High Stakes: America's Perilous Long-Term Debt Problem
Wealth magnate Ray Dalio joins the chorus of wealthy individuals expressing caution about America's economic future.
In a new book, billionaire investor Ray Dalio sounds the alarm about the U.S. government's precarious debt situation, warning it's "nearing the point of no return" and heading for a "death spiral" that could destabilize the world's strongest economy.
Dalio's book, "How Countries Go Broke: The Big Cycle," published on Tuesday, shows a stark concern about the government debt that, if left unchecked, could leave us with a crippled economy and spook global investors.
The bond market, typically a tranquil corner of the economy, has been spinning out of control lately. "Volatility in the bondmarket" has been stoked by policies like Trump's tariffs and tax bill, contending investors like Dalio.
Things got noticeable worse in May, when the rate the government pays investors for a 30-year loan spiked to its highest level since 2023. This rout started when investors either sold or refused to buy bonds, demanding higher compensation for a riskier bet on Uncle Sam.
Dalio joins a chorus of billionaires and economists warning about the looming debt crisis, with fears the mountain of government debt could squeeze out essential services, leaving a hollowed-out economy that's unable to work for its citizens.
So, while there's a "very low imminent risk" of a catastrophic debt crisis, the long-term risk is "very high."
But, as Dalio writes, "most policy makers and investors think their current circumstances and monetary system won't change." History has shown that this complacency can be a recipes for disaster.
Sound familiar?
In a "debt death spiral," governments find themselves in a vicious cycle of issuing more bonds to service their existing debts, but facing less demand and needing to pay more and more interest to attract investors. This leaves the country strapped for cash and with fewer options to raise funds.
The higher interest rates investors demand to loan the government money can eat away at funds for essential services, increase interest rates for consumers and businesses, and generally leave the country in dire fiscal straits.
The brunt of the blame has been pinned on Trump's tax bill, with the bill predicted to raise the deficit by slashing taxes without making corresponding spending cuts. The current U.S. deficit is on an unsustainable path and is, according to Dalio, "more than the market can bear." He reckons it'll take only three more years before America gets stuck in a "critical situation."
"I think we should be afraid of the bond market," Dalio warned at an event in May. "I can tell you this is very, very serious."
Despite adding fuel to the fire with his tax cuts, which pleased Wall Street in his first term, Trump's policies have created new challenges: the federal debt burden has ballooned, with the ratio of federal debt to GDP soaring from 104% in 2017 to 123% in 2024, according to the Treasury Department.
The ratcheted-up deficit presents a ticking time bomb, warns Alan Auerbach, a professor of economics at UC Berkeley, and it's not only America that's losing sleep. Earlier this year, JPMorgan Chase CEO Jamie Dimon said a "crack" in the bond market "is going to happen."
"We're now talking about deficits and a national debt-to-GDP ratio that are really going to be unprecedented," Auerbach observes, "except for recent recessionary times."
And, it doesn't look like Democrats and Republicans can find common ground on the issue either, fuelling fears that they'll continue to row in opposite directions despite the raging storm ahead.
"It's like being on a boat that's headed for rocks," Dalio notes, "and they agree that they should turn, but they can't agree on how to turn." The clock is ticking—we'd better figure it out soon, else the consequences could be grave.
- The increased federal debt burden, as a result of policies like tax cuts and tariffs, could lead to a debt death spiral, where governments issue more bonds to service existing debts but face decreasing demand and higher interest rates, which can negatively impact essential services, businesses, and the general economy.
- In the world of politics and finance, Ray Dalio's warnings about America's long-term debt problem become especially relevant when considering the current state of the bond market, which has shown volatility due to these policies, and the general-news headlines filled with discussions about sovereign debt crises and unsustainable deficit trajectories.
