Ray Dalio warns world is on cusp of debt crisis

US needs to slash its deficit to 3% of GDP, investment guru tells the World Governments Summit

Speaking at the World Governments Summit in Dubai with Tucker Carlson, Ray Dalio, left, said there is now a big global debt issue. Antonie Robertson/The National

The world is on the cusp of an unprecedented debt crisis – that is the warning of American investment guru Ray Dalio.

Speaking at the World Governments Summit in Dubai in a conversation with Tucker Carlson, Mr Dalio said there is now a big global debt issue.

Mr Dalio, the founder of hedge fund giant Bridgewater Associates, said he had forecast this based on historical trends which revolve around five major cycles.

The first is money debt markets. The others are internal order or civil wars, natural disasters, technology and, finally, great world power conflict such as with the US and China.

“There is a supply and demand situation”, said Mr Dalio. “The way the debt cycle works is think of credit, and credit systems as being like a circulatory system. Credit brings buying power, brings nutrients to all of the system.” Debt however, is like plaque in the system, if it accumulates the system “begins to have a problem”.

“In the US, about a trillion dollars a year now goes to pay interest rates, and over the next year, we're going to have over $9 trillion of debt that we have to pay back or roll forward,” Mr Dalio said during the summit session.

US needs to slash debt

Keeping his lens on the US, Mr Dalio said that the country needs to slash its deficit. He said the United States will run a deficit of about 7.5 per cent of GDP if the Trump tax cuts are continued as planned. This, Mr Dalio said needs to be reduced to 3 per cent.

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“You have to take sharp pencils and you also have to think: what are you going to break along the way? Because you don't want to break too many things along the way, but you've got to do it fast.” said Mr Dalio.

But he believes it is possible to bring the deficit down to 3 per cent. “There's taxes, there's spending, cut the spending in various ways, cut it down as far as you can, and that becomes tolerable.”

Video: Ray Dalio speaks to The National