Ray Dalio, Co-Chairman and Co-Chief Investment Officer of Bridgewater Associates, speaks at the Skybridge Capital SALT 2021 New York Conference.
Brendan McDermid | Reuters
As the Federal Reserve implements its first interest rate Billionaire investor Ray Dalio says the U.S. economy still faces “massive debt” since the early days of the coronavirus pandemic.
The central bank’s decision lowers the federal funds rate to a range of 4.75% to 5%. The rate not only determines banks’ short-term borrowing costs, but also affects a variety of consumer products such as mortgages, car loans and credit cards.
“The challenge for the Fed is to keep interest rates high enough to benefit creditors but not so high that they cause trouble for debtors,” the founder of Bridgewater Associates told CNBC’s “Squawk Box Asia” on Thursday. The difficulty of this “balancing act”.
The U.S. Treasury Department recently reported that the government has This year, interest payments on its $35.3 trillion Treasury bill exceeded $1 trillion. The increase in debt servicing costs also coincides with a sharp rise in the U.S. budget deficit in August, with the full-year budget deficit approaching $2 trillion.
On Wednesday, Dalio listed debt, currencies and the economic cycle as one of his priorities. Top five forces impact the global economy. He expanded on his views on Thursday, saying he was generally interested in “the huge amounts of debt created by governments and monetized by central banks. These are scales that have never existed in my lifetime.”
Governments around the world have taken action record debt load Funding stimulus packages and other economic measures during the pandemic prevent collapse.
When asked about his outlook and whether he sees a credit event imminent, Dalio responded that he does not.
“I don’t think you’re going to be compensated for the significant depreciation in the value of the debt because of artificially low real interest rates,” he said.
Dalio noted that while the economy is “relatively balanced,” there is still a lot of debt that needs to be rolled over and new debt created by the government needs to be sold.
Dalio’s concern is that neither former President Donald Trump nor Vice President Kamala Harris will prioritize debt sustainability, meaning these pressures are unlikely to ease. No matter who wins The upcoming presidential election.
“I think over time the path to debt monetization will increasingly be very similar to Japan’s path,” Dalio said, noting that the Asian country has kept interest rates artificially low, causing the yuan to depreciate. yen and lowered the value Japanese bonds.
“The value of Japanese bonds has fallen by 90%, so artificially lowering yields every year will generate huge taxes,” he said.
For years, the Bank of Japan has insisted on a negative interest rate regime and embarked on one of the most aggressive monetary easing policies in the world. The country’s central bank has recently Rate hike in March This year.
Additionally, when there aren’t enough buyers in the market to take on the supply of debt, there could be a situation where interest rates have to rise or the Fed could have to step in and buy, which Dalio believes they will do.
“I think the Fed’s intervention is a very significant bad event,” the billionaire said. The oversupply of debt also raises questions about how to repay it.
“If we measure it in hard currency terms, then you’re going to have a credit event. But in fiat currency terms, central banks will buy these debts and monetize the debt,” he said.
In this case, Dalio expects the market to see all currencies fall as well, since they are all relative.
“So I think you’re going to see an environment very similar to the 1970s or the 1930-45 period,” he said.
Regarding his own portfolio, Dalio claimed that he doesn’t like debt assets: “So if I were to tilt, it would be underweight debt assets like bonds,” he said.
