Dalio: Facing a $35 trillion debt, the Federal Reserve needs to maintain a "difficult balance" in interest rates

With the unexpected 50 basis point rate cut by the Federal Reserve last night, renowned investor and founder of Bridgewater Associates Ray Dalio stated in an interview with CNBC that the U.S. economy is facing the challenge of massive debt, while the Federal Reserve is struggling to maintain interest rate balance.

The central bank decided to cut the federal funds rate by 50 basis points to between 4.75% and 5%. This rate not only determines the short-term borrowing costs for banks, but also affects various consumer products such as mortgage loans, car loans, and credit cards.

Dalio pointed out that the Federal Reserve needs to keep interest rates at a sufficiently high level to attract creditors without putting too much pressure on debtors, a balancing act that is very difficult.

Budget deficit expands, Dalio warns of debt crisis

According to the latest report from the U.S. Department of the Treasury, the total U.S. debt currently stands at $35.3 trillion. In order to repay this debt, the Treasury has already paid over $1 trillion in interest this year. The Treasury projects that the fiscal deficit in 2024 will be close to $2 trillion, a 24% increase from the same period last year, and the debt size may further expand.

Dalio further stated that the global economy is being deeply impacted by debt, currency, and economic cycles. Especially during the pandemic, governments around the world have taken on record levels of debt to support the economy and prevent collapse.

Nevertheless, Dalio does not believe that a credit crisis will occur immediately. He believes that due to low interest rates, the actual value of debt has significantly depreciated, but new debt issues are brewing.

Although the economy is "relatively balanced," there is a "large amount" of debt that needs to be extended and sold, and this debt is created by new government debt.

He is concerned that neither former President Donald Trump nor Vice President Kamala Harris will prioritize debt sustainability, meaning that regardless of who wins the upcoming presidential election, these pressures are unlikely to ease.

He predicts that the U.S. will increasingly rely on debt monetization, following a path similar to Japan's, which means an increased risk of devaluation of the dollar and other currencies.

The value of Japanese bonds has already plummeted by 90%, so artificially lowering yields each year will generate huge tax revenues.

The Bank of Japan has been adopting a negative interest rate policy for many years. In March of this year, the Bank of Japan began to change its policy and raised interest rates for the first time, indicating that they are gradually moving away from extremely loose monetary policy.

Debt monetization may trigger a global currency crisis

He also stated that if the market does not have enough buyers to absorb the debt, the Federal Reserve may have to intervene in purchases, which could lead to rising interest rates. He pointed out that Fed intervention would be a "very significant negative event," reflecting the risks of excess debt supply.

If we base it on hard currency, a credit event will occur. But based on legal tender, central banks purchasing this debt will monetize the debt.

He expects that in this scenario, global markets will see a situation where all currencies depreciate, as all currencies are relative. He believes that the future economic environment may be very similar to the conditions of the 1970s or the period from 1930 to 1945 Regarding personal investment strategies, Dalio stated that he is not optimistic about debt assets and will reduce investments in debt assets such as bonds