Ray Dalio "calls out" the Trump administration: If the deficit is not reduced, a debt crisis may "strike" in three years like a heart attack!

According to the Zhitong Finance APP, Ray Dalio, the founder of Bridgewater Associates, warned the Trump administration: commit to reducing the deficit now, or a major debt crisis could erupt within three years. In an interview, Dalio stated, "If you don't do this, you're going to have trouble." He added, "I can't tell you exactly when it will come, just like a heart attack. The time is getting closer. I guess it's three years, plus or minus a year, something like that."

As Dalio issued his warning, the Trump team was striving to achieve a dual goal: maintaining large-scale tax cuts while reducing the annual deficit, which recently reached $1.8 trillion. Meanwhile, Dalio explained in his new book "How Countries Succeed or Fail" how the debt cycle works and advocated for an immediate commitment to reduce the U.S. deficit to 3% of GDP.

"If you don't do this, then you have to bear the consequences, okay? You have to bear the consequences," Dalio stated. "When the economy and heart attacks happen, you'll find that voters won't be very happy. So you have to bear the consequences."

Dalio believes that understanding history and the long-term mechanisms of the debt cycle was key to his success in founding Bridgewater, helping him navigate the 2008 financial crisis and profit during the subsequent Eurozone debt crisis.

He is now concerned that even if the U.S. needs to issue new bonds to repay existing ones, it may still face a lack of bond buyers. He is not the only one worried. JP Morgan analysts pointed out at the end of 2022 that the three major buyers of U.S. Treasury bonds (including foreign central banks, domestic U.S. banks, and the Federal Reserve) simultaneously exited the market for the first time.

Dalio stated, "When you add more debt on top of a pile of debt, not only is the existing debt a problem, but you also have to increase the sales of more debt. You have to sell this debt, and you have to sell it to individuals, institutions, or central banks and sovereign wealth funds."

"Nowadays, due to sanctions and an excess of bonds, when I calculate who the buyers are and how much we have to sell, I find there is a significant imbalance, and I know what that means."

For Dalio, a key event in his early career that ultimately led to a profound understanding of the market was President Richard Nixon's unexpected decision in 1971 to sever the link between gold and the dollar. More than 50 years later, he sees the possibility of similar market shocks—where the U.S. might at some point sanction major holders of U.S. debt and stop paying interest, or even seek to restructure its debt.

Dalio stated, "You might see the U.S. government say they will restructure the debt; they won't call it a default. They will say, 'Under this policy, we will do better.'"

When asked about the potential Mar-a-Lago agreement—assuming the U.S. could seek to devalue the dollar while maintaining its "special status" in the global financial system—Dalio dismissed the idea that the U.S. could successfully devalue its currency against other currencies.

He said, "I don't think the dollar will devalue against all other currencies. I think all other currencies will devalue along with the dollar. In other words, it depends on the major central banks, and largely on other currencies. It's an ugly competition." He stated, "This is very similar to the 1970s and also to the 1930s, when all currencies fell relative to gold or other hard assets."

When discussing the risk of an "ugly" race to the bottom in currencies, Dalio said investors must ask, "What are the stable alternative currencies? Bitcoin may be part of it, possibly a large part of it, but what are the alternative currencies? Because debt is money, and money is debt."

Dalio likes Bitcoin as a safe haven because it is different from real estate; it cannot be pinned down and is not easily confiscated or taxed.

When asked if he is more optimistic about gold now than he was a few years ago, Dalio replied, "Oh, yes. I think gold—I’m not going to drone on about gold, I don’t want people to run out and buy it... I want to limit gold positions. What I want to say is: you know far more unknowns about the future than anyone knows about the future. So we must always remain humble. What you need is proper diversification to create a portfolio."

He added that theoretically, the "prudent" proportion of gold in a portfolio could be around 10% to 15%. "This small amount of gold can provide protection and diversify the portfolio. I think the most important thing is that you don’t have too much exposure."