Dalio: The United States is heading toward 1930s-style extreme governance

Bridgewater founder Ray Dalio stated in an interview with the Financial Times that the wealth gap, collapse of values, and loss of trust have led to more “extreme” policies in the United States. Dalio said: “I think the current political and social situation is similar to what happened around the world in the 1930s and 1940s.”

Dalio stated that a politically weakened central bank will undermine people’s confidence in the Federal Reserve’s ability to defend the value of the currency, and will also reduce the attractiveness of holding dollar-denominated debt assets.

Dalio said that years of massive deficits and unsustainable debt growth have pushed the U.S. economy to the brink of a debt crisis. He noted that, even before Trump’s latest fiscal plan, presidents from both parties had witnessed the worsening situation. The new budget is expected to result in enormous overspending, which could trigger a debt-induced “heart attack” in the relatively near future. “I think about three years, at most a difference of one or two years.”

Dalio said that the U.S. budget imbalance will force the large-scale issuance of new debt, and he believes that demand for debt is unlikely to keep up with supply.

Dalio also stated that as the market begins to doubt the U.S. fiscal credibility, the Federal Reserve will face tough choices. Dalio said: “Either allow interest rates to rise, triggering a debt default crisis, or print money to buy the debt that others won’t buy.” He pointed out that both options would hurt the dollar.