The United States is currently in a “death spiral” of debt that could lead to an economic “heart attack” if both parties do not work together to start cutting immediately, according to Ray Dalio, the founder of the world’s largest hedge fund.
During a recent conversation on “The All-In Podcast” with co-host David Friedberg, Dalio noted that a “death spiral” typically refers to when a company or government has too much debt and must borrow to service it. According to Dalio, investors are acutely aware of this, which is causing credit to get worse and interest rates to increase.
Dalio, the Chief investment officer of Bridgewater Associates, says this is the worst thing that can happen to a heavily indebted entity. He notes that the key question is whether the debt creates a large enough income to mitigate this issue.
“That’s like, I don’t know, eating vegetables or something. It’s a healthy process. And if not, credit begins to build up this debt, it begins to become like plaque in the arteries. And you can measure it just like you could measure it in the arteries, and you can see how it constricts that circulatory system,” Dalio told “All-In.”
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Ray Dalio, the founder of the world’s largest hedge fund, warned “The All-In Podcast” co-host David Friedberg of serious economic consequences is the national debt is not addressed quickly. (The All-In Podcast)
If interest and debt service continuously constrict a government’s money supply, Dalio claims this can lead to an “economic debt heart attack.”
A large amount of debt creates the need for somebody to buy it. Debt risks not only create the urgency for new supply to be offered, but holders may also sell those debt assets, leading to an overwhelming supply relative to demand, according to Dalio.
In the event that the debt service burden rises or there is a big supply-demand imbalance, the government’s central bank can print more money and buy it. If they do not, the price of the debt must rise to constrict borrowing, snowballing to the constriction of non-existent credit, in turn weakening the economy and causing bad economic conditions.
Dalio says the government can let that happen or print money and buy the debt to monetize it. However, this will cause inflation and lower the value of the debt.
“In either case, you don’t want to hold that debt because either there’s a debt service problem or there’s a depreciation,” he adds.
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The U.S. national debt has exceeded $36 trillion. (All-In Podcast/Jemal Countess/Peter G. Peterson Foundation/Chip Somodevilla/Getty Images)
Today, the U.S. has $36.4 trillion of federal government debt and a Gross Domestic Product (GDP) of 29.1 trillion, giving a debt-to-GDP ratio of 125%. This ratio has climbed steadily since the pandemic began in 2020, when the federal government debt was $20 trillion, and GDP was just $21 trillion. Since the pandemic, federal government debt has risen by 80%, while GDP has climbed by 38%.
Despite recent efforts to cut interest rates again, markets have traded treasuries down, causing the long-term interest rates of U.S. debt to spike up to levels not felt since just before the 2008 global financial crisis. To keep the economy growing, the U.S. government is running a nearly $2 trillion annual deficit, nearly 7% of GDP, while paying over $1 trillion per year in interest alone on the existing outstanding debt.
Dalio expressed a sense of urgency in relation to mounting debt, wading into the potential benefits of the Department of Government Efficiency (DOGE) and how the need to cut costs will inevitably accentuate already entrenched political divisions.
Touting his personal solution, Dalio said the deficit, which is the equivalent of bonds selling, must be cut from 7.5 percent down to 3 percent of GDP.
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Congress is racing to execute the recommendations of Trump’s new DOGE commission. (Getty Images)
“Different people have different views as to how to cut it. Forget it. I don’t really care,” Dalio said. “Just, you have to have a unified agreement. Everybody in Congress and the president and so on should pledge to do that. And then the question is how to do it. But they should know that number (equivalent to around 900 billion a year).”
Dalio worries that the timeline to close this gap may be too long. He says it’s not just a matter of DOGE but also less regulation and productivity changes, which could, in part, come from artificial intelligence (AI) or even revenue produced by tariffs and translate into profit.
When asked if America is better off with President Donald Trump versus former President Biden in the financial context, Dalio said, “Yes, I do believe we are.”
“In terms of profitability and the likelihood of cutting, I think the Republicans are probably more likely to make these moves than the Democrats. But you also have to take into consideration the impacts, the social impacts and the other impacts that are going to come from this. We’re at a civil war internally and we’re at an international war simultaneously. So, there are second-order effects. I think the main thing is to take those numbers and make them real at 3 percent,” he continued.
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Pie chart on government spending. (Fox News)
But these cuts will be brutal, according to Dalio. He notes that “how the pie is divided” with respect to government budgeting is going to be very political and the “disruptive effects will be enormous.”
“We’re really all guessing on how disruptive those effects will be. It’s too much of a – but you’re absolutely right. Lots of jobs are going to be lost,” he said. “Lots of change is going to happen in terms of turbulence. And do we have a plan? How could we even agree on a plan of how to deal with that? I don’t think we’re in a time, it may be in the rest of our lifetimes, where that agreement is going to be easy.”
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The Economic Policy Innovation Center (EPIC) released a new model in December that said it is “possible” that the U.S. government would exhaust the ability to pay its debts by June 16, 2025.
“The government is projected to run about a $2 trillion deficit next year. And so that means that the spending obligations that Congress and the government have incurred are a lot more than what we’re going to bring in tax revenues,” Matthew Dickerson, director of Budget Policy at EPIC, told Fox News Digital. “To be able to pay the things the government has promised to pay on time, you need to increase the debt limit.”
