Billionaire Ray Dalio warns that other countries are no longer lining up to purchase government debt after witnessing the crisis in the US banking industry.
In a new interview with YouTuber Chris Williamson, Dalio explains why the collapse of Silicon Valley Bank is just a symptom of a much larger problem instigated by the Federal Reserve.
According to the legendary investor, the historical rise in interest rates over the past year has dramatically devalued the bonds sold by the government to buyers such as banks, companies and other nations a few years ago.
Bond prices and interest rates tend to move in the opposite direction. When interest rates soar, the prices of older bonds plummet as they have to compete with newer bonds that offer higher yields.
Says Dalio,
“If you look at the Silicon Valley Bank issue, it’s not so much their issue as much as a worldwide issue… What’s a bank? A bank takes in deposits, and then it takes that money and invests it in things. So they bought a lot of government bonds that had a higher yield than they were paying out in the deposits.
There’s a tightness of monetary policy, and those yields went up and the bonds went down in value, and then the amount they have to pay out went up in value, and so they went broke.
That is happening all over. That happens not only through banks. Banks as a whole did a lot of that, but insurance companies and so on all around the world.
The same sort of thing happened in Europe. The same sort of thing happened with (Japan), companies even buying US dollar bonds a lot.”
According to Dalio, the Federal Reserve’s tight monetary policies have created a catastrophic environment for the US. The billionaire says that nations and other buyers are backing away from US bonds just as the government needs more money to fund the national deficit.
“If you were to mark those (bonds) to market, you would have a terrible calamity, but what’s going to likely happen is they don’t want any more of those bonds, and we’re going to have to sell more bonds because we’re going to have a deficit. So when you have a deficit, you have to pay for it through selling debt, and there’s a lesser demand for that debt.”
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