Dalio: The Fed ending QT = stimulating the economy amid a bubble, the US "big debt cycle" has entered its most dangerous stage!

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Bridgewater Associates founder Ray Dalio issued a warning, saying that the Federal Reserve’s decision to end quantitative tightening (QT) may be adding water to the bubble, creating an even bigger bubble.

On Wednesday local time, Dalio published an article on LinkedIn pointing out that the current Fed easing policy is being implemented at a time when asset valuations are high and the economy is relatively strong; ending QT is "stimulus into a bubble" rather than the traditional "stimulus into a depression."

Fed Chair Jerome Powell recently stated that as the banking system and economy expand, the Fed "will increase reserves again at an appropriate time." In Dalio’s view, this means QE is returning—just packaged as a “technical operation.”

Dalio believes that the U.S. “long-term debt cycle” has entered its most dangerous stage, and that the market should not ignore this fact:

When the supply of U.S. Treasury bonds exceeds demand, the Fed “prints money” to buy bonds and the Treasury shortens bond maturities to fill the demand gap for long-term bonds, these are all typical late-stage dynamics of the "long-term debt cycle."

Dalio expects that in a liquidity-rich environment, long-duration assets (such as tech and AI stocks) and inflation-hedged assets (such as gold) will benefit, but this “liquidity bubble” will ultimately face the challenges of risk accumulation and policy tightening.

QE Transmission Mechanism: Relative Prices Drive Market Flows

Dalio explains the transmission mechanism of QE in detail. He points out that all financial flows and market volatility are driven by relative attractiveness rather than absolute attractiveness. Investors choose different assets based on their relative expected total returns; expected total returns equal asset yields plus price changes.

Taking the current market as an example, gold’s yield is 0%, the 10-year US Treasury yield is about 4%. If gold’s expected annual price increase is less than 4%, investors will prefer bonds; otherwise, they will prefer gold. Considering inflation, if the central bank increases money and credit supply, this will lift inflation expectations, thereby enhancing gold’s relative attractiveness compared to bonds.

QE is usually implemented to create liquidity and suppress real interest rates. If liquidity mainly flows into financial assets, it will drive up asset prices, lower real yields, expand valuation multiples, compress risk spreads, and push up the price of gold, resulting in “financial asset inflation.” This effect widens the wealth gap between asset holders and non-holders.

Unprecedented “Stimulus in a Bubble”

Dalio emphasizes that the environment for current Fed QE is completely different from the past, which significantly increases policy risks. Historically, QE was typically deployed during recessions or times of extreme weakness, featuring the following conditions: falling and reasonably valued assets, economic contraction, low inflation, serious debt and liquidity issues, and wide credit spreads.

However, the current situation is completely the opposite. Asset valuations are at high levels and keep climbing, the S&P 500 earnings yield is 4.4%, the nominal yield on 10-year Treasuries is 4%, with a real yield of about 1.8%, and the equity risk premium is only about 0.3%. The economy is relatively strong, with average real growth over the past year at 2%, and unemployment rate at just 4.3%.

Inflation is slightly above target at about 3%, and deglobalization and tariff costs are putting upward pressure on prices. Credit and liquidity are ample, with credit spreads near historical lows. Implementing QE in this environment amounts to "stimulus into a bubble."

Government Debt Monetization, Repeat of the Liquidity Frenzy Before the 1999 Crisis?

Dalio thinks that due to highly stimulative fiscal policy—massive debt stock and deficits financed by large-scale government bond issuance—QE is in fact monetizing government debt rather than simply providing liquidity to the private sector.

If (the Fed’s) balance sheet starts to expand significantly, while interest rates are cut and fiscal deficits remain huge, we will see this as a classic interaction between monetary and fiscal authorities for the monetization of government debt.

This makes current policy "look more dangerous and more inflationary."

Dalio warns that, in the short term, the market may usher in a “liquidity melt-up” similar to the eve of the 1999 internet bubble burst or the QE period of 2010–2011.

In Dalio’s view, the current U.S. policy mix—expanding fiscal deficits, renewed monetary easing, deregulation, an AI boom—is creating a “super easing with a bet on growth.”

While these policies often spark asset booms in the short term, they also tend to mean: bubbles inflate faster; inflation is harder to control; risks accumulate more deeply. And when policy is forced to reverse, the cost will be greater.

He expects QE will push down real rates, enhance liquidity via compressed risk premiums, and lift valuation multiples—especially favoring long-duration assets (tech, AI, growth stocks) and inflation-hedged assets like gold. Once inflation risks reawaken, tangible asset companies such as those in mining and infrastructure may outperform pure long-duration tech stocks.

Risk Warning and DisclaimerThe market involves risk, investment requires caution. This article does not constitute individual investment advice, nor does it consider the special investment objectives, financial situation, or needs of any specific user. Users should consider whether any opinion, viewpoint, or conclusion in this article is suitable for their specific situation. Invest accordingly at your own risk. ```