Dec 4, 2023
America’s national debt is currently closing in on a staggering $33.74 trillion. And according to Ray Dalio, founder of the world’s largest hedge fund, Bridgewater Associates, that number may continue to rise — quite rapidly.
“We are at a point in which we are borrowing money to pay debt service,” he said in a recent interview with CNBC.
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The hedge fund legend explained that if a country’s debt were to grow faster than its income, its debt service would be “encroaching” on its spending. And if the country wanted to maintain its current level of spending, it would need to “get more and more into debt.”
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“The way that works, it accelerates,” he said.
He added that the problem is exacerbated by America’s internal political issues and social conflicts.
Dalio is not the only one to point out the connection between U.S. politics and fiscal health. Moody's Investors Service recently changed its ratings outlook for the U.S. from "stable" to "negative.” It warned that “continued political polarization” in Congress may heighten the risk of lawmakers failing to achieve consensus on a fiscal plan to “slow the decline in debt affordability.”
Will interest rates go higher?
Since the U.S. Federal Reserve began raising interest rates in March 2022, many borrowers have experienced the burden of higher monthly payments. Should interest rates persist in rising, it poses significant challenges for a country grappling with nearly $34 trillion of debt.
When asked about his forecast for interest rates a year from now, Dalio responded, “I don't think there's going to be any important change in the Fed policy, other than maybe a slight easing as the economy slows down.”
And yet recent indicators still suggest an expanding economy.
Last month, the Commerce Department reported that, for Q3, real GDP in the U.S. increased at an annual rate of 4.9%. This statistic not only exceeded economists’ expectations, but also marked the biggest increase since Q4 of 2021.
That said, Dalio is concerned about the nation’s financial strength.
“Financially strong means: do you earn more than you spend? Do you have a good income statement as a country? And do we have a good balance sheet?” he remarked. “We are near that inflection point.”
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Jing is an investment reporter for Moneywise. He is an avid advocate of investing for passive income. Despite the ups and downs he’s been through with the markets, Jing believes that you can generate a steadily increasing income stream by investing in high quality companies.
