Hedge fund legend Ray Dalio warns of a US credit crunch - and says it could tank markets and spark a recession
- Ray Dalio warned a painful credit crunch could hammer financial markets and spark a recession.
- The billionaire investor said a surge in government-bond sales could cause private credit to dry up.
American households and businesses could suffer a brutal credit crunch that slashes asset prices and tanks the economy, Ray Dalio has warned.
The billionaire investor suggested private-sector lending could dry up if the heavily indebted US government ramps up bond sales to finance its spending plans. The Federal Reserve might exacerbate the problem if it accelerates its bond sales to cool the economy and curb red-hot inflation, he said in a LinkedIn post on Tuesday.
The flood of bonds into the open market could crowd out the supply of private debt, resulting in tighter credit conditions for consumers and companies, he said.
"Since the amount sold has to equal the amount bought, it seems most likely that will happen via a big contraction in private credit, which will lead to a lot less buying of goods, services, and financial assets, and hence price declines in financial assets and an economic contraction," Dalio said in a LinkedIn post on Tuesday.
In Dalio's view, it could soon become harder or more expensive for Americans to take out loans, mortgages, and other types of debt. The result could be less spending and investing, which would drag down the prices of stocks and other assets, and plunge the economy into a recession.
The Bridgewater Associates founder also rang the alarm on mounting civil strife in the US, and the surge in overseas conflicts such as Russia's war with Ukraine. Those two trends, combined with rising economic pressures around the world, represent an "especially dangerous confluence of events," he said.
Dalio has previously criticized the Fed and the government for flooding the US economy with debt and cash, which created an asset-price bubble. He predicted the consequence would be annual inflation of 4% to 5%— well above the Fed's target rate of 2% — and interest rates above 4.5% for years to come.