Billionaire investor Ray Dalio says the 'Great Wealth Transfer' explains the US economy's resilience

Bridgewater Associates founder Ray Dalio.

Eoin Noonan/Getty Images

• The US economy has remained resilient despite the Fed's rate rises and recession fears.
• Ray Dalio argued that's due to a big government transfer of wealth to the private sector.
• He said that's kept household sector balance sheets in good shape despite rising government debt.

Interest rates are at a 22-year as the Federal Reserve continues to battle inflation, and recession fears remain – but the US economy is holding in there. 

Growth in the second quarter beat analysts' expectations, inflation is rapidly cooling, and unemployment is holding steady at under 4%. 

Exactly why the economy remains resilient is open to debate – but veteran investor Ray Dalio has come up with an explanation. 

The Bridgewater Associates founder wrote a lengthy LinkedIn post Wednesday outlining what he called the "Great Wealth Transfer."

"There was a big government-engineered shift in wealth from 1) the public sector (the central government and central bank) and 2) holders of government bonds to 3) the private sector (i.e., households and businesses)," he wrote. 

"This made the private sector relatively insensitive to the Fed's very rapid tightening to a more normal monetary policy. As a result of this coordinated government maneuver, the household sector's balance sheets and income statements are in good shape, while the government's are in bad shape." 

In other words, central government took on a lot more debt and central banks printed far more money – causing their balance sheets to deteriorate and inflation to rise – to the benefit of the private sector. 

Although the Fed's tightening has at times sent bonds and stocks falling, and squeezed some areas of the economy such as commercial real estate, private sector net worth has risen and unemployment declined fell, according to Dalio. 

But he once again issued a dire warning to the US government about high debt levels. 

"Does it matter that the central governments and central banks have such bad balance sheets and income statements if the real economy is in pretty good shape? Of course it does!" he wrote. 

"As with people and companies, governments that borrow have debt service payments and eventually have to pay back principal, which is painful. The only differences in their finances are that governments can confiscate wealth through taxes and print money via the central bank (so that's what we should expect to happen)."

Dalio believes it's highly likely that as the cost of interest payments keeps rising, the government will need to sell more debt, leading to a "self-imposed debt spiral." 

It's not the first time Dalio has issued such a warning.

"In my opinion, we are at the beginning of a very classic late, big cycle debt crisis, when the supply-demand gap, when you are producing too much debt and have a shortage of buyers," he told a Bloomberg conference in June.

At the start of this year, Dalio also compared American policymakers' handling of the debt ceiling crisis to "a bunch of alcoholics who write laws to enforce drinking limits". 

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