Ray Dalio says UK policies show ‘incompetence’ and warns other governments not to make the same mistakes

Ray Dalio has added his name to a growing list of critics of the UK’s new spending plan, which was unveiled by Prime Minister Liz Truss and Chancellor of the Exchequer Kwasi Kwarteng last week.

The billionaire investor – who founded what is now the world’s biggest hedge fund, Bridgewater Associates, in 1975 – argued that the plan’s aggressive tax cuts will raise the UK’s debt to an unsustainable level and weaken the pound.

“Investors and policymakers: Heed the lesson of the UK’s fiscal blunder,” Dalio wrote on Tuesday tweet. “The panic selling you’re seeing now is driving out UK bonds, currency and financial assets because of the recognition that the large supply of debt the government has to sell is far too much for demand. .”

On Monday, in response to Truss’ new spending plan, the UK bond market had its biggest one-day sell-off in its history, pushing the total losses in the country’s stock and bond markets since Truss became prime minister. on September. 5 to over $500 billion. Meanwhile, the pound hit an all-time low of $1.05 against the US dollar on Monday morning, and although it has since risen to $1.07, the currency is still near 40-year highs low vs the dollar.

Following the announcement of the new Truss spending plan, the UK’s Debt Management Office said it will increase its debt issuance of 72.4 billion pounds for the current fiscal year to 234.1 billion pounds.

The new spending plan will also push the United Kingdom’s debt to GDP ratio to around 101%, the highest level of debt the United Kingdom has had since 1962, according to Deutsche Bank.

In Ray Dalio’s view, this rapid increase in debt, coupled with the lack of demand for the pound on the world stage, is a recipe for disaster.

“That makes people want to get out of debt and out of the currency. I don’t understand how the people behind that move didn’t realize that. It shows incompetence,” Dalio said. “Mechanically, the UK government is operating like an emerging country government, it’s producing too much debt in a currency that doesn’t have much global demand.”

The investor went on to argue that this should be a teaching moment for governments around the world not to increase their debt to unsustainable levels.

“I hope, but I doubt, that other policymakers who are doing similar things…will recognize that they risk a similar outcome—and that investors will see this as well,” he said.

Analysts are also concerned that the UK’s new spending plan, designed to stimulate economic growth and help cushion the effects of high energy prices in the short term, could worsen overall UK inflation. And consumer prices already jumped 9.9% from a year ago in August.

“The government is trying to balance support for consumers and businesses with measures that could encourage further inflation, while trying to revive a stagnant economy,” said Giles Coghlan, chief market analyst at a broker Forex global HYCM. Fortune. “Such a large fiscal package could contribute to rising prices in the medium to long term which could further damage an economy and currency that is already on its knees.”

The potential inflationary impact of the new spending plan has led to increased calls for the Bank of England (BoE) to raise interest rates significantly, with some economists even calling for the UK’s base interest rate to move from 2.25% to as high as 6 % next year. .

That’s bad news for UK homeowners. Monthly mortgage rates will increase immediately for 2 million people on tracker or variable interest rate plans if the BoE goes ahead with its next rate hike. And another 1.8 million homeowners on fixed-rate deals will have to pay much higher rates next year, according to UK Finance.

With the UK facing more interest rate hikes ahead, rising government debt, a debt-ridden pound, and a European energy crisis, Deutsche Bank’s chief economist, David Folkerts-Landau, said he now believes the recession will be tough a country that will last three or four. quarters.

“We’re thinking in terms of a recession that’s going to be deep and long,” he told Bloomberg on Tuesday. “It’s the price we have to pay for financial stability and getting on the right track.”

This story originally appeared on Fortune.com

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