American investor Ray Dalio, founder of Bridgewater Associates, has warned that the recent decision by the Federal Reserve (FED) to end quantitative tightening (QT) and prepare for a return to quantitative easing (QE) is a clear sign of the end of the great debt cycle. He described this process as a tipping point where debt and stimulus overload converge towards structural correction.
“The Fed is stimulating (the economy) toward a bubble,” Dalio said, referring to the shift in monetary policy announced by Governor Jerome Powell.
“This is described as a technical strategy, but in any case it is a measure to increase flexibility,” he points out. Investors believe this change is “one of the indicators to follow to track the progression of the Great Debt Cycle,” a concept that defines successive stages of expansion. Leverage and inflation precede economic readjustment.
Dalio quoted Powell himself as saying that at some point, “reserves will start to gradually increase to catch up with the size of the banking system and the economy.”
For the analyst, the fact that the Fed is once again expanding its balance sheet while interest rates are being cut and budget deficits remain high “constitutes a classic interaction between the Fed and the Treasury to monetize government debt.”
Bridgewater's founders emphasize that this scenario will occur when “private credit and capital market confidence remain strong, stock prices are high, credit spreads are minimal, unemployment is low, inflation is above target, and AI stocks are in a bubble.”
The following table shared by Dalio compares various historical episodes of financial stimulus: the Great Depression, World War II, the 2008 Global Financial Crisis, QE1, and the COVID-19 pandemic. This is in stark contrast to the current state of the American economy. Indicators include real GDP growth, unemployment, inflation, cyclically adjusted price-to-earnings ratio (CAPE), credit spread, and public debt to GDP.
This comparison reveals that unlike past periods of stimulus during recessions with high unemployment and low inflation, the current situation combines positive growth, low unemployment, moderate inflation, record stock market valuations, and historically high government debt (118% of GDP).
According to Ray Dalio, this suggests that: “This time monetary easing will take place in a bubble, not a crisis.”
Valuation of financial assets is imminent
Dalio said this type of policy, applied during stock market euphoria, expands the valuation of financial assets and They tend to compress real returns and increase wealth inequality. He also warns that if the supply of U.S. Treasuries exceeds demand and central banks “print money” to absorb it, we will reach “classic end-of-debt-cycle dynamics.”
“Currently, quantitative easing will not be a stimulus for a recession, but a stimulus for a bubble,” Dalio emphasized. He added that this type of intervention “monetizes government debt rather than simply liquidating the private system” and “looks like a bold and risky bet on growth, especially growth driven by artificial intelligence, funded by extremely lax fiscal, monetary and regulatory policies.”
Dalio's analysis is consistent with recent market interpretations that Bitcoin prices are independent of global liquidity cycles. As reported by CriptoNoticias, digital currencies tend to predict changes in monetary policy and serve as leading indicators of credit expansion or contraction. In this context, the possibility of a return to QE and an increase in liquidity. Could fuel a new phase of Bitcoin's rise This is to counter a weaker dollar and expected inflation.
Dalio concludes that the rise in technology and financial assets, coinciding with a return to monetary expansion, has brought the global system closer to the tipping point of the Great Debt Cycle, where the interaction between fiscal and monetary policy is no longer sustainable. “It will be important to see how much the Fed's balance sheet expands,” he said, warning of what the outcome of this cycle could be. It has the potential to redefine market conditions for years to come.
