Ray Dalio: Rock-Bottom Rates Allowed Companies To Sell "Dreams Instead Of Earnings"

Having explained that "the world has gone mad and the system is broken," Bridgewater Associates founder Ray Dalio sat down with CNBC to criticize Washington's fiscal profligacy, claiming that the federal government doesn't have a plan for eliminating its growing pile of debt, and that it will need to raise taxes in a way that's "well engineered" to stave off broader societal issues.Since the beginning of the year, Dalio has established himself as a crusader for government reform, calling for the government to treat economic inequality as if it were a national emergency. To that end, Dalio said during the interview, which took place on the sidelines of the Greenwich Economic Forum, that the national debt, pension liabilities and health-care liabilities will ultimately have to be paid via higher taxes, since default isn't an option for the US government.




Over the summer, following a trip to trippy arts festival Burning Man, Dalio offered a relatively optimistic forecast for the US economy.

Ray Dalio

Dalio added that the issue is "almost a currency issue", since the longer Washington waits, the bigger the threat to the integrity of the US dollar.

"We're dealing with almost a currency issue, longer term, in terms of what is the value of currency when those liabilities – not only the debt liabilities, but the pension liabilities and the health-care liabilities, which are like debt. They are promises that have to be paid – they will either be paid by higher taxes or they'll be not paid and defaulted on," he said.

"I don't think they will be defaulted on," he added. "I think by-and-large they're going to be paid, but if they raise taxes too much, then it changes the nature of that economics."

Dalio's warnings come as the national debt surges to $22.9 trillion, roughly 103% of GDP, while debt held by the public reaches $16.9 trillion.

But the federal government isn't the only entity that has "gone mad" when it comes to spending. Low interest rates have forced investors to reach for yield, enabling even sophisticated investors to justify the business models of companies like WeWork which relied on dangerous levels of leverage to finance a growth-at-all-costs model that eventually backfired on the company's investors.

"Because the world is looking for yield, companies can sell dreams instead of earnings," he said. "There's a reaching that's happening because people need yield."

Dalio disagreed with his interviewer when asked if he thought investors could solve the problem of inequality by pressuring corporate boards to pay employees more. If Dalio had his druthers, he would gather a group of economists with "on-the-ground experience" and lock them in a room for six months until they find a solution for economic inequality in the US, though he later acknowledged that this was a "pipe dream."

With investors allocating more capital to high-yield credit, most of that money "is not going to trickle down" to the average person and the broader community, making the wealth gap even worse.

At one point during the interview, Dalio was confronted about Bridgewater's Pure Alpha Fund and its unsuccessful bets on government bonds. He responded by insisting that he wasn't interested in talking about his firm's positioning,but clarified that he would be happy to discuss his views on markets.

Watch the full interview.