Ray Dalio Is Predicting A Financial Crisis…Again.

Dalio’s History Of Faulty Predictions

It doesn’t take much to understand that Ray Dalio, a hedge fund titan, is like every other human being and is prone to error. I will not dismiss Dalio entirely, as his track record of managing money at Bridgewater is nothing to be scoffed at. However, his track record is far less enviable regarding debt crisis predictions. Here is a brief timeline.

• March 2015 – Hedge Funder Dalio Thinks the Fed Can Repeat 1937 All Over Again
• January 2016 – The 75-Year Debt Supercycle Is Coming To An End
• September 2018 – Ray Dalio Says The Economy Looks Like 1937 And A Downturn Is Coming In About Two Years
• January 2019 – Ray Dalio Sees Significant Risk Of A US Recession
• October 2022 – Dalio Warns Of Perfect Storm For The Economy (That was also the stock market low.)
• September 2023 – Dalio Says The US Is Going To Have A Debt Crisis

But you can even go further back than these when he wrote about some of his biggest mistakes about a decade ago:

“The biggest of these mistakes occurred in 1981-’82, when I became convinced that the U.S. economy was about to fall into a depression. My research had led me to believe that, with the Federal Reserve’s tight money policy and lots of debt outstanding, there would be a global wave of debt defaults, and if the Fed tried to handle it by printing money, inflation would accelerate. I was so certain that a depression was coming that I proclaimed it in newspaper columns, on TV, even in testimony to Congress.“

Even though Dalio understands his mistakes from 1981 to 1982, he has been repeating them over the last decade.

For investors who listened to Dalio’s predictions of a coming “depression” a decade ago, they missed participating in one of the most significant bull markets in U.S. history.

Again, please don’t make a mistake in what I say. Ray Dalio is a knowledgeable person. However, intelligence does not necessarily prove accuracy in predicting the future. He was wrong in the 80s and has been incorrect over the last decade.

Does that mean he will “never” be correct? No. But investors have lost more money worrying about Dalio’s predictions than they would likely have even if he had been accurate.

But what about those CBO projections?

The CBO’s Projections Are Full Of Faults

Every year, the Congressional Budget Office (CBO) releases a series of projections estimating federal deficits and debt levels over a 10-year horizon. These forecasts, often treated as gospel by lawmakers and media outlets alike, are used to shape public policy debates, inform budget decisions, and frame the long-term fiscal narrative of the United States. Yet, with striking regularity, these projections fail to materialize.

The reason is that, just as with Dalio, the CBO projections are often biased or one-sided estimations, data is excluded, and various other issues impair future accuracy, both good and bad. Furthermore, the agency’s forecasting methodology has structural flaws, ranging from rigid assumptions to exclusions of dynamic economic feedback to blind spots in fiscal behavior and policy change. The result is a set of projections that often mislead more than they inform. The following is a brief explanation of these flaws.

• The Static Nature of CBO Models – The CBO’s analytical framework is based on a static scoring model. This approach assumes that future policy, such as tax rates, spending levels, entitlement programs, etc., will remain unchanged over the 10-year forecast horizon unless new legislation is ALREADY enacted. In practice, this is rarely the case. For example, if a tax cut is scheduled to expire, the CBO assumes it will expire, even if the likelihood of an extension is high. The same goes for discretionary spending caps, Medicare payment reductions, and defense outlays. As a result, CBO projections often include future “deficit cliffs” or sudden fiscal contractions that lawmakers later avoid, all rendering the projections obsolete before they’re even useful.
• Ignoring Dynamic Economic Feedback – Perhaps the most significant shortcoming of the CBO’s model is its limited use of dynamic scoring—the idea that fiscal policy can influence broader economic outcomes, affecting tax revenues and spending. Instead, they rely heavily on baseline economic forecasts that assume a smooth trajectory of growth and inflation, often borrowed from consensus private forecasts. However, those assumptions are backward-looking, calibrated to historical averages rather than adaptive to current or projected conditions.
• Unrealistic Assumptions About Growth and Interest Rates – One of the most baffling elements of CBO’s debt projections is their unwillingness to incorporate realistic future economic growth rates. Over a 10-year horizon, even minor adjustments to GDP growth assumptions can dramatically alter debt-to-GDP ratios. However, the CBO defaults to a long-run real GDP growth rate of about 1.8% to 2.0%—a figure derived from trend productivity and labor force growth, rather than cyclical or structural changes in the economy.

