In Dalio’s view, servicing that debt squeezes out more productive spending, makes us beholden to investors who are increasingly reluctant to buy our bonds (Hello China!), and prompts actions like interest-rate hikes or currency devaluation that can harm the economy. “You get both the central government and the central bank creating debt to pay for debt and you begin a spiral,” he says. “There are no easy answers.”
He also suggests a “3% solution” that involves halving the annual deficit-to-GDP ratio to 3% by cutting spending, raising taxes and lowering interest rates. For investors, Dalio has long preached diversification, which he defines as a portfolio of 15 uncorrelated assets. As for Fortune 500 leaders, Dalio’s advice is to “immunize yourself: What is a currency-neutral position? What is an interest rate-neutral position? Do you have secure funding? What is your flexibility for being able to source?”
