We owe a lot of money. A really, really lot of it.
The U.S. debt sits at more than $36 trillion. Yes, trillion. That’s a mountain of greenbacks.
And financing that debt comes at a steep price tag, something that’s captured the attention of the legendary hedge fund manager Ray Dalio.
In 1975 Dalio founded Bridgewater Associates, a hedge fund now managing more than $112 billion of assets.
Over his 50-year investment career, he’s seen more than his share of good and bad economic times, and many consider him among the most successful in predicting what could happen next to markets.
He recently offered to take on a major risk facing the U.S. economy. Given his track record, his opinion is startling.
Ray Dalio, founder and CIO mentor at Bridgewater Associates, has some very firm opinions on risks facing the U.S. economy.
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The U.S. economy faces a big challenge in 2025
The Federal Reserve appears caught between an economic rock and a hard place.
Inflation has retreated substantially since peaking above 8% in 2022.
However, inflation uncertainty, including recent volatility, including Consumer Price Index inflation of 2.4% in September, 3% in January, and 2.8% in February, has led to confusion over how the Fed’s monetary policy will evolve in 2025.
That’s especially given the Trump administration’s looming 25% tariffs on Canadian and Mexican imports and 20% tariffs on Chinese imports.
Related: Fed chairman has blunt 9-word response to recession talk
The situation is further complicated by the fact that unemployment crept up to 4.1% in February from 3.5% as recently as 2023, and the number of unfilled jobs shrank to 7.7 million in January from 8.5 million a year earlier.
According to consultants Challenger, Gray and Christmas, roughly 172,000 American workers lost jobs in February — the most in the month of February since 2009.
Since the Fed’s dual mandate targets low inflation and unemployment, two often contradictory goals, it’s shifted from cutting interest rates last year to sitting on its hands as it awaits more conviction as to whether it should be on the economic gas pedal or brake.
A lack of clarity on interest rates could hurt business activity and consumer spending, which are important to tax revenue and necessary for paying our debt.
Ray Dalio: We’re on the cusp of debt reckoning
Dalio managed money when Paul Volcker broke the back of inflation in the 1980s. He also weathered the savings-and-loan crisis in the late 1980s and early 1990s, the internet bust in the early 2000s, the Great Recession in 2008, and the Covid tumble in 2000.
Related: Treasury secretary sends strong message on recession risk
Along the way, he’s made a lot of money predicting what will likely happen to the U.S. economy and stocks.
Currently, the big risk he sees facing the U.S. is our growing debt pile.
“There’s a supply-demand problem,” said Dalio in an interview with CNBC’s Sara Eisen at the Converge Live conference in Singapore. “They have to sell a quantity of debt that the world is not going to want to buy.”
The U.S. federal government is forecast to spend $952 billion on interest on its national debt in fiscal 2025. Projections are that spending will total nearly $1.8 trillion by 2035, according to the Congressional Budget Office.
The inability to find buyers for all that paper could be an existential crisis for the economy, causing bond values to fall and interest rates to rise until they’re attractive enough to persuade people to buy them.
The crisis could happen sooner than people think.
“That’s a set of circumstances that is imminent. Okay, that’s paramount importance,” said Dalio. “The deficit must go from what will be projected now to be about 7.2% of GDP to about 3% of GDP.”
More Economic Analysis:
U.S. consumers are wilting under renewed stagflation risksJobs reports provide critical look at economy, could roil marketsFed inflation gauge indicates big changes in key economic driver
Dalio outlines three possible outcomes if the debt debacle isn’t dealt with:
A debt restructuringThe U.S. politically pressuring other countries to buyCutting off payments to some creditor countries for political reasons
Those solutions are unimaginable to many, but Dalio says there’s precedent.
“If you just look at history, you will see these things repeating over and over again,” said Dalio. “We will be surprised by some of the developments that will seem equally shocking.”
Related: Veteran fund manager who correctly forecast S&P 500 crash updates outlook
