Dalio: The Federal Reserve faces a difficult balance, "enormous debt" may be affected by its intervention!

As the Federal Reserve cut interest rates for the first time since the early days of the COVID-19 pandemic, billionaire investor and founder of Bridgewater Associates, Ray Dalio, pointed out the issue of "a large amount of debt" still facing the U.S. economy.

The Federal Reserve decided to cut the federal funds rate by 50 basis points to between 4.75% and 5%. This rate not only determines the short-term borrowing costs for banks, but also affects various consumer products such as mortgages, car loans, and credit cards.

In an interview, Dalio said, "The challenge the Federal Reserve faces is to keep rates at a sufficiently high level favorable to creditors, while not too high to cause problems for debtors," highlighting the difficulty of this "balancing act."

A recent report from the U.S. Treasury Department stated that the government has spent over $1 trillion this year to pay interest on its $35.3 trillion national debt. The increase in debt service costs coincided with a significant rise in the U.S. budget deficit in August, which is nearing $2 trillion this year.

On Wednesday, Dalio listed debt, currency, and economic cycles as among the five major drivers affecting the global economy. On Thursday, he further elaborated on his views, expressing interest in the "large amount of debt created by governments and monetized through central banks." "These scales have never been seen in my lifetime."

During the pandemic, governments around the world have accumulated record levels of debt burdens to fund stimulus plans and other economic measures to prevent economic collapse.

When asked about his outlook and whether he sees an imminent credit problem, Dalio replied that he does not see this scenario. He said, "What I see is that due to artificially low real interest rates, the value of debt will depreciate significantly, so you will not be compensated."

While stating that the "economy is in a relatively balanced state," Dalio pointed out that there is a "large" amount of new government debt that needs refinancing and selling.

Dalio is concerned that neither Trump nor Harris will prioritize debt sustainability, meaning that regardless of who wins the upcoming presidential election, these pressures are unlikely to ease.

"I think over time, the path of debt monetization will increase, similar to the situation in Japan," Dalio pointed out how Japan has devalued the yen and reduced the value of Japanese bonds by artificially lowering interest rates.

He said, "The value of Japanese bonds has already dropped by 90%, resulting in a huge tax burden imposed annually by artificially lowering yields."

For years, the Bank of Japan has maintained its negative interest rate regime, embarking on one of the world's most aggressive monetary easing practices. It was only in March of this year that the Bank of Japan raised rates.

Furthermore, when there are not enough buyers in the market to absorb the debt supply, there may be a situation where rates must rise or the Federal Reserve may have to intervene in purchases, which Dalio believes they will do. "I think the Fed's intervention would be a very significant negative event," said the billionaire. The excess debt also raises the question of how it will be repaid He said, "If we are in a hard currency environment, then you will encounter credit events. But in a fiat currency environment, you will see debt monetization by the central bank."

In this scenario, Dalio expects the market to see all currencies depreciate because they are all relative.

He said, "So I expect we will see an environment very similar to the 1970s or the period from 1930 to 1945."

Regarding his investment portfolio, Dalio claimed that he does not like debt assets: "So if I were to lean in any direction, it would be to allocate less than the average level to debt assets such as bonds."