US debt crisis: Treasury Secretary and Ray Dalio offer solutions

The yield on 30-year US government bonds stands at approximately 5.27%, a peak not seen in nearly two decades. This exceptional data threatens the stability of Wall Street and is driven by the ballooning US government debt, which has crossed the 40 trillion dollar mark, an annual deficit of nearly 2 trillion dollars, and sticky inflation that has remained above the Federal Reserve's target for over five years.

In response, the US Treasury has taken the unusual step of buying back long-term government bonds. Bank Hapoalim's economic review explains that "the move is intended to signal to the market that the Treasury believes the rise in yields is too high, rather than technically creating large demand for these bonds."

According to the review, the buyback solution "increases the Treasury's financing needs and will require an increase in the issuance of short-term bonds," meaning the Treasury must issue new debt to buy back the old.

Following the Treasury's move, bond yields fell, at least temporarily. The next day, Treasury Secretary Scott Bessent signaled that the administration is willing to go further.

"We are going to increase the volume of the buyback," Bessent told CNBC, clarifying that purchases could exceed 4 billion dollars per bond series, depending on market conditions.

Bessent argued that this is not an attempt by the government to dictate yields. From his perspective, the market is suffering from low liquidity and an exaggerated reaction to headlines, while economic fundamentals do not justify the current yield levels.

Ray Dalio's Warning

Ray Dalio, founder of Bridgewater and one of the world's most prominent investors, warned in a detailed LinkedIn post that the US is approaching a crisis point if Washington continues its current path without reducing the deficit.

"I am convinced that the government's financial situation is at a turning point," Dalio wrote. "If this is not addressed now, debts will accumulate to levels that cannot be managed without major trauma."

While Bessent acknowledges the fiscal challenge, he stated that the administration is examining ways to cut spending by hundreds of billions of dollars and plans to discuss "fiscal consolidation" measures with the head of the Office of Management and Budget, Russell Vought. However, he rejected the notion that the 40 trillion dollar threshold is a breaking point.

"There is nothing magical about the number 40 trillion," Bessent said. "We can grow our way out of this."

Three-Part Solution

Dalio presents a strategy he calls the "three-part solution for 3%."

The goal is to lower the budget deficit to 3% of GDP by balancing three measures:

1. Spending cuts

2. Increasing tax revenues

3. Lowering interest rates

Dalio emphasizes that "these three steps must happen simultaneously to prevent a situation where one adjustment becomes too large and traumatic. These changes must stem from fundamental economic adjustments rather than being forced artificially, for example, by the Federal Reserve."

"According to my forecasts, spending cuts and increased tax revenues, alongside lower interest rates, will result in interest payments being about 1–2% lower than GDP over the next decade," Dalio explains. "This will stimulate economic activity and lead to a significant increase in state revenues."

In the meantime, he offers an investment recommendation: "It is recommended to diversify well between asset classes. Hold an underweight position in debt assets like bonds, and an overweight position in gold and a little bitcoin. An allocation of 10–15% of the investment portfolio to gold may reduce overall risk and improve yield."