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Ray Dalio says politicians will keep raising the debt limit - but doing so will lead to 'disastrous financial collapse'

May 19, 2023, 00:27 IST
Business Insider
Ray Dalio.Pedro Fiúza/NurPhoto via Getty Images
  • Ray Dalio said lawmakers will likely increase the debt limit, but it isn't a good long-term solution.
  • "This will eventually lead to a disastrous financial collapse," he warned in a LinkedIn post.
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Billionaire Ray Dalio doesn't expect lawmakers to allow the US to default, but they will still fail to come up with a viable long-term fix to the debt situation, leading to a crisis eventually.

In a Thursday post on LinkedIn, the Bridgewater Associates founder predicted that negotiations will lead to pledges to cut the deficit in future years but won't actually become reality when the time comes.

"Increasing the debt limit the way Congress and presidents have repeatedly done, and most likely will do this time around, will mean there will be no meaningful limit on the debt," Dalio wrote. "This will eventually lead to a disastrous financial collapse."

President Joe Biden and House Speaker Kevin McCarthy have recently sounded hopeful about reaching a deal on the debt limit that avoids a default. But Dalio sees a bigger issue.

Spending more than you earn and financing it with debt as the US has done for years, he said, isn't sustainable, and it isn't the choice he would make if it were up to him.

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Down the line, Dalio noted, this decision will make it impossible to pay investors a high enough interest rate to have them hold debt assets, while also keeping interest rates low enough for borrowers to be able to service their debts.

"When debt assets and liabilities reach the point that the amount of debt sold is greater than the amount of debt that buyers want to buy, central banks are faced with a choice: they either have to let interest rates rise to balance the supply and demand, which is crushing to debtors and the economy, or they have to print money and buy the debt, which is inflationary and encourages holders of the debt to sell the debt, which makes this debt imbalance worse."

Both outcomes, in his view, create a debt crisis, with government bonds being sold off at great volumes. At the same time, failing to increase the debt limit would also lead to financial havoc and social upheaval.

Resolving the stalemate necessitates a bipartisan plan that ultimately reforms the financial system, Dalio said.

Pushing the issue down the line with a quick-fix answer now, as has been done 78 times before, will perpetuate existing issues, so this has to be done alongside a "smart bipartisan plan that will take adequate time to be developed," he maintained.

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"I hope to see the smart bipartisan moderates band together to fight the extremists of both parties," Dalio said. "I think that the leader(s) who come out in favor of this kind of smart bipartisan path should receive huge bipartisan support rather than the alternative path of not finding a smart bipartisan approach, which assuredly will lead us toward disaster."

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