This baked-in pessimism ignores potential upside scenarios such as demographic shifts, productivity surges due to technology, or policy-induced economic acceleration. Conversely, it fails to adequately model downside risks like recessions, geopolitical shocks, or credit events. The result is a misleading “middle path” that rarely reflects actual outcomes.

Similarly, the CBO assumes a gradually rising interest rate environment, where borrowing costs increase alongside debt issuance. However, history shows that interest rates can remain low, even as debt increases. As shown, rates decline with larger deficits as unproductive spending slows economic growth. The recent rate surge resulted from inflation from sending checks to households while shuttering the economy. As the remnants of that infusion fade, economic growth and rates will decline. However, Dalio and the CBO forget the cause of the rate surge and assume the rise was organic when it was not. As growth slows further, Central Bank interventions will challenge the CBO’s recurring narrative that rising debt will inevitably lead to a fiscal crisis via soaring interest payments.

The Future Is Highly Uncertain

To be clear, the CBO is vital in bringing fiscal transparency to government operations. But its forecasts should be treated as scenarios, not certainties. Some economists have argued for including range-based projections—a band of possible debt and deficit paths under varying assumptions for growth, interest rates, and fiscal policy. Others have called for more aggressive use of dynamic scoring to account for behavioral and economic feedback.

One thing is for sure. The future is highly uncertain. As such, any forecast that looks 10 years into the future will be wrong, for better or worse. For example, the U.S. is most likely on the cusp of the next industrial revolution. Such will transform the economy, work, and labor in ways we can not imagine currently. The impact of Artificial Intelligence on employment, productivity, and wage growth could be transformational. However, we must also consider the impact of AI on highly capital-intensive infrastructure needs. As we explored in “Electricity May Cure Debt Concerns.”

“Generative artificial intelligence has the potential to automate many work tasks and eventually boost global economic growth. AI will start having a measurable impact on US GDP in 2027 and begin affecting growth in other economies worldwide in the following years. The foundation of the forecast is the finding that AI could ultimately automate around 25% of labor tasks in advanced economies and 10-20% of work in emerging economies.”

They currently estimate a growth boost to GDP from AI of 0.4 percentage points in the US. Such would undoubtedly reduce the impact of rising debt levels.

The CBO’s debt and deficit projections have value, but they are deeply limited by the assumptions they rest on. Their forecasts ignore how politics evolves, how economies adapt, and how unpredictable the future truly is. They exclude meaningful liabilities, fail to account for economic feedback loops, and assume a rigidity in fiscal policy that doesn’t exist in the real world.

Conclusion

For investors, policymakers, and citizens alike, the key is not to discard the CBO’s work, but to understand its limitations. Notably, consider the following for those like Dalio, pontificating on the rising debt levels as a percentage of GDP.

Japan is a relatively small country compared to the U.S.

• It is not the world’s reserve currency issuer.
• Does not have the economic growth capacity or resources of the U.S.
• Lacks the military strength to defend its sovereignty.
• Has a pressing demographic issue.

Do both countries have financial concerns? Absolutely. Yet, despite all of Japan’s shortcomings, they have not fallen into bankruptcy or faced economic devastation. In other words, as an investor, betting on the demise of the U.S. at 120% of debt to GDP, in the face of the rise of Artificial Intelligence and its potential impact, will likely be a losing bet.

It is also crucial for investors to understand the data they view and use to build investment assumptions. As with Dalio, assuming a “debt crisis” is looming, has severely impaired individuals’ wealth-building process. Will the CBO and Dalio eventually be correct? Will a debt crisis finally happen? Maybe. Anything is possible. You must answer whether that will occur during your investment time frame. More crucially, what will you do after it happens?

The choice is yours to make. However, a wrong decision can severely impact your wealth-building process and the pursuit of your financial goals.

For more in-depth analysis and actionable investment strategies, visit RealInvestmentAdvice.com. Stay ahead of the markets with expert insights tailored to help you achieve your financial goals.

Lance Roberts is a Chief Portfolio Strategist/Economist for RIA Advisors. He is also the host of “The Lance Roberts Podcast” and Chief Editor of the “Real Investment Advice” website and author of “Real Investment Daily” blog and “Real Investment Report“. Follow Lance on Facebook, Twitter, Linked-In and YouTube Customer Relationship Summary (Form CRS)

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