Bridgewater Founder Ray Dalio: The U.S. May Face a Debt Crisis in Three Years, Warns China and Japan May Reduce Demand for U.S. Treasuries
Bridgewater Associates founder Ray Dalio stated in an interview with Bloomberg Television in Singapore that the U.S. may face a debt crisis within three years and warned that China and Japan may reduce their demand for U.S. Treasuries.
Dalio mentioned that about one-third of U.S. debt relies on foreign capital, a significant portion of which comes from Japan and China. He noted that geopolitical factors make China reluctant to continue increasing its U.S. debt holdings, while Japan has lent out a large amount of money and now wants to retrieve it. He reiterated his previous assessment that if the current path does not change, a crisis could occur within three years, with a margin of error of about two years.
In a public article dated August 21, 2026, he likened this situation to an economic heart attack, triggered by a contraction in debt-financed spending that disrupts the economic cycle. He stated that government spending is about 40% higher than revenue and estimated the annual debt repayment requirement at around $11 trillion, approximately twice the government's annual revenue. This is his estimate, not an official statistic from the Treasury.
The interview took place amid a continued decline in global government bonds. Reports indicate that the yield on the U.S. 10-year Treasury is around 5.3%, close to levels not seen since 2002. Bloomberg's summary of the interview also noted that rising borrowing costs and weakened demand from major foreign buyers may first squeeze low-income borrowers.
U.S. debt is expected to exceed $40 trillion for the first time around September 2026. The Congressional Budget Office estimates that the deficit for fiscal year 2026 will be about 6% of GDP, approximately $1.9 trillion. Dalio's target is to reduce the deficit to 3% of GDP by simultaneously cutting spending, increasing taxes, and lowering interest rates, avoiding any single adjustment that is too large.
This is a statement driven by events, not a new Treasury issuance. Potential sellers are the official funds from China and Japan he named, while buyers will need to be domestic investors, other foreign funds, or the Federal Reserve. When yields rise, institutions holding long-term Treasuries are under pressure. He previously suggested reducing bond exposure, allocating 10% to 15% to gold, and keeping a small amount of Bitcoin. The beneficial narrative falls on gold and short-duration assets, while the pressure narrative falls on Treasury issuances reliant on foreign buyers.
He wrote the fiscal inflection point as a conditional statement. Policy shifts, political changes, or wars could advance or delay the timing. In the context of August, the Treasury's debt buyback plan of about $4 billion was listed by him as a signal alongside rising yields, a weaker dollar, and Japan's reduction in holdings.
Source: Public Information
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Dalio's assessment of the debt cycle is not new as of 2026. He founded Bridgewater in 1975, using pure alpha and all-weather strategies to create institutional products across the four quadrants of "growth, inflation, growth decline, inflation decline." His debt cycle framework published around 2011 divided deleveraging into deflationary and inflationary deleveraging. After 2018, he shifted the same framework from China's shadow credit to U.S. fiscal matters, and in 2021, his book "Principles: Life and Work" framed the replacement of reserve currencies as a long-term template. The time window has repeatedly shifted, but the mechanism remains unchanged.
The capital path is reflected in his asset recommendations. He advocates reducing bonds, allocating 10% to 15% of the portfolio to gold, and keeping a small amount of Bitcoin. The motivation is that if foreign official buyers stop, the Treasury must refinance with higher yields to attract domestic and remaining foreign funds. Japan wants to reclaim its foreign loans, and China is reluctant to continue increasing its holdings due to geopolitical reasons, which corresponds to a shift from net increases to net reductions or halts in foreign holdings. The money is not leaving all dollar assets but is moving from long-term Treasuries to gold, short-duration assets, and physical collateral.
The analogy is to the phased withdrawal of foreign buyers from U.S. Treasuries in the 1970s and the period after the U.S. sovereign rating downgrade in 2011, where rates did not immediately spiral out of control, but term premiums increased. The current position is closer to the control phase of the latter part of the cycle rather than an already occurring crisis. The 10-year yield of about 5.3%, near 2002 levels, indicates that prices are already trading on supply excess, not on default.
Structurally, this represents a transfer of pricing power. The issuance price by the Treasury was previously supported by foreign official reserve demand, but now it must be determined by private term premiums. The mechanism is that the deficit remains around 6% of GDP, and his target of 3% has not been realized. After interest expenditures crowd out other spending, new Treasury debt must find non-official buyers. When buyers decrease, pricing power shifts from the issuer to the remaining marginal buyers, with low-income borrowers being the first to face credit contraction due to interest rate transmission.
ABAB News · Law of Cognition
- Debt can roll until the number of buyers decreases.
- Interest first crowds out the budget, then crowds out credit.
- The day official purchases stop, yields begin to price.