Financial Times: You’ve warned for years about America’s overwhelming debt burden. How do you see Donald Trump’s tax and spending promises affecting that trajectory? Is this time more sensitive than ever?
Ray Dalio: Yes. The worsened condition is due to years of excesses, like overeating fatty foods and smoking over a lifetime. The cumulative effects have brought about the current conditions, and the great excesses that are now projected as a result of the new budget will probably cause a debt-induced heart-attack in the relatively near future — I’d say three years, give or take a year or two. I’ll explain.
The credit circulatory system is like the human circulatory system in that it brings nutrients to different parts of the body. If the credit and debt are used to create income that is large enough to service the debt, then the system is working well and healthy. But if the debt and debt service expenditures grow faster than the incomes, they build up like plaque that squeezes out other spending. It is easy to see that happening. The US government’s debt service payments now equal about $1tn a year in interest and are increasing at a fast rate, with about $9tn needed to roll over the debt. That squeezes out other spending. The more that happens, the closer the country is to a debt-induced economic heart attack. Also, when there is a lot of existing debt plus a lot of new debt that is being created to finance deficit spending, the supply of debt being sold is much greater than the demand for it. Over the next year, the federal government will spend about $7tn and take in only about $5tn, so it will have to sell an additional roughly $2tn in debt, in addition to the $1tn it has to sell to pay interest plus the $9tn it has to raise to roll over the debt. Things are likely to get worse than that because when creditors become worried about the debt assets not being good storeholds of wealth, they sell them. The demand for debt will unlikely keep up with the supply. That is a classic sign of the big debt cycle entering the traumatic last phase. At this stage in the cycle, the central bank must decide whether to allow interest rates to go up and have a debt default crisis, or to print money and buy the debt that others won’t buy to try to hold real interest rates down, which will lower the value of money. Another classic sign of coming to the turbulent end of the big debt cycle is central banks doing a lot of printing money and buying debt and then losing so much on the debt assets that they bought that, at that stage, both the central bank and the central government need to borrow more money. This leads to the central bank printing even more money to service the large debts that they have. By all the classic measures, we are late in the big debt cycle, and if those who shape policies don’t change policies, there will be a debt service problem coupled with a debt supply-and-demand problem that will cause a debt-induced economic heart attack.