Last updated: May 18, 2023 at 4:26 PM ET
First posted: May 18, 2023 at 3:04 PM ET
That’s the billionaire investor and founder of Bridgewater Associates, Ray Dalio, warning via a LinkedIn post that while the US government is likely to avoid a debt default for the first time, the lack of effective restraint over spending raises big problems down the line.
Dalio wrote that he doesn’t expect the battle between the Biden administration and Republicans in Congress over increasing the debt limit to result in a default — or if it does, it will be quickly resolved. But any agreement is unlikely to deal objectively with the “big issues” …
That’s the billionaire investor and founder of Bridgewater Associates, Ray Dalio, warning via a LinkedIn post that while the US government is likely to avoid a debt default for the first time, the lack of effective restraint over spending raises big problems down the line.
Dalio wrote that he doesn’t expect the battle between the Biden administration and Republicans in Congress over increasing the debt limit to result in a default — or if it does, it will be quickly resolved. But any deal is unlikely to deal with the “big issues” in an objective way, and instead is likely to adjust things in ways that won’t matter much, and make no real commitment to deficit reduction in the years ahead.
be seen: Confronting the debt ceiling: Here’s what could go into a bipartisan deal
Speaker of the House Kevin McCarthy, D-Calif., to reporters Thursday that he believes a final bill to raise the borrowing limit should be on the House floor next week and that he can “See way. McCarthy and President Joe Biden appointed representatives to negotiate a deal while Biden attended a G7 meeting in Japan.
Both said they were confident a deal would be reached before the government was unable to pay its bills, which could come as early as June 1. Concerns about the debt ceiling have led to volatile trading in short-term Treasury notes that will be affected. A default is possible, but the fears haven’t put permanent pressure on the stock market.
Dow Jones Industrial Average
DJIA
rose 115.14 points, or 0.3%, on Thursday while the S&P 500 rose
SPX
It rose 0.9%, to close at its highest level in nearly nine months.
is reading: The ‘doomsday machine’: This is what would happen if the debt ceiling was breached
Continuing on the same path, Dalio argues, is not sustainable “because debt assets and liabilities increase faster than income ultimately makes it impossible to pay creditors a high enough real interest rate (i.e. inflation-by-inflation rate) at the same time to cause them to hold debt assets without an interest rate.” The real interest rate is too high for debt borrowers to be able to service their debts.”
When the amount of debt sold is more than what debt buyers want to absorb, central banks must decide whether to allow interest rates to rise to balance supply and demand, which would crush debtors and the economy, or print money to buy the debt. The latter option is inflationary and encourages debt holders to sell, making the debt imbalance worse.
“Either way, it leads to a debt crisis similar to the bank flows that we are seeing, but with government bonds being what is being sold and the rush on the bank being what is being sold on the central bank,” Dalio wrote.
At the same time. Failing to increase the debt limit, Dalio said, would lead to default and cut back on essentials for those who couldn’t afford the cuts, causing financial chaos and social unrest.
An agreement to raise the cap would be accompanied by an agreement between Biden and McCarthy, Dalio writes, that would overcome the objections of the “more extreme” members of both parties, who either did not want to raise the debt ceiling or did not want to. Willing to compromise on the long-term budget approach.
#Ray #Dalio #debt #ceiling #controversy #setting #stage #catastrophic #financial #meltdown