Dariola sounded the highest alarm: America's "debt heart disease" may erupt before 2029, trillions of interest will trigger a systemic crisis?

Bridgewater Associates founder and billionaire investor Ray Dalio is increasingly concerned about the sustainability of U.S. debt. Earlier this year, in an interview, he mentioned that the United States may face a debt crisis within 2-4 years, between 2027 and 2029. In this article, I will show you how his predictions are gradually becoming outdated, and what led him to draw such a negative conclusion about the U.S. economy. For each point I will discuss, I will elaborate on my viewpoint. The Biggest Problem with the U.S. Economy Dalio pointed out that the biggest problem with the U.S. economy is its debt burden: the U.S. government has to pay around a trillion dollars in interest each year, and if it weren't for this interest expense, they could spend an extra trillion dollars, and over time, this situation will worsen. Additionally, they also have to roll over the debt accumulated before, so this year they have to roll over approximately nine trillion dollars, slightly higher than the nine trillion dollars in debt. This means that once the new funds run out, they will have to issue bonds again. When the debt burden becomes enormous, this becomes a problem. The financial crisis is a turning point for debt sustainability. This crisis is so severe that the Federal Reserve began implementing unconventional monetary policies, such as quantitative easing, a policy that is already widespread in regions with low economic performance like Japan. Interest rates cannot be lowered further, and at the same time, governments are starting to run huge fiscal deficits. These choices have proven to be correct, as the U.S. economy began to grow rapidly and the stock market fully recovered lost ground in just a few years. However, a huge problem has emerged: the economy has become dependent on fiscal expansion and low interest rates. The COVID-19 pandemic became a turning point: the scale of fiscal expansion was comparable to a world war. Although the pandemic has ended, the U.S. fiscal deficit as a percentage of GDP remains between 5% and 7%, much higher than the long-term average of 2.53% (1947-2024). Interest rates are no longer close to 0%, as Dalio pointed out, and this new macroeconomic crisis is having a snowball effect on debt. Trillions of dollars in maturing debt need to be refinanced (at higher interest rates), coupled with huge fiscal deficits each year, the interest payments the government has to make continue to accumulate. Over the past five years, U.S. debt has grown by around $600 billion. Current interest payments exceed $1.1 trillion, funds that could have been used for more productive purposes (such as investing in education, infrastructure, etc.). As the U.S. government has no plans to reduce the debt burden, interest is bound to continue to rise. Dalio is deeply concerned about this and believes a serious crisis could erupt by 2029. However, analysis points out two optimistic reasons that might bring some positivity to the current situation. Firstly, although the debt-to-GDP ratio is high, the financial situation of American households is not so bad. In fact, significant deleveraging progress has been made since 2008 and continues. During the financial crisis, household debt as a percentage of GDP was as high as 100%, but now it is only 70%. Household debt service ratios are also the same. At least American households' current situation is different from what it was in 2008. At that time, debt consumed a significant portion of income, and the debt burden on average households was too high. Thus, even if a crisis erupts again by 2029, its impact on American households is not expected to be as significant as the financial crisis back then. Secondly, the increasing debt and the snowball effect of interest is not unique to the United States but a global issue. Except for Germany, other major economies are facing the dilemma of high debt levels and rising long-term interest rates. More specifically, countries like Japan and Italy might face more complex challenges as their debt levels are higher and GDP growth rates are lower than the United States. France is experiencing political turmoil, Germany's GDP growth has stalled for two years, and the UK is still grappling with high inflation, with its debt-to-GDP ratio also reaching triple digits. In other words, concerns about the direction of the U.S. are reasonable, and the situation in other countries is not optimistic either. This may bring some comfort, as finding solutions might be easier if the global community faces the same issues. What are the Possible Solutions? Regarding possible solutions, there is only one way: either the government increases cash inflows (raising taxes) or reduces cash outflows (cutting fiscal spending). As long as spending continues to surpass income by a significant margin, the debt-to-GDP ratio will not improve. This is obvious. However, Dalio proposes a mixed approach: the best option is to combine measures that restrain the economy with measures that stimulate it - a concept he calls "delicate deleveraging": if taxes are raised or spending reduced, it will curb the economy. But if monetary policy is loosened simultaneously (stimulating the economy), the two can balance each other out, reducing the debt-income ratio, and they can offset each other, this is a well-designed strategy. Dalio adds that, as such, just as happened between 1992 and 1998, by combining tight fiscal policy with loose monetary policy, the economy can ultimately find balance through "delicate deleveraging." In other words, if taxes and interest rates are raised, potential recession risks are planted; but by raising taxes and providing more borrowing incentives, the economy can grow while reducing the debt burden. While people generally take a pessimistic view, if the right measures are taken, global debt can still be brought back to sustainable levels. This chart shows that this is not the first time major economies have needed to cut fiscal deficits: this has happened post-World War II. After the war, the debt-to-GDP ratio in the UK almost reached 200%, but after decades of effort, this ratio was significantly reduced. Back to the U.S. economy, Dalio believes that the fiscal deficit should not exceed 3% of GDP. This is an upper limit, but the U.S. economy