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May
22
2023

What Should Be Done About the Debt Ceiling Argument Between the Democrats and Republicans?
Ray Dalio

I was recently asked what I thought of the debt ceiling debate. To answer that question, I will first explain what I think is likely to happen, and then I’ll explain where I am coming from, which will give you background for my explanation of what I think should be done. 

What I Think Will Likely Happen 

I think that what’s most likely to happen is that the two sides won’t allow a default (or if they do, it won’t be for long) and they won’t deal with the big issues in a substantive way. Rather they will tweak things in ways that won’t matter much and that will look better than they really are (e.g., they will say that they will cut the deficit in future years, which they won’t when the time comes). I wouldn’t do that. 

Where I’m Coming From 

As you know, I’m a global macro investor focused on the five big forces: 1) the money/credit/economic force, 2) the political force within countries, 3) the geopolitical force between countries, 4) the acts of nature force, and 5) the learning/technology force. These are inextricably linked to each other, especially the money/credit/economic and political forces when it comes to the debt limit issue in the US. For that reason, in answering this question I will start with the political issue because I think that it is our greatest threat to good decision making. 

As I see it, nowadays there are three political “types” of people: the hard-right type, the hard-left type, and the bipartisan moderate type. My examination of history showed that this is how the sides have always lined up in the pre-civil war phase of the Big Cycle that we are now in. I believe that everyone is by and large one of these types and that people will likely be increasingly forced to either pick a side and fight for it or hide by staying quiet. Think about it. If forced to pick to fight for one of these sides, which would it be, and would you fight or hide? 

I’m a bipartisan moderate type who won’t hide. I’m a bipartisan moderate because I believe strongly that either or both of the extreme types (hard-right and/or hard-left) attempting to impose their views on others won’t work— it will just intensify the conflict, which will lead to a type of civil war that will make clear who has the power to determine what’s done. By “civil war,” I don’t necessarily mean violent conflict, though with so many guns in the hands of so many people who are willing to fight to protect the lives that they believe are at risk of being taken away by the other side, the risk of violent conflict is not nil. I think that it is more likely that the civil war will take the form of splits between red states and blue states, between the federal government and the state governments, and between the haves and the have-nots, especially in blue states and wherever wealth gaps are large, finances are bad, and social issues like drugs, mental illness, and crime are worst. In any case, because I believe that our financial/economic problems are great, I believe that significant bipartisan reforms are required to get us on the right track financially, economically, socially, and politically.

Because I believe these things to be true and because my expertise is in finance and economics, I believe that: 

1. 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. Why? Because spending more than one earns and financing it with debt, which we have been doing for a long time, is easy, pleasurable, and not sustainable. It’s not sustainable because increasing debt assets and liabilities faster than income eventually makes it impossible to simultaneously pay lender-creditors a high enough real (i.e., inflation-adjusted) interest rate to have them hold the debt assets without having that real interest rate too high for the borrower-debtors to be able to service their debts. 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. In either case that creates a debt crisis that is like the runs on the banks that we have been seeing, but with government bonds being what is sold and the run on the bank being a run on the central bank. As explained in greater depth in Chapters 3 and 4 of my book Principles for Dealing with the Changing World Order, that is how all reserve currencies and big debt cycles have ended. From what I see, which I will cover in another post, 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. At the same time... 

2. ...not increasing the debt limit will lead to default and/or a cutting back on basics for those who can’t afford cutbacks, which will cause financial havoc and social upheaval. 

What I Believe Should Be Done

I believe that we need a smart bipartisan plan not only to deal with the budget deficit issue but for dealing with all of our country’s financial, economic, and national debt issues. I think the system needs to be reformed. 

