The U.S. is probably two years away from its next downturn and will see a significant weakening of the dollar, hedge fund manager Ray Dalio said.
The impact of the nation's current tax cut-driven fiscal stimulus will begin to fade in about 18 months, just as the U.S. ramps up its borrowing to help pay off pension, health care and other unfunded obligations, he said in an interview with Bloomberg Television Wednesday.
Domestic and foreign demand for U.S. debt won't keep up with the nation's borrowing needs, and the Federal Reserve ultimately will need to print money to fund the deficit rather than raise interest rates. That will result in a steep depreciation of the dollar, said Mr. Dalio. The greenback could fall as much as 30%, he said.
"Two years out is when I'm worried about," said Mr. Dalio, who runs the world's biggest hedge fund at Bridgewater Associates LP, Westport, Conn. "It'll be more of a dollar crisis than a debt crisis, and I think it'll be more of a political and social crisis," with greater internal conflict than in 2008.
The effectiveness of monetary policy in reversing the downturn will be limited, as interest rates will already be low and with quantitative easing at its maximum, he said.
Mr. Dalio said current regulations don't necessarily provide the freedom to deal with certain financial emergencies.
"I think there should be an emergency economic powers act" that allows the president, the Federal Reserve chairman, and the heads of the two Houses of Congress — when in agreement — "to do the things that are necessary" if circumstances "are not properly anticipated in the law," he added.
Mr. Dalio released a book this week, "A Template for Understanding Big Debt Crises," which studies prior financial downturns.