Recently in the United States, the public debt has surpassed $40 trillion, with the 30-year Treasury bond yield rising to its highest level since 2007. This has put pressure on the stock market as the bond market sells off, while gold has risen to a three-month high. The fluctuations in bond markets and other asset prices have increased market concerns about the potential impact of the continuous increase in U.S. debt. Ray Dalio, the founder of Bridgewater Associates, has warned that failure to address this issue promptly could trigger a debt crisis within five years, proposing three key response strategies.
The total size of U.S. public debt broke through the $40 trillion mark on the 18th. The U.S. Treasury announced on August 19 that it would double the size of its ultra-long-term bond repurchases, raising the limit for each repurchase to over $40 billion. Following this announcement, the long-term bond yield briefly decreased but rebounded the next day, with the 30-year Treasury bond yield remaining above 5%.
Meanwhile, spot gold has climbed back to $4,600 per ounce, and Bitcoin has surged over 24% in the week. The trends in U.S. bonds, gold, and cryptocurrencies are influenced by various factors, but the recent simultaneous fluctuations in multiple asset classes have drawn increased market attention to changes in debt, currency, and long-term capital costs.
In response to the recent capital market turmoil, Ray Dalio, a renowned investment figure, published an article on social media on the 21st titled “How Nations Go Bankrupt: The Logic Behind Current Changes,” where he pointed out that the U.S. government’s fiscal situation is at a turning point. If not addressed promptly, the continued accumulation of debt could lead to significant economic trauma in the future.
Dalio cautioned that a U.S. debt crisis could potentially erupt within a year, with a high probability of occurring within three years if the current trajectory persists, and no later than five years.
According to Dalio’s analysis, his concern lies not in the sudden loss of debt repayment ability in the U.S. in the short term, but in the potential worsening imbalance between debt and fiscal revenue over time. The U.S. fiscal deficit still exceeds 6% of GDP, with interest payments reaching $1.2 trillion this fiscal year. As the debt size increases, the interest burden correspondingly rises, potentially further inflating the fiscal deficit, requiring the government to continue issuing new debt for financing. If investors demand higher yields for long-term debt, the government’s financing costs may also increase.
Dalio’s prescription for this scenario is the “Three Steps to Move Forward Together.” He believes that in order to reduce the deficit to 3% of GDP, a relatively balanced approach is needed to simultaneously cut government spending, increase tax revenues, and lower interest rates, avoiding any overly aggressive policy that could cause severe economic trauma.
However, he also emphasized that the decrease in interest rates must stem from improvements in economic and fiscal fundamentals, rather than artificially pushing rates down by the Federal Reserve, to prevent potentially severe consequences.
It is worth noting that regarding how to alleviate massive debt and maintain economic growth, U.S. Treasury Secretary Benson previously proposed the “3-3-3 plan,” which also sets reducing the fiscal deficit to 3% of GDP as a core goal. The other two goals of the plan are achieving a real annual GDP growth of 3% and increasing daily crude oil production by 3 million barrels. Increasing energy supply is seen as helpful in easing energy prices and inflationary pressures.
Dalio’s analysis also reflects that reducing the deficit to 3% of GDP faces multiple practical constraints. Many U.S. government expenditures are statutory rigidities or deemed necessary, allowing limited room for cuts. With the deficit still near 6% of GDP, Dalio thus places “increasing taxes” alongside cutting spending and lowering interest rates as one of the three measures. However, taxation has long been a contentious issue in the U.S. political environment, making the implementation of related adjustments more challenging.
The 30-year U.S. Treasury bond yield remaining above 5% primarily reflects factors such as the U.S.’ own debt, fiscal, and inflationary conditions. However, recently, the long bond yields of other major developed economies have also risen in sync, expanding market concerns beyond just the U.S.
Recently, Germany’s benchmark 30-year bond yield rose to 3.763%, hitting a 15-year high, while France’s yield for similar-term bonds reached its highest level since 2008. Japan’s 30-year bond yield also climbed to 4.1285%, surpassing the 30-year peak set earlier this spring.
The reasons for the rising long-term bond yields in different countries are not entirely alike. The U.S. is facing ongoing massive fiscal deficits and debt issuance demands. Japan is further affected by monetary policy adjustments and long-term demographic changes, while Europe faces pressures from increased energy, defense, and fiscal expenditures.
Sun Guoxiang, a professor at the Department of International Affairs and Business at Nanhua University in Taiwan, previously analyzed for Epoch Times, stating, “The synchronous rise in global long-term bond yields this time seems to be influenced primarily by inflation, central bank policies, and market sentiment, but at a deeper level, it is due to expanding fiscal deficits, increased debt supply, and investors demanding higher term premiums.”
The increase in long bond yields does not necessarily mean a wholesale exodus of funds from the bond market. For some long-term investors, the rising yields themselves may enhance the attractiveness of assets such as U.S. bonds. However, Dalio’s analysis focuses on another scenario: if debt continues to increase and further affects inflation, the purchasing power of currencies, or market perceptions of fiscal conditions, debt-related assets may face long-term risks distinct from short-term price fluctuations.
Based on this assessment, Dalio suggests that investors reduce the allocation of debt assets such as bonds. He believes that allocating 10% to 15% of a portfolio to gold can help manage currency and debt risks; he also anticipates relatively stronger performance in cryptocurrencies like Bitcoin.
In the same week that Dalio issued the warning, gold rose to a three-month high, and Bitcoin surged over 24%. Sun Guoxiang believes that the current scenario of “bond yields rising while gold also rises” is not contradictory, as both may reflect the same thing: “The market demands higher returns to hold government bonds long-term, while also increasing the need for non-sovereign assets like gold.”