For these reasons, I believe that to try to settle this issue in a few meetings and move to an expeditious answer, as has been done 78 times before, won’t fix our basic problems and will eventually lead to a terrible outcome. I believe that more structural changes are required. I believe that one of those temporary, quick, kick-the-can-down-the-road type moves as is now in the works should happen, but it should be accompanied by a smartbipartisanplan that will take adequate time to be developed. I emphasize the words 1) smart, 2) bipartisan, 3) plan, and 4) adequate time. (FOOTNOTE: The closest recent examples of something like this were the 2010 Simpson-Bowles plan and the committee formed in 2011 after debt ceiling negotiations between Obama and Boehner. Both bipartisan commissions failed to reach the required agreements on how to reduce the deficit and we still have the same problems more than a decade later, only worse. These failures are bad precedents, but there isn’t another good alternative path to addressing the debt/finance problem than a smart bipartisan one.)

To produce something that actually works, the leaders from both sides—Biden and McCarthy—would have to agree and overcome the objections of the more extreme members of their parties who either don’t want to lift the debt ceiling or aren’t willing to compromise on a long-term approach to budgeting that works both economically and socially. To me, that battle between moderates who are willing to compromise and do practical things and extremists who aren’t will need to be fought someday soon, so it might as well be fought now. As mentioned, I hope to see the smart bipartisan moderates band together to fight the extremists of both parties. I think that the leader(s) who come out in favor of this kind of smart bipartisan path should receive huge bipartisan support rather than the alternative path of not finding a smart bipartisan approach, which assuredly will lead us toward disaster. If one side doesn’t agree to this, the other side should openly throw down the gauntlet and show that the other side is not willing to work on this problem in a cooperative way. Unfortunately, the primary political system encourages extremism in well-recognized ways that I don’t have to recount. Strong leaders in pursuit of the best outcomes via bipartisanship would have to have the courage to make this move. Maybe in the end, bipartisan moderates from both parties will band together in a third political party. Anyway, as I said, history and common sense tell me that smart bipartisanship is the only way we are going to get through this well together. The middle needs to overtake the extremes. Do I think these things will happen? I don’t think that it is probable. The most likely path is toward there being a big clash of these forces. 

As for the actual plan to do what needs to be designed, it isn’t complicated, though it’s tough to get people to agree. Four years ago, I wrote an article explaining “Why and How Capitalism Needs to Be Reformed” that lays out my thinking more completely than I can do here. In a nutshell, what I believe needs to happen is to make the reforms that are required for us (Americans) to collectively earn more than we spend and both grow the pie and divide the pie well, with sustainable government finances.

Remember that I was asked what I would do, not what I think will be done, so that’s what I’m giving you. But of course, my own views about how that should be done are much less important than there being a bipartisan plan created by skilled moderates who are willing to fight against the extremists to defend their plan. One of the biggest problems is that everyone fights for exactly what they want, so I don’t want to do that—i.e., I don’t care if the plan includes what I think is best as much as I want it to contain what a smart bipartisan group of designated people thinks is best and will fight the extremists to get. I think this is an opportunity for some brave moderates to get together and do this, despite the huge political costs.

I won’t get into what I’d like to see in a plan because what I want isn’t particularly important and because explaining this would be too much of a digression. However, in case you’re interested, I believe that productivity is the much shunned and yet the most necessary ingredient to get to a healthy financial state without cutting our living standards. That is because improving productivity is the only way incomes can rise to be greater than expenditures, and that’s what’s required to manage debts well. Why don’t both sides of the political divide focus on productivity? Because most people are focused on what they get rather than what they produce to exchange with others so they can get what they need. Improving productivity and dividing its benefits so that most people benefit is the only path that will work, and that must be done cost-effectively to achieve a double bottom line, which is an investment that is both financially viable and produces a social good. There are many good double bottom-line investments in education, infrastructure, fighting the drug problem, addressing mental illness, and other programs that produce broad-based opportunities. And of course, a debt management/restructuring plan would need to be part of any sensible plan. But as I said, what is most important is that we have a smart bipartisan plan so that the pie is grown and divided well.

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Raymond Thomas Dalio is an American billionaire investor and hedge fund manager, who has served as co-chief investment officer of the world's largest hedge fund, Bridgewater Associates, since 1985. He founded Bridgewater in 1975 in New York.

 

 

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