Ray Dalio, founder of the hedge fund Bridgewater Associates, warns of a looming “debt crisis heart attack” for the U.S., pointing to rising deficits, interest costs, and waning treasury demand. 

However, despite these concerns, interest payments remain a manageable slice of tax revenue, and significant portions of new spending target productive investments in infrastructure and industry. 

If executed wisely, these investments can fuel future economic growth and tax revenue, mitigating long-term debt risks.

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The billionaire founder of the hedge fund Bridgewater Associates, Ray Dalio, has seen more than a few market cycles and generated huge profits during the 2008 financial crisis and euro-zone debt crisis.

That’s why when he warns that the U.S. is three years away from a “debt crisis heart attack,” people listen.

In a recent interview on Bloomberg’s Odd Lots podcast, Dalio laid out a grim scenario.

He said rising deficits, ballooning interest costs, and shrinking demand for U.S. treasuries are all signs of a looming tipping point.

If the government doesn’t act now, he argues the U.S. could face a funding crisis and a breakdown in its global financial position.

Dalio believes the U.S. is entering the final stages of a debt supercycle, a phase where structural deficits spiral and politics makes real reform impossible.

It’s a provocative message… but when you look at the numbers more closely, the story isn’t so one-sided.

There’s no question that deficits are high. Last year, the U.S. posted a $1.8 trillion shortfall.

Interest costs are rising too, with 10-year Treasury yields now hovering around 4.25% to 5%.

Even at those rates, math doesn’t justify panic.

Each $1 trillion in new borrowing costs the government about $42 billion to $50 billion per year in interest. That’s roughly 1% of the $4.3 trillion the U.S. collects annually in federal tax revenue.

The main point is that debt is growing, but so is the economy.

More importantly, this isn’t borrowing just to pay the bills. Much of the recent spending is being directed toward long-term investment.

The Biden administration’s CHIPS Act, Inflation Reduction Act, and Infrastructure Investment and Jobs Act are each designed to improve U.S. competitiveness, productivity, and resilience.

In other words, these are investments that will generate more profits in the future.

So, if government spending is well allocated, it won’t be a drain on the economy but a fuel for future growth.

Additionally, the International Monetary Fund has studied public investment multipliers for years.

Their research shows that in most environments, government spending on infrastructure and industrial policy produces more than a one-to-one return.

In normal times, the multiplier averages around 1.1 to 1.2. That means every dollar spent generates more than a dollar in GDP.

… and when interest rates are low, or when economies are operating below potential, that number can rise to 1.5 or higher.

Considering the cost of borrowing is at most 5% currently, these multiplier levels show that public investment creates additional value even after paying the interest.

Dalio fears that borrowed money will go to waste or worse, crowd out private investment.

However, many of the projects underway are already attracting follow-on private capital, and borrowing costs remain historically moderate.

If public money leads to faster growth and higher tax revenue, the long-term debt picture looks far less alarming.

Dalio is a brilliant student and also a teacher of economic history. His concerns about unsustainable deficits and political gridlock deserve serious attention.

… but the solution isn’t to slam the brakes on public investment. If anything, the key to long-term stability lies in spending better, not necessarily spending less.

If interest costs remain a small and manageable slice of federal tax revenue, and new borrowing goes toward productive uses, the U.S. is far from a fiscal heart attack.

Investors shouldn’t let doomsday headlines cloud the bigger picture. For now, the U.S. is still betting on growth and that should give investors plenty more room to run.

Best regards,

Joel Litman & Rob Spivey
Chief Investment Officer &
Director of Research
at Valens Research