To solve this, Dalio said the U.S. needs to carefully employ a three-part strategy to get the budget deficit down to 3% of gross domestic product.
First, Dalio said the U.S. government needs to reduce its spending. Second, he said tax revenue needs to be raised. Finally, the New York native and Harvard Business School alumni said lower interest rates were needed.
“All three need to happen concurrently so as to prevent any one from being too large,” Dalio said. “If any one is too large, the adjustment will be traumatic.”
Dalio cautioned against ramming through these adjustments by “force.” For instance, “it would be very bad if the Federal Reserve unnaturally forced interest rates down,” he said.
Dalio said it’s important to to take steps now, while the economy is healthy. An economy in recession requires increased government spending, he said.
Dalio said the exact timing of a debt crisis can be swayed by variables ranging from military conflict to political change. On its current trajectory, the U.S. could enter such a crisis in as early as one year or as late as five. “My guess, which I suppose will be a bad one, is that it will come in three years, give or take two, if the course we’re on is not changed.”
To prepare, Dalio recommended investors are underweight debt assets, such as bonds.
As much as 10% to 15% of a portfolio could land in gold, as well as “a bit” of bitcoin, the hedge fund founder said.