CNBC – Billionaire Ray Dalio doesn’t expect lawmakers to allow America to default, but they still fail to come up with a viable long-term solution to the debt issue, leading to an eventual crisis.
In a Thursday, May 18 post on LinkedIn, the Bridgewater founder predicted that the negotiations would lead to deficit-cutting pledges in the coming years, but would not become a reality when the time came.
“Increasing the debt limit the way Congress and Presidents have done time and again, and most likely will this time, will mean that there will be no reasonable debt limit,” Dalio wrote. “This will eventually lead to a catastrophic financial collapse.”
President Joe Biden and House Speaker Kevin McCarthy recently expressed optimism about reaching a debt ceiling deal to avoid default, but Dalio sees a bigger problem.
He said that spending more than it earns and financing it with debt, as the United States has done for years, is not sustainable, and not a choice he would make if it were up to him.
Dalio noted that this decision would make it impossible to pay investors an interest rate high enough to cause them to own debt assets, while keeping interest rates low enough for borrowers to be able to service their debts.
“When debt assets and liabilities reach the point where the amount of debt sold is greater than the amount of debt buyers are willing to buy, central banks are faced with a choice: either they let interest rates rise to balance supply and demand, which crushes debtors and the economy, or they have to Printing money and buying debt, which is an inflationary matter that encourages debt holders to sell debt, which makes this debt imbalance worse.”
Both outcomes, in his view, create a debt crisis, with government bonds being sold off in large quantities. At the same time, failure to raise the debt limit will lead to financial chaos and social unrest.