America's debt burden could lead to an 'economic heart attack', fears billionaire investor Ray Dalio

Ray Dalio compared the credit system to the circulatory system, which, when used well, boosts productivity and income. "...the credit/market system is like the circulatory system, bringing nutrients to all parts of the body that make up our markets and economy.

Billionaire investor Ray Dalio has cautioned the rising debt burden as potential 'economic heart attacks' for US and other economies, fearing Washington's debt servicing in ten years could reach about $50-55 trillion, which will be about 6.5-7 times its revenue.

The US government is running a large and growing budget deficit of about $2 trillion this year, adding to the total American debt of $30 trillion accumulated over the years, which is roughly six times the annual revenue.

"...the interest bill on the debt will be about $1 trillion which is about 20 percent of your enterprise’s revenue (US revenue, in this case) and half this year’s budget shortfall (deficit) that you will have to borrow to fund," Dalio said. While debt servicing consumes 20 percent of the US revenue, in addition to this interest outgo, the US will also have to pay back the principal that is coming due, which together is around $10 trillion.

The warning has come at a time when investors have been tracking tariffs too closely but not paying enough attention to the breakdown in monetary, political and geopolitical orders, said Ray Dalio, which he recently called as 'once-in-a-lifetime' events.

Read More: 'Something worse than recession': Billionaire investor Ray Dalio's fresh warning for US

"...the debt service payments — in other words, the paying back of principal and interest that you have to do to not default — is about $10 trillion, which is about 200 percent of the money coming in." This, Ray Dalio said, could soon overwhelm America's spending priorities, and without a course correction, the system is becoming increasingly unstable.

Ray Dalio compared the credit system to the circulatory system, which, when used well, boosts productivity and income. "...the credit/market system is like the circulatory system, bringing nutrients to all parts of the body that make up our markets and economy. If credit is used effectively, it creates productivity and income that can pay back the debt and interest on the debt, which is healthy." However, if this system is not used well, then it may not be able to produce enough income to pay back the debt and the interest on it, leading to 'plaque that squeezes out other spending'.

The fear is that eventually, this could snowball into a debt rollover problem, as holders of the debt may not want to roll it over and instead want to sell it.

This, Dalio said, may create shortage of demand for US debt. "...when there is a shortage of demand relative to supply, that either leads to a) interest rates rising, which drives markets and the economy lower, or b) the central banks "printing money" and buying debt which lowers the value of money which raises inflation from what it would have been." When this becomes severe, both government and the central bank may need to borrow to make debt service payments, leading to a self-reinforcing debt spiral, Dalio added.

The billionaire investor and hedge fund manager said three key markers need to be watched:

1) The amount of government debt service relative to government revenue, which he has compared to 'plaque in the circulatory system'.
2) The selling of government debt relative to demand for it, which is "like the plaque breaking off and causing a heart attack".
and
3) The amount of money printing to purchase debt once there is a shortfall in demand. Dalio compared this to a "doctor administering a heavy dose of liquidity/credit to ease the liquidity shortage, producing more debt which the central bank has an exposure to".

Dalio's solution involves reducing the US deficit to 3% of GDP, as a '3 Percent 3-Part Solution':

-Spending cuts
-Tax revenue increases
-Modest interest rate cut

"Based on my projections, spending cuts and tax revenue increases by about 4% each relative to current planning, and interest rates falling by about 1-1.5% in response, would lead to interest payments that are lower by 1-2% of GDP on average over the next decade, and stimulate a rise in asset prices and economic activity which will bring in much more revenue," Dalio said, adding that this balanced approach could stabilize US debt levels without sending a shock to the economy.

Dalio added that many major economies such as UK, the EU, China and Japan are on similar, unsustainable paths, advising investors to diversify across geographies and asset classes, reduce exposure to debt assets like bonds, hold gold, and 'a bit of Bitcoin' to hedge against any debt crises.

"Most countries have similar debt and deficit problems. The UK, EU, China, and Japan all do. That is why I expect a similar debt and currency devaluation adjustment process in most countries, which is why I expect non-government produced monies like gold and bitcoin to do relatively well."

Dalio added, "....as general advice, I suggest diversifying well in asset classes and countries that have strong income statements and balance sheets and are not having great internal political and external geopolitical conflicts, underweighting debt assets like bonds, and overweighting gold and a bit of bitcoin. Having a small percentage of one’s money in gold can reduce the portfolio’s risk, and I think it will also raise its return." Ray Dalio's Bridgewater is backing diversification to offset the impact of tariffs on global growth.

Dalio has released his latest book 'How Countries Go Broke: The Big Cycle' where he makes the case that America's debt burden is 'nearing the point of no return', approaching a 'death spiral' threatening its economic stability.

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