Billionaire investor Ray Dalio has highlighted Treasury Secretary Scott Bessent’s recent announcement of increased government debt buybacks as a warning signal for a potential debt crisis in the United States. Dalio pointed out that this move, alongside the Japanese government’s reduction of its U.S. bond holdings and rising long-term Treasury yields, collectively indicate growing financial stress. According to Dalio, the government’s financial position is at a critical juncture, and if decisive action isn’t taken soon, managing the escalating debt could become extremely traumatic.

Dalio emphasized that the U.S. is currently spending about 40% more than its income, resulting in a swelling budget deficit that reached $432 billion in July. While Bessent suggested that the deficit might have peaked during the Trump administration and hinted at efforts to significantly reduce spending, Dalio remains skeptical about substantial cuts due to the committed and essential nature of current expenditures. He noted that the debt service burden is now roughly $11 trillion annually, which is about twice the country’s total yearly revenue, and this cost is expected to rise, making debt management increasingly challenging.

To address the situation, Dalio put forth a three-part strategy aimed at reducing the budget deficit to around 3% of GDP. His approach calls for simultaneous actions: cutting government spending, raising tax revenue, and lowering interest rates. Dalio warned that these steps must be balanced to avoid shock disruptions, cautioning against forcing interest rates artificially low through Federal Reserve intervention. He stressed that now is the opportune time to implement these measures while the economy remains stable since recessions typically require increased government spending.

Looking ahead, Dalio projected that if current policies continue unchanged, the U.S. could face a debt crisis within one to five years, with his best estimate being roughly three years out. To prepare for the increased financial volatility he anticipates, Dalio advised investors to reduce exposure to debt instruments like bonds and instead allocate 10% to 15% of portfolios into gold and add a small portion of bitcoin as a hedge. His perspective comes amid recent market turbulence caused by surging Treasury yields and a pause in the S&P 500’s rally.