Ray Dalio's Bridgewater Associates has returned more money to investors than almost any other hedge fund...

Since its inception in 1975, it has generated nearly $60 billion – putting it right in line with the likes of other hedge-fund heavyweights Millennium and D.E. Shaw.

Only quantitative hedge fund Citadel has generated more money for its investors.

So even though Dalio stepped away from Bridgewater completely in 2021, folks still listen when he speaks. And last month, he had some fighting words for the U.S. government...

In short, Dalio is worried the government is spending too much money. The U.S. has roughly $34 trillion in debt... which is more than our annual gross domestic product ("GDP").

The gap is also expected to keep getting bigger. The Congressional Budget Office forecasts that the U.S. debt-to-GDP ratio will reach an all-time high by the end of the decade, and Dalio thinks that's going to start devaluing our debt soon.

He believes investors should fear debt hitting Treasury bonds... and that, for now, it's best to look to international markets.

As we'll explain today, while our mounting debt looks concerning, the amount the U.S. spends isn't as important as what it's spending on.

All government spending can be measured by its 'multiplier effect'...

The multiplier effect shows how much $1 of government spending turns into future GDP.

A "multiplier" of 1, for example, means that for every $1 the government spends, $1 turns into GDP.

Some spending categories – like Medicare, Medicaid, or other money that goes directly to people or consumables – have a lower multiplier than others because they don't produce as much (if any) economic output.

Those sorts of investments, though they may be beneficial to society, are less productive from an economic standpoint and just lead to more national debt.

Investments on things like infrastructure, on the other hand, have a higher multiplier because they lead to future growth.

Take the U.S. Interstate Highway System, for instance...

This infrastructure will last decades, and it will lead to increased output in other industries... like transportation, autos, and travel. And growth in those industries will have a snowball effect elsewhere... like in chip manufacturing and retail.

Every $1 the U.S. government puts into our highway system translates into roughly $1.80 in additional GDP. That means this spending has a multiplier effect of 1.8... and leads to nearly double the original investment.

So even though these investments are accumulating more and more debt, they're also stimulating more economic growth.

In other words, while keeping track of the U.S. debt level does matter, it matters more to understand how we're accumulating that debt.

If the U.S. is spending on long-term opportunities that lead to future economic growth, there's no need to worry...

Spending on things like chips, clean energy, and infrastructure have a higher multiplier effect.

Just look at the math...

Let's say the government spends $1 trillion on these various investment initiatives. And it finances all of it in debt at the current 10-year rate, which is 4.4%. That means the government is looking at a total interest expense of $44 billion on that $1 trillion.

But if the multiplier effect of all that spending is 1.5 times – less than the highway system – it would benefit GDP to the tune of $1.5 trillion.

GDP comes right back to the government's pocket in the form of taxes. Between individuals and corporations, the average tax rate is about 30%. That means the extra $1.5 trillion in GDP will contribute $450 billion to the future government budget.

Subtract out the $44 billion in interest expense we mentioned above... and the government is still in the green by $406 billion on its investment.

Again, it's important to watch what the U.S. is spending on, but more spending isn't inherently bad.

In recent years, a lot of the U.S. budget has been invested in high multipliers like infrastructure... And new infrastructure should boost GDP for years to come.


Rob Spivey
June 12, 2024