Dalio warns that the U.S. fiscal situation has reached a "turning point"; a debt crisis may erupt in the next 1 to 5 years. He suggests reducing bond holdings and increasing allocations to gold and Bitcoin.

Ray Dalio, founder of Bridgewater Associates and billionaire investor, has once again raised concerns about the financial situation in the United States. He believes that the announcement by Treasury Secretary Janet Yellen this week to expand long-term Treasury bond buybacks, combined with the surge in long-term U.S. Treasury yields and Japan's reduction of its exposure to the U.S. bond market, may indicate that the U.S. finances are approaching a critical turning point. If the debt issue is not addressed in a timely manner, the U.S. could face a more severe debt crisis in the coming years. On Friday, Dalio posted on social media that he believes the U.S. government's financial situation has reached a "turning point." He warned that if action is not taken now, debt will continue to accumulate until it becomes unmanageable without causing significant economic disruption. This week, the U.S. Treasury Department announced it would expand its long-term Treasury bond buyback operations, at least doubling the originally planned scale. Yellen further stated that the Treasury would increase the buyback size, with single operations possibly exceeding the previously announced $4 billion, aiming to improve liquidity in the long-term U.S. Treasury market. However, Dalio believes that the Treasury's direct ability to buy bonds is actually "very limited." In his view, the recent actions taken by the Treasury, when viewed alongside the substantial rise in long-term Treasury yields and changes in overseas investor demand for U.S. government bonds, merit increased caution from investors. The U.S. is currently experiencing a "shortfall" with a continuously expanding fiscal deficit. Dalio pointed out that the U.S. government's current expenditures exceed its revenues by about 40%, which is one of the fundamental reasons for the ongoing expansion of the fiscal deficit. The U.S. budget deficit exceeded $432 billion in July. Yellen previously indicated that under the Trump administration, the U.S. fiscal deficit might have peaked, and the government team is exploring plans to cut hundreds of billions of dollars in spending. However, Dalio believes there is very limited room for significant fiscal spending cuts, as a considerable portion of the governments expenditures have already formed long-term commitments or are deemed necessary for the functioning of the government and society. After years of persistent deficits, the U.S. debt levels have far surpassed the governments annual revenue. Dalio likened this to corporate finance, stating that if the U.S. government were viewed as a company, the annual debt-related expenditures, including repayment of principal and interest, amount to about $11 trillion, roughly 200% of its annual revenue. As the debt levels continue to rise, the pressure to repay principal and pay interest will further increase in the future. Dalio proposed a "three-pronged" approach: cutting expenditures, increasing revenue, and lowering interest rates. Regarding how to address the fiscal issues in the U.S., Dalio believes that three measures need to be taken simultaneously to reduce the fiscal deficit as a percentage of Gross Domestic Product (GDP) to about 3%. Firstly, the U.S. government needs to cut fiscal expenditures. Secondly, it needs to increase tax revenues. Thirdly, it needs to lower overall interest rates to alleviate the financing costs of government debt. However, Dalio emphasized that these three measures must be advanced together and cautiously, without overly relying on any one approach. He stated that if any one adjustment is too dramatic, it could severely impact the economy. For example, relying solely on drastic cuts in government spending could significantly slow economic activity; similarly, excessive increases in taxes could also stifle growth. Dalio also specifically warned against pushing interest rates down through administrative pressure. He indicated that if the Federal Reserve artificially lowers rates in an abnormal manner, it would be a very poor decision. Dalio believes the U.S. should address fiscal issues while the current economic situation is still relatively healthy because once the economy enters a recession, the government typically needs to increase fiscal spending to stimulate the economy, making it even more challenging to address the debt problems. When asked when the U.S. debt issue might realistically evolve into a crisis, Dalio stated that the timing is influenced by various factors such as war, political changes, and the economic environment, making it difficult to predict accurately. Based on the current trajectory of development, if there is no change in policy direction, the U.S. could enter a debt crisis in as little as one year, and at most within five years. Dalio stated that his rough estimate is that if the U.S. continues on its current path, a debt crisis could emerge in about three years, with a potential fluctuation of two years either way. However, he also clearly acknowledged that this is just a very rough time estimate, not an accurate prediction. In light of potential fiscal and debt risks, Dalio believes that investors should adjust their asset allocations accordingly. He recommends that investors decrease their allocation to debt-related assets, including bonds; at the same time, they could consider allocating 10% to 15% of their portfolios to gold and holding a "small amount" of Bitcoin to enhance portfolio diversification against fiscal and monetary risks. Overall, Dalio's focus is not on a specific debt figure such as $40 trillion, but on the long-term cycle forming in the U.S. financesnamely, high fiscal deficits driving continuous debt increases, substantial financing needs potentially pushing long-term rates higher, and higher rates further increasing government interest expenditures and future financing demands. In his view, if the U.S. cannot simultaneously make adjustments to spending, taxes, and financing costs while the economy is still relatively strong, this cycle may ultimately develop into a more severe fiscal and financial market crisis.