Bridgewater Associates founder Ray Dalio raised 3% solution: The U.S. debt crisis is worrying

Ray Dalio, the founder of the world's largest hedge fund Bridgewater Associates, proposed the "3% Solution" and called for reducing the U.S. fiscal deficit from 7.5% of GDP to 3% to stabilize the economy. He also emphasized the importance of interest rates, diversified investments, and alternative currencies, and warned of the threat that political polarization poses to market stability.

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The Potential Debt Crisis in the United States

In a recent interview with CNBC's Squawk Box at the World Economic Forum in Switzerland, Ray Dalio discussed the U.S. debt, citing his new book "The Principles for Navigating Big Debt Crises", which explains the mechanism of national debt and coping strategies.

He emphasized that the current U.S. fiscal deficit has reached 7.5% of GDP, and if the deficit cannot be balanced, it may lead to an imbalance in market supply and demand, causing turmoil in the bond market.

The current debt scale has become so large that if a large amount of government bonds are issued, it may cause an imbalance in supply and demand; if bond holders start to sell, the oversupply will lead to more serious problems.

The 3% Solution

To address this, he proposed the "3% Solution", calling for reducing the ratio from 7.5% to 3% to stabilize the market and avoid the resulting economic problems:

Government interest rates are the basis and reference for all markets, including the stock market and the bond market. Therefore, the key figure to solve this problem is 3%.

Dalio emphasized that to achieve the 3% deficit target, in addition to raising taxes or cutting spending, action can also be taken when the economy is in good condition to reduce the interest cost of debt:

When interest rates fall, the country can reduce the cost of debt payments, thereby achieving the stabilization target more quickly.

Political Polarization is the Urgent Issue

As for the specific interest rate measures, Dalio frankly admitted that the biggest challenge in solving the deficit is not an economic problem, but political polarization:

First, all members of Congress and the President should reach a consensus to prioritize keeping the deficit at 3% of GDP. If specific measures cannot be agreed upon, spending and taxes can be adjusted proportionally. This is an alternative option, but the important thing is to achieve the 3% target.

In other words, the current political polarization is hindering the implementation of actual policies, and this situation may further affect market stability.

AI Still Has Potential Application Scenarios

At the same time, when asked about the current high historical price-to-earnings (PE) ratio in the stock market, Dalio indicated that there are potential areas in the market, but investors should be cautious about the risks brought by changes in interest rates:

Currently, some areas have risen quite high, especially in innovative fields like artificial intelligence (AI), but many AI application scenarios are still underestimated, which is a potential area.

He added, "The market trend is affected by the deficit issue, and if interest rates rise, the market may decline."

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The Value of Diversified Investment and Alternative Currencies

In terms of investment strategy, Dalio emphasized the importance of diversification, and he advised investors to diversify their assets and avoid excessive concentration in specific markets:

Everyone needs to have more understanding of "alternative currencies", such as gold, which is an effective diversified asset. Bit and debt are also forms of currency, but their risk lies in the fact that they are essentially "promises of future payments", so they need to be evaluated more cautiously.

In summary, in the interview, Dalio emphasized the importance of fiscal deficits, interest rates, and diversified investments in the current global economy, while warning market participants to have a deeper understanding of economic mechanisms and prepare for potential future risks.