As U.S. debt levels continue to rise, hedge-fund founder Ray Dalio says that the financial system is in need of “big restructuring.”
Key Details
- In a recent newsletter, Dalio shared that, in his view, U.S. debt levels have reached an unsustainable height, and the financial system will suffer because of it.
- As debt increases, Dalio says that central banks will have to purchase the debt.
- The Bridgewater Associates founder also emphasized his “Big Cycle” framework, where he suggests that economic patterns repeat themselves throughout history.
Why it’s news
Dalio’s Big Cycle suggests that history repeats economic patterns and is driven by enormous debt, internal conflict in a country, disputes between nations, natural disasters, and technological changes.
These five forces, Dalio says, are now coming together in a way that may create massive global economic disruption. Historically, he says, when these forces have reached such intensity, there has been a tremendous economic change.
“The lessons I learned from studying history led me to believe that we are on a path toward a period of great disorder that includes financial turbulences and great conflicts within and between countries,” Dalio says.
Following nine consecutive interest rate hikes from the Federal Reserve, Dalio warns that an “economic contraction” is coming soon—likely within the next two years. In his view, the next several years could be economically challenging.
“Given these conditions, it appears that interest rates that are high enough—and money and credit that is tight enough—to fight inflation and provide lender-creditors with adequate real returns will be unbearably high for borrower-debtors,” Dalio says. “This means the system is close to the point where big restructurings will be needed. Of course, which debtors and creditors are affected will vary.”
