According to Ray Dalio, the debt crisis could crash US growth, and happen happen as quickly or as delayed as supply and demand dictate.
American hedge fund manager and billionaire investor Ray Dalio believes that the US is in a precarious fiscal situation. According to Dalio, a debt crisis is looming.
Speaking to CNBC’s Sara Eisen, Dalio said:
“We’re going to have a debt crisis in this country. How fast it transpires, I think, is going to be a function of that supply-demand issue, so I’m watching that very closely.”
The US debt levels have increased significantly in the last few years. According to the US Department of Treasury, federal spending increased about 50% between fiscal 2019 and fiscal 2021. Dalio believes that economic growth could also fall to zero.
Last week, the US national debt crossed the $33 trillion benchmark for the first time ever. The Treasury Department announced that debt levels hit $33.04 trillion, suggesting that the federal government has been borrowing heavily to fund its operations. As of Tuesday, the debt had increased by another $100 billion, adding more than $14 billion every day.
According to The Kobeissi Letter publication, the national debt has risen by $1 trillion every month since the debt ceiling crisis. The publication also notes that debt has increased by $11.5 trillion over five years. At the moment, there is no pointer of a reduction in borrowing and spending. Estimates already posit that the country’s national debt will spike to $45 trillion within four years.
US inflation is a very strong factor potent enough to affect the country’s national debt. Fortunately, the US Federal Reserve recently decided to keep interest rates unchanged. However, the July increase put these rates at a range of 5.25 to 5.55, the highest since 2001.
US National Debt Crisis and Interest Rates
On the one hand, the Fed expects another increase in interest rates. Indications suggest that the apex bank will again raise rates by 25 basis points. However, the Fed also believes inflation will likely slow down without serious economic problems.
Although this seems like good news, the high-interest rates may not disappear anytime soon. US policymakers predict that the benchmark short-term interest rate will still be over 5% next year and near 4% in 2025. This is still higher than the figure in 2019.
As of May, the US was $31.4 trillion in debt, the highest in the world. The second-highest was China at $14 trillion, followed by Japan’s $10.2 trillion, France’s $3.1 trillion, and Italy’s $2.9 trillion.
Looming Government Shutdown
White House officials and congressional leaders have now warned of the possibility of a government shutdown. By all accounts, the US government is only two days from a possible shutdown if lawmakers do not reach a deal on government funding by midnight on October 1st. According to rating agency Moody’s, a shutdown would be detrimental to the US debt rating.
“[A shutdown would reveal] the significant constraints that intensifying political polarization put on fiscal policymaking at a time of declining fiscal strength, driven by widening fiscal deficits and deteriorating debt affordability,” said the agency.