Ray Dalio predicts a financial collapse

The American investor warns once again that the US is in danger of a financial collapse because too much debt is being generated and there is a shortage of buyers. He also points out that inflation, low-interest rates and political fragmentation will worsen the situation.

Ray Dalio, the renowned investor and founder of the investment fund Bridgewater Associates, has been warning of the danger of a financial collapse for months. During the negotiations on the debt ceiling to avoid a default of the US administration, Dalio explained in a post on LinkedIn that it was not enough to agree on a new debt limit unless there was an agreement on how to contain or reduce spending and that “raising the debt limit the way Congress and presidents have repeatedly done will ultimately lead to a disastrous financial collapse”.

Indeed, you don’t have to be a financial guru to know that spending more than you earn and financing it with debt is the perfect recipe for economic disaster. This, however, is not necessarily always true if you have the ability to print money without consequences. The hegemony of the dollar as the world’s reserve currency and the assured demand for this currency thanks to the recycling of petrodollars gives the US a de facto “free credit card” that allows it to spend money without too much worry.

When debtors and creditors cannot be satisfied

But the Bridgewater founder points out that this is not sustainable in the long run, because increasing the debt assets and liabilities faster than generated income eventually makes it impossible to pay an interest rate that satisfies what creditors and debtors can afford. In other words, interest rates have to be high enough for the creditor to get a good return on his money, but not to the point where the debtor cannot repay his debt.

He also argues that this scenario could lead to panic and create a debt crisis similar to the bank run that precedes banking crises, but in this case against the central bank and with government bonds. A situation he describes as disastrous that “will cause financial disaster and social disruption”.

In this context, the investor believes that we are approaching this tipping point where the amount of debt issued by the government will outstrip demand, which would force a massive printing of money and a sale of government bonds that would put the central bank in an untenable position. In other words, creditors will either not lend more money and sell their debt assets – causing interest rates to rise – or force the central bank to print more money and buy debt in an attempt to keep interest rates low, thus creating inflation and causing economic activity to contract.

How to avoid or prepare yourself for the collapse

“I think you have to reform the system and have an expeditious response with intelligent bipartisanship,” Dalio notes in a Bloomberg interview. He adds, “If we continue down this path, in terms of what’s likely in the next five and ten years, it would get to a point where this balancing act becomes very difficult”.

In any case, these measures or paradigm shift depends mainly on politicians, over whom the population does not have much influence regardless of electoral results. We should bear in mind that the interests of the banks and the powers that be take precedence over those of the general public. In the face of a financial crisis, only a select minority has access to privileged information that allows them to assess the seriousness of the situation to protect their savings.

So how can we protect our finances in the face of an economic disaster that seems more than likely? Ray Dalio is clear, although he admits to owning a “little bit” of bitcoin, he prefers gold, which he describes as “universal and timeless”, adding “I don’t understand why people are more inclined towards bitcoin than gold. If you look internationally, gold is, for central banks, the third reserve asset”. In this economic context, buying gold is one of the few options that banks and people have to safeguard their money.

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