has become accustomed to deficits between 5% and 6%. If the U.S. seriously starts to cut fiscal deficits, there is still time to avoid an inevitable debt crisis. What if the 3% threshold cannot be reached? So, the question now is: who will take responsibility for reducing fiscal spending or increasing taxes? This is a key obstacle to economic recovery. Although Dalio's viewpoint on "delicate deleveraging" can be implemented, whether the 3% leverage ratio can be reached in the short term is questionable. If a politician promises to raise taxes and cut spending, can they still get elected? It all starts with the willingness of the people to sacrifice the present for a better future. This path will not be easy, but postponing the problem itself is a choice, and that choice will inevitably have consequences. Avoiding a problem will not make it disappear. Regarding this, Dalio said: "This is reality because it will create public conflicts, and it may never happen. But if you don't, you're in trouble. So, it's a choice. If you don't do it, you're responsible. Tell yourself, if you don't do this, the crisis I'm talking about will happen, I can't tell you exactly when. It's like a heart attack, you can't predict it accurately, right? I understand, you're getting closer and closer. I guess probably around three years or so, plus or minus a year." Just as a person with serious cardiovascular disease will eventually have a heart attack if they continue to lead an unhealthy lifestyle. However, a heart attack cannot be predicted, just like the U.S. debt crisis. Dalio seems quite certain that a crisis will erupt by 2029. You can't wait for the crisis to erupt before getting into the market: the potential gains you miss out on may be higher than the potential losses you might face. Dalio believes that the U.S. is currently approaching a period where there is likely to be a significant change in the monetary system, with an impact akin to the Nixon Shock (August 15, 1971). From 1974 to the beginning of 1980, the stock market as a whole performed poorly, but it wasn't the end of the world; rather, it was a period full of opportunities. However, in the long run, the U.S. stock market has multiplied several times over the decades. In sum, Dalio's points may be valid, but that doesn't mean one should avoid investing. There is no return in adopting a "wait and see" strategy forever. No one knows if a change in the monetary system will happen, and even if it does, the timing might not be right. What Does a "Debt Heart Attack" Look Like? Assuming the economy can no longer avoid a debt crisis, what would it look like? Dalio believes it will be different from the Nixon Shock. What is certain is that the Federal Reserve will engage in massive bond purchases as it did before. It may not make an official announcement, but it will intervene as it did in 2008 or 2020, only on a larger scale. In preparation for this, as in 1971, some measures may be taken, such as extending debt maturities. All these are possible. Dalio says: "So, don't expect any formal announcement from the Fed indicating the problem of U.S. debt unsustainability. It's more likely they'll do it more subtly. When the burden of debt interest becomes too heavy and the demand for U.S. Treasuries declines, the Fed will begin massive purchases of outstanding Treasuries. In addition, the Fed could extend the maturity of its debt, and I think the probability of this happening would be greater if the inflation rate exceeds the target of 2%." Dalio also points out another option, although the chances of this option are minimal: defaulting on debts under various pretexts. He explains: "We live in a world similar to the 1930s. For example, the United States froze Japanese assets in the 1930s, which is us freezing their bonds, which means they will not get money. So today, due to sanctions, a backlog of bonds, and other reasons, when I calculate who the buyers are and how much bonds we need to sell, I find a severe imbalance between supply and demand, I know what's going on. In other words, it's a hidden default. However, this is a last resort, and the likelihood of this happening is zero at present. We still have time to reverse the debt problem, just to reach the 3% threshold mentioned earlier." Why Should We Pay Attention to Dalio's Theories? Apart from his profound knowledge of economic history, the importance of his arguments lies in our experience in 2025 - he accurately predicted the environment for the remaining 9 months of the year in March. Dalio said: "The conditions of that day look like what happened on August 15, 1971, only on a larger scale. You will see supply-demand issues. You will see interest rates skyrocket, monetary tightening, just like what happened in 2020. Rates will rise. This will be reflected in rising interest rates and a depreciation of currency value, especially relative to gold or other currencies. Perhaps, even though this will affect all currencies, as they all will depreciate, you will see rising interest rates, even if the Fed adopts an accommodative policy. Then you will see the Fed taking action again, buying assets and implementing a new round of quantitative easing, and then you will see reactions similar to 2021 and 2020, not only inflation but also gold and other related asset prices will rise, that's how it will be." This is mostly accurate. This year, the dollar is depreciating against major foreign currencies and gold. Even with the federal funds rate cut, market rates will still rise. The yield on U.S. 30-year Treasury bonds is rising, but the yield on 10-year Treasury bonds remains unchanged. Despite the Fed's rate cut, long-term bond yields are still high, indicating bond market observers are not positive about U.S. Treasuries. One final prediction is: the Federal Reserve will once again roll out quantitative easing measures. This month, the Fed announced it would restart its short-term Treasury bond purchase program, buying at least $40 billion a month, continuing at least through April. Although this move officially aims to balance the bank repurchase market, strictly speaking, it is not quantitative easing, but it emphasizes the Fed's willingness to adopt a looser monetary policy in the coming months. Overall, Dalio's description of the landscape in March 2025 is gradually taking shape as time goes on: betting on a devaluation in 2026 no longer seems so far-fetched.