Ray Dalio Warns U.S. Debt Crisis Could Hit Within 3 Years, Advises Ample Diversification

Ray Dalio, founder of the hedge fund Bridgewater Associates, has warned that a U.S. federal debt crisis could strike within three years.

Dalio made the remarks in a post uploaded to LinkedIn on August 21 (local time) titled "Principles for Navigating Big Debt Crises: What's Happening Behind the Scenes."

He explained the structural mechanism in which rising debt service costs eventually collide with a lack of investor demand, forcing the government to accept higher interest rates or have the central bank purchase debt by printing money, which in turn leads to a declining currency value and worsening inflation.

Dalio projected that this year, the U.S. federal government will see revenues of $5.5 trillion and expenditures of $7.5 trillion, resulting in a fiscal deficit of $2 trillion.

He also pointed out that with interest expenses expected to reach about $1 trillion this year, combined with roughly $10 trillion in maturing principal, the total principal and interest the federal government must pay this year amounts to $11 trillion—twice the federal government's revenue—which describes the current situation.

Posing the question to himself about the factors and timing that could trigger a debt crisis, he wrote, "If the fiscal deficit-to-GDP ratio drops from about 7% to around 3%, the risk will be significantly reduced," adding, "With a major external shock, it would happen sooner; without one, it would happen later, or perhaps not at all (if managed well)."

He added, "If current trends do not change, my guess is that it will happen within three years."

Noting that most major economies, including the UK, China, and Japan, face similar debt and fiscal deficit issues, he wrote, "For this reason, non-government-issued currencies like gold or Bitcoin are expected to perform relatively well."

He went on to advise, "As a general rule, I recommend sufficiently diversifying your investments into countries and asset classes with sound income statements and balance sheets, and low internal political conflict and external geopolitical conflict," adding, "It is advisable to lower the weighting of debt assets such as bonds and raise the weighting of gold and a small amount of Bitcoin."

He added that allocating 10% to 15% of assets to gold can reduce portfolio risk while also boosting returns.

Dalio has long warned of the dangers of growing U.S. federal debt.

(Photo: Getty Images)
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