Last month, investor Ray Dalio suggested at The Financial Times that the UK is entering a debt spiral. According to FT:
Ray Dalio, the billionaire founder of hedge fund firm Bridgewater Associates, has warned that the UK could be heading for a “debt death spiral”, in which it has to borrow more and more money to service its rising interest costs.
Dalio told the Financial Times that the recent sell-off in the gilt market, coupled with bouts of sterling weakness, suggested that the market was struggling to absorb the UK’s higher borrowing needs since last October’s Budget.
The combination of rising annual interest payments, which have already topped £100bn a year, and the need to roll over debt at higher borrowing costs, created the risk of a self-reinforcing cycle, he said.
This “looks like a debt death spiral in the making because it will either require more borrowing to service the debt that will have to be serviced, squeeze out other spending, or require more taxes”, said Dalio in an interview.
The United States is not immune to this, but remains relatively insulated—for now—thanks to the fact that the dollar is in greater demand than sterling, and therefore so is US debt. I asked Mises Institute Senior Fellow Alex Pollock about Dalio‘s comment, and Pollock replied with an important point about whether or not “countries” go broke:
Ray Dalio is certainly right to highlight the issue of sovereign defaults. Based on the FT‘s article, I have already ordered a copy of Dalio’s forthcoming How Countries Go Broke.
I do want to object to the book’s title, however. It is not countries, but governments, which overborrow and go broke. The debtor is the government. The government is quite distinct from the country, although in common parlance the two are often confused. It is the government of the United States, for example, not the country, which defaulted five times on its debt between being unable to pay interest on time in 1814 and reneging on its solemn commitment to redeem dollars for gold in 1971. These five defaults do not count the failure to pay its debt by the Confederate government, defaults by a number of individual U.S. state governments, or the historic bankruptcies of the governments of the City of Detroit and the Commonwealth of Puerto Rico.
