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Investing.com -- Ray Dalio, billionaire founder of hedge fund Bridgewater Associates, has issued a warning to the Trump administration. He emphasized the urgency of reducing the deficit to avoid a severe debt crisis in the next three years. Dalio shared his concerns during an interview on Bloomberg’s Odd Lots podcast.
The Trump administration is currently trying to balance the maintenance of substantial tax breaks with the reduction of an annual deficit that recently hit $1.8 trillion. Simultaneously, Dalio is promoting his latest book, How Countries Go Broke, where he explains the functioning of debt cycles and advocates for an immediate commitment to reduce the US deficit to 3% of GDP.
Dalio stressed that the administration must take responsibility for the consequences if they fail to reduce the deficit. He predicted dissatisfaction among voters when the economic crisis, which he likened to a heart attack, strikes.
Dalio’s understanding of history and the workings of long-term debt cycles has been instrumental to his success in creating Bridgewater. This understanding helped him navigate the 2008 financial crisis and profit from the euro-zone debt crisis that followed.
Dalio now fears that the US may struggle to find buyers for its debt, as it needs to issue new bonds to service existing ones. Analysts at JPMorgan noted in late 2022 that all three major buyers of US Treasuries, including foreign central banks, domestic US banks, and the Federal Reserve, had simultaneously withdrawn from the market.
Dalio noted that the US would struggle to sell its debt to people, institutions, central banks, and sovereign wealth funds due to sanctions and an oversupply of bonds. He identified a significant imbalance between the amount of debt that needs to be sold and the potential buyers.
Reflecting on his early career, Dalio recalled President Richard Nixon’s unexpected decision in 1971 to sever the link between gold and the US dollar. Now, he sees the potential for a similar market shock if the US sanctions a large holder of Treasuries, discontinues interest payments, or attempts to restructure its debt.
Dalio dismissed the possibility of the US successfully weakening its currency against others under a hypothetical Mar-a-Lago Accord. He predicted that all currencies would depreciate alongside the dollar, leading to a race to the bottom.
In the face of this risk, Dalio suggested that investors should consider Bitcoin as an alternative form of money due to its stability and difficulty to seize or tax. He also expressed a stronger bullish view on gold than in previous years, suggesting that a "prudent" amount of gold might be around 10% to 15% of a theoretical portfolio.
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