Ray Dalio sees a world debt crisis brewing as most G7 economies are approaching or exceeding an annual debt to GDP the size of its entire monetary yearly economic activity in a backdrop of collapsing birth rates.
A casual perusal of the World Debt Clock underscores a global debt crisis, particularly when the annual debt to GDP exceeds 100% birth rates, future taxpayers collapse, and a demographic time bomb accelerates a debt death spiral.
Japan, with a 125,246,150 ageing population and a Public Debt to GDP of 280.3%, is a case in point.
“Japan, with a 125,246,150 ageing population and a Public Debt to GDP of 280.3%, is a case in point”
RAY DALIO
Ray Dalio sees a world debt crisis brewing as it squeezes out consumption
“The credit that we buy things with financial assets and goods creates debt, and that debt accumulates like plaque in the system,” said Ray Dalio.
The lifeblood of the economy is credit, feeding the economic organs. When excessive debts accumulate in the system, higher interest payments block the flow of credit, and the economic organs starved of lifeblood die. Ray Dalio noted that the US spends a trillion dollars annually to pay interest on its public debt, squeezing out spending.
“Over the next year, we are going to have 9 trillion dollars of debts that we will have to pay back and roll forward,” he said.
Ray Dalio sees a world debt crisis, a supply-demand imbalance leading to higher interest rates
“One man’s debts are another man’s assets,” he said.
When investors see the maturity risks of holding bonds being too high due to inflation, demand for bonds falls, and bond yields and interest rates rise. “If you think your assets are no good, you want to sell them, which creates this terrible supply-demand imbalance,” he said.
Ray Dalio believes central banks resort to more currency creation to suppress yields, causing unintended monetary inflation.
He believes the supply and demand for debt is so critical that we have immediate issues.
“Trauma in the treasury bond market jeopardises money as a store of value,” he said.
“One man’s debts are another man’s assets”
RAY DALIO
Not just a US problem, Ray Dalio sees a world debt crisis
“I am speaking of the US, but several countries face this issue,” he said.
Ray Dalio thinks the debt problem is a global problem in China, the US and Europe, leading to internal and geopolitical instability.
He advocates cutting the US public deficit to 3% of GDP, which he believes should be a bipartisan policy.
The goal of getting to a public deficit of 3% entails three elements: Taxable income, public spending cuts and interest rates. “If you do the first two, you will have lower interest rates,” said Ray Dalio.
Ray Dalio sees a world debt crisis and believes we are going through a time warp
“You will see a debt crisis, internal and external conflicts, a changing world order and technology changes. It is almost like being in a time warp, and we will be in a different world,” he said.
