Following the Federal Reserve's unexpected interest rate cut of 50 basis points 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 enormous debt, while the Federal Reserve is struggling to maintain a balance in interest rates.

The central bank decided to lower 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 mortgages, auto loans, and credit cards.

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

Advertisement

According to the latest report from the U.S. Department of the Treasury, the total debt of the United States currently stands at $35.3 trillion.

To repay this debt, the Treasury has already paid over $1 trillion in interest this year.

The Treasury forecasts that the fiscal deficit in 2024 will approach $2 trillion, a 24% increase from the same period last year, and the debt scale may further expand.

Dalio further stated that the global economy is deeply affected by debt, currency, and economic cycles.

Especially during the pandemic, governments around the world have taken on a record level of debt to support the economy and avoid collapse.

Nevertheless, Dalio does not believe that a credit crisis will occur immediately.

He believes that due to low interest rates, the real value of debt has significantly depreciated, but new debt issues are brewing.

Although the economy is "in a relatively balanced state," there is a "large amount" of debt that needs to be rolled over and sold, which is new debt created by the government.

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

He predicts that the United States will increasingly rely on monetizing debt, taking a path similar to Japan, which means an increased risk of devaluation for the dollar and other currencies.

Japan's bond value has already plummeted by 90%, so artificially lowering yields every year generates huge taxes.

The Bank of Japan has been implementing a negative interest rate policy for many years.

It was only in March this year that 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 extreme loose monetary policy.

He also stated that if the market does not have enough buyers to absorb the debt, the Federal Reserve may have to intervene and purchase, which could lead to rising interest rates.

He pointed out that the intervention of the Federal Reserve would be a "very significant negative event," reflecting the risks brought by an excess supply of debt.

If we base it on hard currency, then a credit event will occur.

But based on fiat money, central banks purchase these debts, monetizing them.

He predicts that in this situation, the global market will see a situation where all currencies fall, as all national currencies are relative.

He believes that the future economic environment may be very similar to the conditions of the 1970s or between 1930 and 1945.

Regarding personal investment strategies, Dalio said that he is not optimistic about debt assets and will reduce investments in debt assets such as bonds.