Ray Dalio (pictured), founder of Bridgewater Associates, the world’s biggest hedge fund, has warned the dollar could lose almost a third of its value in the relatively near future. He reckons the US currency could face a “crisis” two years from now, as the gap between government spending and tax receipts expands sharply in the wake of US president Donald Trump’s tax cuts.
By then, the boost that the US economy has experienced from recent tax cuts will have faded and the economy will be weakening. However, at the same time the government will be forced to boost its spending on various long-term obligations – such as pensions and healthcare.
The risk, says Dalio, is that the US won’t be able to sell enough government debt (Treasuries) to fund its growing budget deficit. But nor will it be willing to risk choking off growth by raising interest rates. As a result, the Federal Reserve – the US central bank – will have to print money to fund the gap. This direct monetisation of the deficit will help weaken the dollar, sending it down by around 30% in all. “It’ll be more of a dollar crisis than a debt crisis,” Dalio told Bloomberg’s Erik Schatzker, “and I think it’ll be more of a political and social crisis.”
Dalio – who has also consistently drawn parallels between the 1930s and today’s surge in populist politics – has recently released Bridgewater’s exhaustively-researched guide to financial crises, A Template for Understanding Big Debt Crises, which can be downloaded free from his website, Principles.com.