Ray Dalio Explains the Complexity Surrounding the U.S. Economic Situation

• Dalio says the U.S. is entering the late stage of a six-phase monetary cycle.
• Typically, the sixth stage involves the demand for a reserve currency that cannot meet the supply.
• A complex debt situation puts treasury bondholders in danger.

Bridgewater Associates founder Ray Dalio says the U.S. is on the brink of a period of great disorder, when a monetary breakdown could occur. According to Dalio, that is the fifth stage in a six-stage cycle, with the sixth stage being the period of actual breakdown of the monetary order.

The U.S. Economy is Repeating a Historical Pattern

Dalio made the statement during a podcast, where he explained the ongoing socioeconomic and sociopolitical developments in the U.S. The renowned investor highlighted the complexities of the current system, noting how it aligns with historical periods, when the U.S. transitioned across different eras.

According to Dalio, the upcoming sixth stage will be characterized by the demand for a reserve currency that is insufficient for meeting the supply. That will lead to a rise in the long rate amid the central bank’s efforts to hold it down by easing the short rate and shortening the maturity of the debt it sells.

Central Banks are Concerned About a Potential Payments Problem

In the meantime, Dalio explained that, under these conditions, existing debts and currencies fall relative to non-fiat currencies like gold, reflecting a movement by central banks and countries to hold gold as a reserve currency. The reasons behind such decisions include the prevailing demand and supply situation, alongside their fear of an emerging payments problem.

Dalio highlighted the dangers of holding traditional assets such as treasury bonds, citing the powers of the creditors, who may unilaterally impose sanctions or make drastic decisions because of the supply-demand problem. Meanwhile, the same situation could leave the creditors vulnerable, as the inability to sell those bonds could trigger a rise in interest rates.

The Consequences of Government’s Actions

Considering the ongoing situation in the U.S. financial sector, Dalio noted that the government’s system, despite addressing the issues temporarily, creates long-term debt problems. According to him, such protocols lead to a debt situation that rises until it squeezes expenditure, creating the supply-demand situation and repeating previous cycles.

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