According to the founder of the world’s largest hedge fund, the US dollar could soon fall as much as 30% which could leave it looking like the Turkish Lira. The chairman of Bridgewater Associates, Ray Dalio has warned that the US economy is on the verge of a major currency crisis due to the unaffordable buildup of debt.
Dalio warned recently in an interview through Bloomberg that the US might have to go through a similar type of inflationary debt crisis which is currently being suffered by emerging market economies like Argentina and Turkey.
Triple-digit inflation has taken countries around the world by storm in 2018. Argentina, Iran, Turkey, Sudan, Yemen, and Zimbabwe currently have annualized inflation at the hundred and 111%, 187%, 38%, 127%, 27% and 170% and that’s not even mentioning the total destruction of the Bolivar in Venezuela.
The United States currently has unprecedented debt levels which have been exacerbated thanks to the Federal Reserve artificially propping up the economy through a zero interest rate environment over the past decade. The access to easy credit has allowed consumers to blow up asset bubbles since the financial crisis of 2008.
Ray Dalio’s ideas about the US dollar has come from his recent book “A Template for Understanding Big Debt Crisis” in which he analyzes 48 historical debt crisis in order to show how they took place.
He states that most debt crises are very similar although Dalio distinguishes between those that are “inflationary” and “deflationary”.
“When it is denominated in a foreign currency, like these countries, which have a lot of Dollar-denominated debt, then they can have a problem servicing that debt. When the Dollar goes up they don’t have enough cash and they get into that spiral of printing money which devalues their currency and makes it even harder to meet their debt obligations,” Dalio says.
The United States has continuously ran a reckless fiscal policy which has resulted in a $21 trillion national debt which goes alongside the government tax cuts which warrant another $1.5 trillion over the next decade. The United States currently has no cushion for when the economy goes into a recession or slows down.
President Donald Trump recently went on record saying he’s not worried about the US sliding into a massive debt crisis because he doesn’t think it will happen until he leaves office.
The skeptics will keep saying 'do deficits really matter?' but they tend to forget that deficits matter when financial markets decide they matter. The United States has been able to ride the coattails of its reserve currency status for years now, but at some point there is a limit because they rely on foreign funds heavily to finance the deficits.
And maybe, just maybe, the spike in USA Sovereign risk this week amid shutdown fears and debt ceiling discussions, is the first sign of a chink in the reserve currency's armor...