Bridgewater Associates founder Ray Dalio proposes a 3% solution: concerns over the US debt crisis

Ray Dalio, founder of Bridgewater Associates, the world's largest hedging fund, proposed the '3% Solution' to reduce the US fiscal deficit from 7.5% of Gross Domestic Product (GDP) to 3% to stabilize the economy. He also emphasized the importance of interest rates, diversified investments, and alternative currencies, while warning of the threat that political division poses to market stability.

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Potential Debt Crisis in the United States

Ray Dalio recently discussed U.S. debt at the World Economic Forum in Switzerland, in an interview with CNBC's 'Squawk Box,' quoting from his recent book 'The Changing World Order: Why Nations Succeed and Fail,' explaining the mechanism of national debt and strategies for dealing with it.

He emphasized that the current fiscal deficit in the United States has reached 7.5% of GDP. If the deficit cannot be balanced, it may cause a market imbalance between supply and demand, leading to turmoil in the bond market.

The current debt scale has grown so large that issuing a large amount of government bonds could cause an imbalance of supply and demand; if bond holders start selling, the resulting oversupply will lead to even more serious problems.

3% Solution

In response, he proposed the '3% solution,' calling for reducing the proportion from 7.5% to 3% to stabilize the market and avoid resulting economic problems.

Government Intrerest Rate is the basis and basis of all markets, including the stock market and the bond market. Therefore, the key figure to solve this problem is 3%.

Dalio emphasizes that to achieve the 3% deficit target, action can be taken not only by increasing taxes or cutting expenses but also by reducing the interest cost of debt when the economy is doing well.

When the Interest Rate falls, the country can reduce the cost of debt payment, thereby achieving stability goals faster.

Political differences have become the most urgent task

Regarding specific Intrerest Rate measures, Dalio frankly stated that the biggest challenge in addressing the deficit is not an economic problem, but political differences:

First of all, all members of Congress and the President should reach a consensus to prioritize controlling the deficit within 3% of GDP. If consensus cannot be reached on specific measures, adjustments to expenditures and taxes can be made proportionally. This is an alternative option, but it is important to achieve the 3% target.

In other words, the current political division hinders the implementation of practical policies, and this situation may further affect market stability.

AI still has potential application scenarios

At the same time, considering the current high level of the price-to-earnings (PE) ratio in the stock market, when Dalio was asked whether this is a good investment environment, he indicated that there are potential areas in the market, but investors should carefully monitor the risks brought by changes in Intrerest Rate:

Certain areas have already risen significantly, especially in innovative fields such as Artificial Intelligence (AI), but many application scenarios of AI are still underestimated. This is a potential area.

He added, "The market movement is affected by the deficit problem, and if the Intrerest Rate rises, the market may fall."

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The value of diversification in investments and alternative currencies

In terms of investment strategy, Dalio emphasizes the importance of diversification, and he suggests that investors should diversify their assets to avoid over-concentration in specific markets:

Everyone needs to have a better understanding of the concept of 'alternative currency', such as gold, which is an effective form of diversification. Bitcoin and debts are also forms of currency, but the risk lies in the fact that they are essentially 'promises to pay in the future', so they need to be carefully evaluated.

In summary, Dalio emphasized the importance of fiscal deficits, interest rates, and diversified investments in the current global economy during the interview, while warning market participants to have a deeper understanding of economic mechanisms and prepare for possible risks in the future.

This article, Bridgewater Associates founder Ray Dalio proposes a 3% solution: the US debt crisis is worrying, first appeared on Chain News ABMedia.