt, there could be a situation where interest rates have to rise or the Fed may be forced to step in and buy, which Dalio said would be the case.
“I see the Fed’s intervention as a very negative event,” the billionaire said. The excess debt also raises questions about how it is being repaid.
“If we were in terms of hard currency, then we would have a credit event. But in terms of fiat currency, we have the purchases of that debt by central banks, monetizing the debt,” he said.
In this scenario, Dalio expects markets to see all currencies decline as well because they are all relative.
“So I think we would see an environment very similar to the 1970s, or the period from 1930 to 1945,” he said.
For his own portfolio, Dalio says he doesn’t like fixed income assets: “so if I had to make a decision, it would be to underweight fixed income assets like bonds,” he said.
