The US is at a low risk of an imminent debt crisis – but high risk in the long term, billionaire investor Ray Dalio writes in a new book.
The US government debt situation is “nearing the point of no return” and approaching a “death spiral” that could threaten the stability of the world’s largest economy, he writes in the book, How Countries Go Broke: The Big Cycle, published today.
Some economists and investors have been sounding the alarm about the deficit for years. But this year, Wall Street has begun to heed caution as US President Donald Trump’s tariffs and tax bill agenda have stoked volatility in the bond market, which is the usually quiet bedrock of the US and global economies.
Investors are increasingly concerned about the potential for Trump’s “big, beautiful” tax bill to put pressure on the federal debt burden at a time when there is uncertainty about the outlook for the economy and the appeal of US assets.
In May, the rate the US government has to pay investors for a 30-year loan spiked to its highest level since 2023.
That’s because investors either sold or refused to buy bonds and demanded higher compensation in exchange for what looked like a riskier loan to the US government.
Dalio is the latest billionaire to sound the alarm over the US debt and deficit, with worries that the vast government debt will crowd out spending on essential services to leave a hollowed-out economy that can’t work for its citizens and which spooks global investors.
There is a “very low imminent risk” of a US government debt crisis, but a “very high long-term risk,” Dalio writes in the book.
“Even though this progression has happened many times in history, most policy makers and investors think their current circumstances and monetary system won’t change,” Dalio writes.
“The change is unthinkable – and then it happens suddenly.”
A higher deficit means the Treasury might need to sell more bonds to finance its spending and interest payments.
A debt “death spiral” describes when a government needs to issue more bonds to raise money to pay its existing debts, but faces less demand and has to pay investors more and more interest for them to bite.
“A spiral of rising interest rates leading to worsening credit risk, leading to less demand for the debt, leading to higher interest rates is a classic debt ‘death spiral’,” Dalio writes.
The higher interest rates investors demand to loan the government money leave less money for running a country, increase interest rates for consumers and businesses and generally leave a country with fewer options to raise cash.
“To me, that suggests that US policy makers should be more, not less, conservative in dealing with the government’s finances because the worst thing possible would be to have its finances in bad shape during difficult times,” Dalio writes.
Turmoil in the bond market
Trump’s tax bill is set to raise the deficit because it slashes tax revenues without enough cuts to spending to balance things out.
The current US deficit is on unsustainable path and is “more than the market can bear,” Dalio said at an event on May 22 in New York ahead of the book’s release.
He said that he anticipates it will be roughly three years before the US is in a “critical situation”.
“I think we should be afraid of the bond market,” Dalio said.
“I can tell you that this is very, very serious.”
Tax cuts can be a boon for Wall Street, and the stock market cheered Trump’s tax cuts during his first term.
But what makes this time different is adding to the deficit while the federal debt burden has ballooned: the ratio of federal debt to gross domestic product, or the total value of goods and services produced in the economy, soared from 104 per cent in 2017 to 123 per cent in 2024, according to the Treasury Department.
“We’re now talking about deficits and a national debt-to-GDP ratio that are really going to be unprecedented, except for recent recessionary times,” Alan Auerbach, a professor of economics at UC Berkeley, previously told CNN.
Dalio’s book comes out days after JPMorgan Chase chief executive Jamie Dimon said on Friday at the Reagan National Economic Forum that a “crack” in the bond market “is going to happen”.
“The US long bond is already near its highest levels since the (2008 financial crisis),” Ajay Rajadhyaksha, an analyst at Barclays, said in a recent note.
“As markets absorb the details of the new tax bill, and realise that deficits are likely to keep rising for the foreseeable future, the risk is that longer yields keep rising as well.”
Nor have Democrats and Republicans shown they can work together on the problem, Dalio said at the May 22 event.
“It’s like being on a boat that’s headed for rocks,” he said, “and they agree that they should turn, but they can’t agree on how to turn.”
