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'Disastrous financial collapse': Ray Dalio on problem bigger than raising debt ceiling

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(Kitco News) Raising the U.S. $31.4 trillion debt limit without fixing the issue at large is a "kick-the-can-down-the-road" type solution that will eventually lead to a "disastrous financial collapse," billionaire and Bridgewater's founder Ray Dalio warned in a LinkedIn post.

With the so-called X-date (June 1) just over a week away, the most likely outcome in this debt ceiling debate will be either avoiding default or raising the debt cap soon after the U.S. fails to pay its bills, said Dalio.

But that is not the most critical outcome since increasing the debt limit without dealing with the issue more substantively would lead to a disaster.

"Increasing the debt limit the way Congress and presidents have repeatedly done, and most likely will do this time around, will mean there will be no meaningful limit on the debt. This will eventually lead to a disastrous financial collapse," Dalio wrote.

Spending more than the country earns is not sustainable. With debt increasing faster than income, it will be impossible to pay a high enough rate to convince creditors to hold the debt while at the same time having an interest rate not too high for borrowers to service their debts, according to Dalio.

"When debt assets and liabilities reach the point that the amount of debt sold is greater than the amount of debt that buyers want to buy, central banks are faced with a choice: they either have to let interest rates rise to balance the supply and demand, which is crushing to debtors and the economy, or they have to print money and buy the debt, which is inflationary and encourages holders of the debt to sell the debt, which makes this debt imbalance worse," he said.

This will eventually create a debt crisis that will see a run on the central bank with government bonds getting sold.

"That is how all reserve currencies and big debt cycles have ended," Dalio warned. "We are approaching that tipping point in which the amount of debt sold by the government will be greater than the demand for it, which could lead to the central bank having to print money and buy bonds and a sale of government bonds that would put the central bank in that untenable position I just described."

Not increasing the debt ceiling will trigger financial havoc and social upheaval as well. This is why Dalio supports "a smart, bipartisan plan" that will simultaneously deal with the country's financial, economic, and national debt issues. "I think the system needs to be reformed," he said.

In his idea scenario, Dalio envisions reforms that will see the U.S. "collectively earn more than we spend and grow the pie and divide the pie well, with sustainable government finances."

Increasing productivity is key to this plan. "Improving productivity is the only way incomes can rise to be greater than expenditures, and that's what's required to manage debts well," he added.

The chances of that actually happening are low, and the most likely outcome is a big clash between the extreme elements of the Republican and Democratic parties.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.