Ray Dalio Says Debt-Ceiling Debate Sets Stage for ‘Disastrous Financial Collapse’

The comments below are an edited and abridged synopsis of an article by William Watts

Billionaire investor and Bridgewater Associates founder Ray Dalio warns that while the US government is likely to avoid a first-ever debt default, a lack of effective restraint on spending spells trouble ahead.

Ray Dalio Says Debt-Ceiling Debate Sets Stage for ‘Disastrous Financial Collapse’ - BullionBuzz - Nick's Top Six
Nations Debt Ceiling

Dalio doesn’t expect the battle between the Biden administration and congressional Republicans over a debt-limit increase to lead to a default. But any agreement is unlikely to deal with the big issues in a substantive way and will instead likely tweak things in ways that won’t matter much, making no real commitment to cutting the deficit in future years.

Dalio says that staying on the same path isn’t sustainable “because increasing debt assets and liabilities faster than income eventually makes it impossible to simultaneously pay lender-creditors a high enough real (i.e., inflation-adjusted) interest rate to have them hold the debt assets without having that real interest rate too high for the borrower-debtors to be able to service their debts.”

When the amount of debt sold is greater than what debt buyers want to absorb, central banks must decide whether to let interest rates rise to balance the supply and demand, which will crush debtors and the economy, or print money to buy the debt. The latter option is inflationary and encourages debtholders to sell, making the debt imbalance worse.

“In either case that creates a debt crisis that is like the runs on the banks that we have been seeing, but with government bonds being what is sold and the run on the bank being a run on the central bank,” Dalio said.

At the same time, not increasing the debt limit will lead to default and to cutbacks on basics for those who can’t afford cutbacks, causing financial havoc and social upheaval.

An agreement to raise the limit would ideally be accompanied by an agreement that overcomes the objections of the more extreme members of both parties, who either don’t want to lift the debt ceiling or aren’t willing to compromise on a long-term budget approach.