Bridgewater Associates founder Ray Dalio is putting US investors on notice, warning that America’s financial situation presents serious problems.
In a new interview on CNBC, the billionaire compares the US economy to a circulatory system, whereby credit is brought to the people, and the people then have to convert it into profits.
If the credit is not used productively, however, Dalio notes that the debt simply builds up, not only slowing down the economy, but also hurting the bond market as well.
Dalio, who answers “yeah” to the question of whether or not America is “going broke,” suggests that the amount of debt the US has is creating a supply and demand imbalance for bonds, diluting bondholders as more and more debt is issued.
“Think of the circulatory system like there’s this great circulatory that brings credit to people and then if they use that credit well, they produce profits, and the profits pay for it. And so, if debt is rising relative to income, that’s a problem. And so, what happens is, mechanistically, is first, that as debt and debt servicing rise, then the debt service, the interest rate and the debt payments increase and squeeze out spending, and so you’re seeing that…
The second force is buying and selling. In other words, one man’s debts are another man’s assets. So they’re holding these bonds. There are so many people that are holding these bonds around the world…
They then take those bonds and they now have to buy a lot of other bonds because we’re selling those bonds. Not only is there a supply and demand problem now if I actually calculate who are the buyers of those, you are reducing demand relative to supply, and if you get into a position where they have to then worry about those bonds, they could sell those bonds, so the amount to be sold, it can be much greater even than the amount of the new debt that’s being produced and this is a supply and demand problem. So the second factor is the supply and demand, and the third is when that supply and demand problem happens, either interest rates go up, or the central bank comes in and prints money.
So if we go through those numbers… We can see the position of the US and the problem emerging.”
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