Fitch Ratings places the United States on negative watch due to debt ceiling, Bridgewater founder Ray Dalio discusses potential solutions

U.S. Treasury Secretary Janet Yellen previously issued a warning, stating that the Treasury's cash is expected to run out in early June. If Congress fails to reach a consensus on raising the federal debt limit, it could trigger a "constitutional crisis." At that time, the U.S. may not be able to pay government employees' salaries, and even the interest on U.S. national debt may default. In response, one of the three major credit rating agencies, Fitch Ratings, has placed the U.S. AAA rating on a negative watchlist. Fitch stated that the ongoing debt ceiling negotiations have increased the risk of the government being unable to repay some of its debts.

Debate between the two parties on reducing spending in the context of the debt ceiling

The debt ceiling is the maximum debt ratio that the government can bear. Once the debt ceiling is reached, no more funds can be borrowed to pay off old debts with new money. The debt ceiling can also be understood as a limit on the country's spending, and the annual budget allocation by Congress is actually one of the contents of the debt ceiling. However, many expenditures are long-term and fixed, such as social security, healthcare, defense spending, education, and more. President Biden pointed out at the recent G7 meeting that the Republicans are demanding cuts to healthcare and education funding, which would result in over 100,000 teachers, aides, and 30,000 law enforcement officers being laid off, which is an unreasonable approach.

According to a report by CNBC, House Speaker Kevin McCarthy stated on Wednesday that despite differences in spending, negotiations to raise the U.S. debt ceiling are moving towards reaching an agreement. However, Republican House member Steve Scalise announced that the House's scheduled one-week Memorial Day recess will begin as planned on Thursday, indicating that there still seems to be no consensus between the two parties on reducing spending in the context of the debt ceiling, and an agreement may not be reached quickly.

Treasury Secretary Yellen also expressed concerns about the possibility of the U.S. facing its first-ever debt default, stating that she has observed "some pressure in the financial markets." The S&P 500 index fell by 0.73% on Wednesday. However, it is puzzling that both gold and Bitcoin, which were previously considered as hedging assets, have also shown a downward trend recently.

Solution proposed by Ray Dalio, Founder of Bridgewater Associates

Ray Dalio, the founder of Bridgewater Associates, mentioned his views on the debt ceiling. He believes that the most likely scenario is:

Neither side will allow a default or, if they do, it won't last long, and they won't deal with big issues in a substantive way. Instead, they will make adjustments that look better than they are in reality, such as promising to reduce deficits in the coming years, but failing to do so when the time comes.

Rather, Ray Dalio also believes that wise bipartisan cooperation is the only way to overcome the current difficulties. How the two parties integrate internal opinions in the coming days to temporarily navigate the current crisis is just a stopgap measure. The fundamental issue - the rate of debt growth exceeding income growth - is the problem that the U.S. must address in the future. Ray Dalio believes that productivity is the key factor that can achieve a healthy financial situation without lowering living standards. Only by achieving collective income exceeding expenditures and ensuring sustainable government finances can the pie grow larger and be shared together.