Ray Dalio, Bridgewater Associates co-chairman and co-chief funding officer, speaks in the course of the Skybridge Capital SALT New York 2021 convention.
Brendan McDermid | Reuters
Because the U.S. Federal Reserve carried out its first rate of interest lower because the early Covid pandemic, billionaire investor Ray Dalio flagged that the U.S. financial system nonetheless faces an “enormous amount of debt.”
The central financial institution’s resolution to lower the federal funds fee by 50 foundation factors to a spread of 4.75% to five%. The speed not solely determines short-term borrowing prices for banks, but additionally impacts numerous client merchandise like mortgages, auto loans and bank cards.
“The challenge of the Federal Reserve is to keep interest rates high enough that they’re good for the creditor, while keeping them not so high that they’re problematic for the debtor,” the founding father of Bridgewater Associates advised CNBC’s “Squawk Box Asia” on Thursday, noting the problem of this “balancing act.”
The U.S. Treasury Division not too long ago reported that the federal government has spent greater than $1 trillion this 12 months on curiosity funds for its $35.3 trillion nationwide debt. This improve in debt service prices additionally coincided with a big rise within the U.S. finances deficit in August, which is approaching $2 trillion for the 12 months.
On Wednesday, Dalio listed debt, cash and the financial cycle as one of many high 5 forces influencing the worldwide financial system. Increasing on his level Thursday, he mentioned he was typically fascinated about “the enormous amount of debt that is being created by governments and monetized by central banks. Those magnitudes have never existed in my lifetime.”
Governments world wide took on report debt burdens in the course of the pandemic to finance stimulus packages and different financial measures to stop a collapse.
When requested about his outlook and whether or not he sees a looming credit score occasion, Dalio responded he didn’t.
“I see a big depreciation in the value of that debt through a combination of artificial low real rates, so you won’t be compensated,” he mentioned.
Whereas the financial system “is in relative equilibrium,” Dalio famous there’s an “enormous” quantity of debt that must be rolled over and likewise offered, new debt created by the federal government.”
Dalio’s concern is that neither former President Donald Trump or Vice President Kamala Harris will prioritize debt sustainability, meaning these pressures are unlikely to alleviate regardless of who wins the upcoming presidential election.
“I believe as time goes on, the trail will probably be more and more towards monetizing that debt, following a path similar to Japan,” Dalio posited, pointing to how the Asian nation has kept interest rates artificially low, which had depreciated the Japanese yen and lowered the worth of Japanese bonds.
“The worth of a Japanese bond has gone down by 90% so that there is a large tax by artificially supplying you with a decrease yield every year,” he said.
For years, Japan’s central bank stuck to its negative rates regime as it embarked on one of the most aggressive monetary easing exercises in the world. The country’s central bank only recently lifted rates of interest in March this 12 months.
Additionally, when markets do not have enough buyers to take on the supply of debt, there could be a situation where interest rates have to go up or the Fed may have to step in and buy, which Dalio reckons they would.
“I might view [the] intervention of the Fed as a really vital unhealthy occasion,” the billionaire said. Debt oversupply also raises questions of how it gets paid.
“If we had been in exhausting cash phrases, then you definately would have a credit score occasion. However in fiat financial phrases, you might have the purchases of that debt by the central banks, monetizing the debt,” he said.
In that scenario, Dalio expects that the markets would also see all currencies go down as they’re all relative.
“So I believe you’d see an setting similar to the 1970’s setting, or the 1930 to ’45 sort of interval,” he said.
For his own portfolio, Dalio asserts that he does not like debt assets: “so if I’ll take a tilt, it will be underweight in debt property comparable to bonds,” he mentioned.
