Ray Dalio has never been particularly optimistic when it comes to the subject of national debt. He has described America’s $38 trillion borrowing burden as an economic “heart attack” waiting to happen.
But there are options available to avert such a crisis, he believes, from increasing revenues in the form of taxes to lowering government spending. The only problem is, politicians on both sides of Capitol Hill would need to come to an agreement over the longer term to make that happen. This, the Bridgewater Associates founder fears, is not going to happen.
What has economists so worried isn’t necessarily the value of a nation’s debt, but rather its debt-to-GDP ratio, and how much of that debt is interest payments on existing borrowing. At the time of writing, America’s ratio is at approximately 120%, and the government is spending in excess of $10 billion a week to maintain this debt.
Speaking at the Oxford Union in an interview released Thursday, Dalio was asked whether he would advise fiscal restraint to rebalance budgets, or investment in growth to even out the ratio.
“It really comes from a little bit of everything,” he said, but added that ultimately a political alliance of some sort would be the silver bullet to set America on a healthier fiscal path.
He added: “You need a strong [political] middle because both sides will fight each other and probably get to the point where there are irreconcilable differences, and they can’t resolve that—and difficult things will happen.” However, if a strong consensus can be created, this will allow for “difficult” decisions to be made to “achieve a better situation,” Dalio added.
But he continued: “It has to be done in a bipartisan way, in other words, I would like a bipartisan commission to deal with the mechanics and achieve that. I don’t think these things are going to happen.”
Dalio also reminded the audience of the outcome as he sees it.
First, he repeated his theory that government spending to grow the economy will be squeezed out by interest payments to service the debt—the “heart attack.”
But he also warned that the combination of high debt and rising geopolitical tensions could prove a worrying mix. “One man’s debts are another man’s assets,” Dalio pointed out. “When you have a lot of debt … they may not believe that they’re going to be good storeholds of wealth—particularly when you also have the clashes … between countries.
“Let’s say the Chinese, which are a creditor to the United States, if they understand history or even what’s been happening recently, [they might] feel threatened that those bonds they’re holding may not be produced full value, and can be used for sanctioning.”
Other options available
Many economists believe that the more extreme ends of Dalio’s outlook will not come to pass, because the Federal Reserve will intervene in the debt issue before a crisis truly comes to pass. They have a very simple tool in their arsenal: quantitative easing. Although an unpopular option for many reasons, by increasing the money supply, the Fed effectively lowers the cost of long-term borrowing, and makes it cheaper to service.
There’s also a wealth—literally—of opportunity set to become available in the coming decades. The Great Wealth Transfer is expected to see $80 trillion change hands over the next 20 years, according to UBS, and governments across the world are likely to want in on that shift.
Private wealth could be leveraged by incentivization, such as offering tax-free premium bonds, or legislatively by steering pension funds toward domestic government debt, UBS chief economist Paul Donovan recently told a media roundtable.
“More contentious options exist,” he added. “Such as taxing wealth through capital gains or inheritance levies. In practice, the initial focus tends to be on financial repression—using tax incentives or regulation to direct money into government bonds—before moving toward wealth taxation.”
