Editor's Note: Ray Dalio once again contextualizes the risks in the US economy within a larger historical framework.
In his view, the growing US deficit, with government spending consistently outpacing income, could eventually force the government to continue borrowing and printing money. As a result, inflation may become harder to bring down, interest rates may remain high, thereby suppressing consumption, investment, and the financial markets. If economic growth slows at the same time, the US could find itself in a "stagflation" environment.
This is also why Dalio suggests allocating to gold. Gold here is not merely a safe-haven asset but a defense against the devaluation of fiat currency. When the market begins to worry about the purchasing power of the dollar and US debt credit, gold often attracts renewed attention.
However, the US dollar remains the core currency in the global financial markets for now. Funds are still flowing into the US, and there has been no noticeable collapse in demand for US bonds. What Dalio really wants to emphasize is that the risks of the dollar system will not suddenly erupt but will gradually accumulate amidst high deficits, high inflation, war, and waning trust.
How long can the global market unconditionally trust the US dollar credit when fiscal deficits, inflationary pressures, and geopolitical conflicts are all on the rise?
The following is the original text:
Ray Dalio is issuing a warning about the current state of the global economic order.
The Bridgewater Associates founder and billionaire investor said he sees troubling signs: the US economy is heading toward a "disorderly" phase characterized by rising fiscal deficits, heating inflation, and waning confidence in the US financial empire from abroad.
This week, on the latest episode of the podcast "Interesting Times," Dalio outlined a possible scenario: due to excessive borrowing and currency debasement, the US could slide into a financial crisis.
Related Reading: "Ray Dalio's Latest Interview: Can the US Still Escape the Decline Cycle?"
Dalio said, "A financial crisis means that your spending capacity will be very limited." He speculated that in this scenario, the US might not be able to afford its military and social spending. "You would be very constrained. As demand fails to match supply, interest rates would rise, suppressing borrowing, impacting the markets, and so on."
The deficits of the United States and many countries around the world are on the rise. According to data from the U.S. Treasury Department, the U.S. government's spending in the last fiscal year was $7 trillion, while revenue was $5.2 trillion.
Dalio stated that historically, higher deficits often lead to economic "issues." He referred to the fact that governments usually cover costs by printing more money, but doing so can result in currency devaluation and rising inflation.
The eventual outcome could be a "stagflationary environment." This refers to a scenario that financial markets least like to see: high inflation coupled with weak economic growth. He added that he believes investors should allocate 5% to 15% of their assets to gold to weather "truly bad times."
Dalio said, "Looking back in history, we will see that during all these times, all fiat currencies declined, while gold rose."
For a long time, Dalio has emphasized the importance of gold as a hedge against economic turmoil and has repeatedly reminded his followers to focus on "currency debasement trades." This logic suggests that higher deficits and higher inflation will erode the value of currency, making assets like precious metals a more attractive store of wealth.
Ultimately, the turbulence facing the global economy may mean that no currency can stably store wealth. Last year, he pointed out that the rapid rise in gold prices was a signal that fiat currencies had already begun to weaken.
In recent years, many economists have not agreed on the impact of "de-dollarization." De-dollarization refers to countries reducing their dependence on the U.S. dollar. However, Dalio suggested that the world monetary order could indeed change over time. He cited the British pound as an example, noting that the pound lost its status as a global reserve currency in the mid-20th century.
He also pointed out similarities between the current tensions around Iran and war. The risk of war could weaken external confidence in the United States as an economic and political superpower. Especially with rising oil prices, market concerns about inflation have significantly increased.
Dalio stated, "We don’t know what the world will look like in three to five years. Things we don’t know are far greater than things we know. What I think we can be certain about is that we are in a disorderly world, and these are bigger risks."
Despite an increasing discussion in the market about currency devaluation, investment inflows into the United States have been accelerating in recent years, and demand for U.S. Treasuries remains stable. These two signals indicate that the U.S. dollar still maintains its dominance in financial markets.
The U.S. dollar index measures the dollar's performance against a basket of foreign currencies. Since the beginning of this year, with investors factoring in higher rate expectations, the dollar index has risen by as much as 2%; however, in recent times, due to hopes in the market for a swift end to the Iran war, the dollar's upward momentum has cooled off. On Thursday, the dollar index traded around 97.85, remaining relatively flat for the year.
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