The United States has crossed a staggering financial milestone, with its national debt rising above $40 trillion. But according to billionaire investor Ray Dalio, the bigger concern is not the size of the number alone. It is the debt cycle behind it
The United States has crossed a staggering financial milestone, with its national debt rising above $40 trillion. But according to billionaire investor Ray Dalio, the bigger concern is not the size of the number alone. It is the debt cycle behind it.
In a recent post on X, Dalio argued that the US is showing several signs of the debt dynamic he has described in his book How Countries Go Broke: The Big Cycle.
He pointed to rising US bond yields, weakness in the dollar and the enormous amount of new Treasury debt that needs to find buyers.
His warning comes just days after US national debt crossed the $40 trillion mark for the first time. The milestone has renewed questions over how long Washington can continue borrowing at such a pace.
Dalio’s argument is not that the US is about to suddenly run out of money. Instead, he describes a longer process in which rising debt creates rising interest payments, which then force governments to borrow even more.
If the supply of debt eventually becomes too large for investors to absorb comfortably, the government can face a much more difficult choice: accept sharply higher interest rates or rely more heavily on central-bank money creation.
Dalio’s ‘Big Debt Cycle’: How the problem starts
Dalio compares the debt system to the human circulatory system.
More from BusinessHe argues that Credit is useful when it helps generate enough income and productivity to repay the debt and interest. The problem begins when borrowing fails to generate enough income to cover those obligations.
At that point, debt servicing starts taking up a growing share of available money. It is like plaque building up in the arteries: the system may continue functioning, but the flow becomes increasingly restricted.
For a government, the process works in a similar way.
Washington borrows money by selling Treasury securities. It then has to pay interest to the people and institutions holding those securities. As the total debt grows, the interest bill can also become larger.
If the government continues running deficits, it has to issue even more debt. And when old bonds mature, it needs to borrow again if it does not have enough revenue to repay the principal.
That creates what Dalio describes as a debt rollover problem — the government depends on creditors continuing to lend or “roll over” the money rather than demanding that it all be repaid.
The US is borrowing while already carrying a huge debt load
Dalio’s latest warning comes as the US faces exactly this combination of large deficits and enormous refinancing needs.
In his assessment of the US government’s finances, he estimates annual government revenue at around $5.5 trillion, against expenses of roughly $7.5 trillion. That leaves a deficit of around $2 trillion.
At the same time, he estimates that the US faces around $1 trillion in interest payments and roughly $10 trillion in principal coming due, meaning the government has to find buyers willing to continue financing a very large amount of debt.
This is why Dalio says simply looking at the $40 trillion debt figure misses part of the story.
The critical question is: How much debt does the government need to sell, and how much are investors willing to buy at acceptable interest rates?
What happens when demand for US debt weakens?
For decades, US Treasury bonds have enjoyed enormous demand from investors, banks, institutions and governments around the world.
But Dalio says the danger emerges when the supply of government debt grows faster than demand for it.
Imagine Washington needs to borrow $2 trillion more, but investors are no longer willing to buy that debt at the previous interest rates. The Treasury may then have to offer higher yields to attract buyers.
Higher yields mean higher borrowing costs for the government.
That can make the problem self-reinforcing: more borrowing creates more interest payments, higher interest payments increase the deficit, and the larger deficit requires still more borrowing.
Dalio identifies the relationship between debt servicing, the supply of government bonds and demand for those bonds as three of the key indicators to watch when assessing whether a debt problem is becoming serious.
Why can’t the US simply print money?
This is where the role of the Federal Reserve becomes important.
If investors are unwilling to absorb enough government debt, one possible response is for the central bank to buy bonds by creating money.
That can provide the government with a larger pool of buyers and prevent interest rates from rising as sharply.
But Dalio warns that this solution comes with another cost.
If a central bank creates large amounts of money to purchase government debt, the value of the currency can come under pressure and inflation can become higher than it otherwise would have been. In Dalio’s framework, this creates a difficult trade-off: allowing interest rates to rise can hurt the economy, while creating money to hold rates down can weaken the currency and fuel inflation.
If the process becomes extreme, Dalio describes it as a debt-money-printing-inflation spiral.
Why Dalio calls it a potential ‘debt heart attack’
Dalio’s central warning is that debt crises usually do not arrive out of nowhere.
They build over years as debt and debt-service costs rise faster than incomes and government revenues. Eventually, debt payments can begin crowding out other government spending, while investors demand higher returns for holding government debt.
Dalio compares the final stage to an “economic heart attack”, in which debt-financed spending becomes so constrained that the normal flow of money and credit through the economy is disrupted.
He says the US is now at an “inflection point” and that the problem should be addressed while the economy remains relatively strong, rather than waiting for a downturn. His concern is that an economic contraction could actually make the debt problem worse because government borrowing needs tend to increase during a recession.
Is the US heading for a debt crisis?
Dalio does not say that a crisis is inevitable or that it will happen immediately.
He argues that the timing depends heavily on policy decisions and external shocks. In his view, reducing the US budget deficit to around 3 per cent of GDP would significantly lower the risk, while wars, political shifts or other major shocks could accelerate the process.
He estimates that if the current course is not changed, a crisis could potentially emerge within a few years, although he acknowledges that this is only his estimate.
His broader point is that the US cannot assume its status as the world’s dominant reserve-currency country makes it immune to debt problems.
The dollar gives Washington an enormous advantage because there is strong global demand for US financial assets. But Dalio argues that reserve-currency status ultimately depends on confidence. If investors begin to doubt the ability of a government to manage its debt and preserve the value of its currency, that advantage can weaken.
