Ray Dalio, founder of Bridgewater, stated that as government debt grows faster than revenue, the US fiscal situation is approaching an accelerating 'turning point'.
In a recent interview, he stated that as the US government borrows more and more money to pay its debts without any reduction in spending, this loophole has become increasingly deep.
Dalio predicted, "Its operation can only continue to accelerate... We are in a stage of this acceleration, which has led to supply and demand issues
US debt is approaching the acceleration inflection point
With the snowball of US debt growing, one of the problems is political dysfunction.
Earlier, Fitch, one of the three major rating agencies in the United States, had downgraded the credit rating of the United States, and Moody's, another authoritative rating agency, also downgraded the outlook for the debt rating of the United States this month.
Dalio asked, "As a country, are our income statement and balance sheet good - are our assets more than our liabilities? The worse the situation gets, the more long-term problems we will face. You can tell from the numbers. This is just a matter of numbers. We are approaching that turning point
Dalio's warning comes at a time when the total debt of the United States has exceeded 33 trillion dollars. According to the data of the Ministry of Finance, the total debt of the United States is $33.7 trillion. Since the outbreak of the COVID-19 epidemic in early 2020, the total debt of the United States has surged by 45%. Among them, the public owes $26.7 trillion in debt. Last year, the government increased its deficit by $1.7 trillion to maintain the pace of spending.
The challenge facing the US government is that even if the US does not need to pay off all its debts, it does need to pay the huge interest that this debt brings. However, in the current situation of weakening market demand and surging supply, these debt servicing costs are rising, casting a growing shadow on the prospects of US treasury bond bonds.
Overseas buyers are evacuating
Dalio warned that these problems have affected foreign demand, and pointed out that 40% of US debt is sold overseas, but these overseas buyers are now retreating.
As many major economies around the world turned to monetary tightening mode after the epidemic, global central banks, as big buyers of US treasury bond bonds, have taken a step back.
Last week, the US Treasury Department released the International Capital Flow Report (TIC) for September 2023. The report shows that Japan, China and the United Kingdom, the top three overseas "creditors" of the United States, all reduced their holdings of US treasury bond in September, which pushed the size of US treasury bond held by overseas investors in that month to the lowest level since May.
At the same time, overseas private sectors are also slowing down the pace of buying US bonds. The data analyzed by Torsten Slak, Chief Economist of Apollo Management, confirms this.
The data graph compiled by Slock shows that foreign private buyers (green line in the figure below) once increased their purchases of US bonds during the Federal Reserve's interest rate hike in 2022. But by 2023, as the Federal Reserve's interest rates peaked, they had been slowing down their buying pace.
Source: Apollo Management Company