'Dump bonds, buy gold and bitcoin': Ray Dalio warns US debt crisis could hit within 3 years

Ray Dalio, founder of Bridgewater Associates and the father of the "all-weather portfolio," has warned that a US federal debt crisis could arrive within three years, as the country's national debt surpasses a record $40 trillion.

Dalio posted the warning on Friday (local time) on LinkedIn under the title "How Countries Go Broke: The Big Cycle — The Dynamics Behind What Is Happening Now," which is also the title of one of his books.

In the post, Dalio said that as debt-servicing costs rise, they eventually collide with insufficient investor demand, forcing the government to accept higher interest rates or compelling the central bank to purchase debt by printing money — eroding the currency's value and deepening inflation.

Dalio projected that this year the US federal government will take in $5.5 trillion in revenue while spending $7.5 trillion, leaving a fiscal deficit of around $2 trillion.

He estimated the federal government's interest costs this year at roughly $1 trillion. Adding approximately $10 trillion in maturing principal, the total debt-service obligation for the year reaches $11 trillion — roughly twice the government's annual revenue, all of it going toward repaying a portion of the debt and covering interest.

"If the deficit-to-GDP ratio is reduced from around 7 percent to about 3 percent, the risk will decrease significantly," Dalio wrote. He added that "if there is a big external shock it will happen sooner, and if there isn't it will happen later or (if well-managed) perhaps not at all."

"If the current trends don't change, my guess is that it will happen within three years," he added.

The crisis he envisions is not limited to the United States. Dalio noted that most major economies — including the United Kingdom, China and Japan — face similar debt and fiscal deficit problems, and said that "for these reasons, non-government-issued currencies like gold and bitcoin are expected to perform relatively well."

"As general advice, I recommend diversifying sufficiently across countries and asset classes with sound income statements and balance sheets and not too much domestic political conflict and external geopolitical conflict," he wrote. "It is advisable to reduce exposure to debt assets such as bonds and increase holdings of gold and a small amount of bitcoin."

Dalio said that allocating 10 to 15 percent of a portfolio to gold can reduce risk while also improving returns.