Dalio says three recent developments match a debt-restructuring pattern
PANews reported on Aug. 22 that Bridgewater founder Ray Dalio said three recent developments line up closely with the “classic debt restructuring template” described in his book How Countries Go Broke: The Big Cycle.
He pointed to Japan selling part of its U.S. government bonds, U.S. long-term Treasury yields hitting new highs while the dollar weakens, and the U.S. Treasury secretary announcing that the Treasury will buy government bonds.
What Dalio sees in debt, interest costs and bond supply
Dalio said that when government debt grows faster than income, interest expense squeezes fiscal room. If bond supply exceeds market demand, yields may rise, or central banks may be forced to buy government bonds and expand money supply to keep markets stable, which would weaken the value of the currency.
He said the U.S. currently faces about $32 trillion in federal debt and about $1 trillion in annual interest payments. Over the next 10 years, he said, debt could climb to $55 trillion to $60 trillion.
His asset-allocation advice
Dalio said the deficit should be reduced to 3% of GDP through lower spending, higher taxes and lower interest rates, warning that debt pressure could worsen if that does not happen.
On investing, he recommended diversifying into asset classes and countries with strong finances, healthy balance sheets and fewer internal political and external geopolitical conflicts. He also said investors should reduce exposure to debt assets such as bonds and add gold and a small amount of bitcoin.
Holding a modest amount of gold, such as 10% to 15% of total assets, can lower portfolio risk and also improve returns, he said.