Ray Dalio has never been exactly optimistic when it comes to public debt. He described the $38 trillion the United States owes as an economic “heart attack” waiting to happen.
But there are options to avoid such a crisis, he believes — from increasing revenue through taxes to reducing government spending. The only problem is that politicians on both sides of the Capitol would need to reach a long-term agreement for this to happen. And that, the founder of Bridgewater Associates fears, won’t happen.
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What concerns economists is not necessarily the absolute value of a country’s debt, but rather its debt/GDP ratio — and how much of that debt corresponds to interest on existing loans. At the time of this writing, the American ratio was at approximately 120%, and the government was spending more than $10 billion a week just to maintain this debt.
Speaking at the Oxford Union in an interview released last week, Dalio was asked whether he would recommend public spending discipline to rebalance budgets or investment in growth to improve the debt-to-GDP ratio.
“It’s a little bit of everything really,” he said, but added that ultimately some kind of political alliance would be the silver bullet to put the United States on a healthier government spending path.
He added: “You need a center [político] strong because the two sides will fight each other and probably get to the point where there are irreconcilable differences that they cannot resolve — and difficult things will happen.”
However, if a robust consensus can be created, it will allow “difficult” decisions to be made to “achieve a better situation”, Dalio added.
But he continued: “This needs to be done in a bipartisan way, meaning I would like a bipartisan commission to deal with the situation and achieve this. I don’t think those things are going to happen.”
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Dalio also reminded the audience what the outcome should be, in his view.
First, he repeated his theory that government spending to boost the economy will be suffocated by the interest payments needed to maintain the debt — the “heart attack.”
But he also warned that the combination of high debt and rising geopolitical tensions could be a worrying mix. “One person’s debt is another person’s asset”, highlighted Dalio.
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“When you have a lot of debt… they may not believe that these assets will be good stores of value — especially when you also have shocks… between countries.
“Let’s say the Chinese, who are creditors to the United States — if they understand history or even what’s been happening recently — [podem] feel threatened and think that the bonds they hold may not be paid in full and could be used as a form of sanction.”
Other options available
Many economists believe that the most extreme scenarios predicted by Dalio will not materialize because the Federal Reserve must intervene in the debt issue before the crisis actually breaks out. They have a very simple tool at their disposal: quantitative easing.
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While it is an unpopular option for a number of reasons, by increasing the money supply, the Fed reduces the cost of long-term borrowing and makes it cheaper to pay off debt.
There is also a huge — literally — source of opportunity predicted for the coming decades. The Great Wealth Transfer is expected to move US$80 trillion over the next 20 years, according to UBS, and governments around the world will probably want to participate in this process.
Private wealth can be mobilized through incentives, such as offering tax-exempt premium bonds, or legislatively, directing pension funds toward domestic public debt, Paul Donovan, chief economist at UBS, recently said in a press roundtable.
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“There are more controversial options,” he added. “Like taxing wealth via capital gains or inheritance taxes. In practice, the initial focus tends to be on financial repression — using tax incentives or regulation to direct money into government securities — before moving on to wealth taxation.”
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