Billionaire investor Ray Dalio says this is how a stagflationary financial crisis could unfold in the US
Original author: Jennifer Sor, Business Insider
Compiled by: Peggy, BlockBeats
Editor’s Note: Ray Dalio has once again placed the risks to the U.S. economy within a broader historical context.
In his view, the growing U.S. deficit and sustained government spending exceeding revenue may ultimately force the government to continue borrowing and printing money. This could make inflation harder to control and keep interest rates elevated, thereby suppressing consumption, investment, and financial markets. If economic growth also slows, the U.S. could enter a period of "stagflation."
This is also why Dalio recommends allocating to gold. Gold here is not merely a safe-haven asset, but a hedge against the depreciation of fiat currencies. When markets begin to worry about the purchasing power of the dollar and the creditworthiness of U.S. debt, gold often regains attention.
However, the U.S. dollar remains the central currency in global financial markets. Capital is still flowing into the United States, and demand for U.S. Treasuries has not significantly collapsed. What Dalio truly wants to highlight is that the risks to the dollar system do not erupt suddenly, but accumulate gradually through high deficits, high inflation, war, and eroding trust.
How long can the dollar’s credibility continue to be unquestioningly trusted by global markets when fiscal deficits, inflationary pressures, and geopolitical conflicts all rise simultaneously?
The following is the original text:
Ray Dalio is issuing a warning about the current state of the global economic order.
The founder of Bridgewater Associates and billionaire investor said he sees troubling signs: the U.S. economy is heading toward a "disorderly" phase characterized by rising fiscal deficits, increasing inflation, and weakening confidence in the U.S. financial empire.
This week, on the latest episode of the podcast "Interesting Times," Dalio described a possible scenario in which the United States could slide into a financial crisis due to excessive borrowing and monetary expansion.
Related reading: "Ray Dalio's Latest Interview: Can the U.S. Escape the Decline Cycle?"
Dalio said: “A financial crisis means spending capacity will become extremely limited.” He speculated that under such circumstances, the U.S. may not be able to afford its military and social expenditures. “You’ll be greatly constrained. As demand fails to match supply, interest rates will rise, thereby dampening borrowing and impacting markets, and so on.”
Deficits are rising in the United States and many countries around the world. According to U.S. Department of the Treasury data, the U.S. spent $7 trillion in the last fiscal year, while government revenue amounted to $5.2 trillion.
Dalio noted that historically, higher deficits have often led to economic "problems." He means that governments typically cover these costs by printing more money, which can lead to currency depreciation and rising inflation.
The end result could be a “stagflationary environment,” which refers to the scenario financial markets fear most: high inflation coupled with weak economic growth. He added that he believes investors should allocate 5% to 15% of their assets to gold to weather “truly bad times.”
Dalio said: "Looking back at history, we see that during all such periods, all fiat currencies decline while gold rises."
For a long time, Dalio has emphasized the importance of gold as a hedge against economic turmoil and has repeatedly reminded his followers to pay attention to the "currency depreciation trade." This logic holds that higher deficits and higher inflation will erode the value of currencies, making assets such as precious metals more attractive as stores of wealth.
Ultimately, the turmoil facing the global economy may mean that no single currency can reliably store wealth. Last year, he noted that the rapid rise in gold prices was a sign that fiat currencies had begun to weaken.
In recent years, many economists have questioned the impact of "de-dollarization," which refers to countries reducing their use of the US dollar. However, Dalio suggests that the global monetary order may indeed change over time. He uses the British pound as an example, noting that the pound lost its status as the world’s reserve currency in the mid-20th century.
He also noted that this bears similarities to the current tensions surrounding Iran. The risk of war could undermine confidence in the United States as an economic and political power. In particular, rising oil prices have significantly heightened market concerns about inflation.
Dalio stated, "We don't know what the world will look like in three to five years. There is so much we don't know compared to what we do know. I believe we can be certain that we are living in an increasingly disordered era, and these are the greater risks."
Despite increasing market discussions about currency depreciation, investment flows into the United States have continued to accelerate in recent years, and demand for U.S. Treasury securities has remained stable. These two signals indicate that the U.S. dollar still holds a dominant position in financial markets.
The U.S. Dollar Index measures the performance of the U.S. dollar against a basket of foreign currencies. So far this year, as investors priced in higher interest rate expectations, the U.S. Dollar Index rose as much as 2%; however, recent market hopes for a swift end to the Iran conflict have cooled the dollar's upward momentum. On Thursday, the U.S. Dollar Index traded around 97.85, roughly flat for the year.
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