Author: Ray Dalio (founder of Bridgewater Associates)

Translation: Shenchao TechFlow

Introduction by Shenchao: In response to the highly anticipated midterm elections in the United States and the change of power in both chambers, Ray Dalio, co-founder of the world's largest hedge fund Bridgewater and a well-known macroeconomist, wrote an extensive article stepping outside the chaos of partisan battles, analyzing the deep trends of the U.S. economy through his classic Big Cycle historical model.

Dalio pointed out that the election results only change the specific individuals responsible for handling issues but do not alter the enormous debt, the wealth gap, great power competition, or the objective challenges in climate and technology that the U.S. faces. With the temporary fiscal funding set to expire in December and the federal debt ceiling approaching in spring 2027, the polarization and confrontation between the two parties are unlikely to bridge the deficit; rather, it may undermine the credibility of U.S. debt as a core global collateral.

Core Conclusion: Regime Change Does Not Alter Objective Predicaments

Many people have asked for my views on the results of the U.S. midterm elections, so I decided to share my thoughts in writing. Given the deep implications of changes in various government positions, I will focus only on the most important core dimensions in this brief article.

From a global perspective, my core conclusion is that these political changes do not alter the objective environment that government representatives must face and deal with. Our problems will not disappear automatically; the key lies in whether representatives from all sides can resolve challenges through efficient bipartisan cooperation or slip into unconstructive opposition.

Specifically, we still face the same enormous debt issue, the same wealth and value gap, the same international geopolitical issues, the same climate problems, and the same technological disruption issues. The election results do not change the classical dynamics of the game surrounding wealth and power. The midterm elections merely change who handles these issues and how they are handled.

The most pressing question is whether there will be more partisan strife and governance dysfunction in the future or less. My judgment is that it is more likely that we will see increased political infighting and more severe dysfunction.

Financial Showdown Forecast: Debt Ceiling and Treasury Credit Risks

We will soon confirm whether my judgment is accurate, starting with the upcoming lame-duck congressional session and subsequent developments. For example, we will see how the elected government representatives address the issue of money, specifically government fiscal spending and tax collection.

This contradiction will resurface on December 11 when President Trump’s temporary fiscal funding expires, and will flare up again in March 2027 when the federal debt is expected to hit the statutory ceiling, peaking in the autumn of 2027 when the Treasury exhausts its unconventional funding measures.

Conflicts surrounding these fiscal allocations are likely to be fierce. Ongoing political strife and tremendous uncertainty may push up yields on short-term treasury bills and similar assets, as investors strive to avoid default risk. At the same time, market concerns about liquidity and credit risks will continuously rise, thus undermining confidence in U.S. debt as the world’s primary safe collateral.

Similarly, Elizabeth Warren's chairmanship of the Senate Banking Committee is likely to spark a series of significant policy battles that directly affect the real economy and financial markets. This is just one small example of the many disturbances about to occur.

International Pattern Evolution: Weak President and Strategic Contraction

The election changes will also entrap the U.S. in a dilemma: a beleaguered lame-duck president, facing a public steeped in isolationist sentiments and attacks from isolationist opponents, confronted with enormous debt and fiscal crises, caught in a kind of non-violent political civil war.

This situation will significantly weaken the president's personal and overall authority on the international stage and will likely lead to a comprehensive geopolitical strategic contraction for the U.S. Moreover, the U.S. strategic contraction will directly promote the most powerful nations in various major geographical regions (such as China in Asia) to further expand their international influence.

Solution to the Dilemma: Moderates Unite Against Extremism

As for how to break this deadlock, I firmly believe that, in principle, the only viable path for the U.S. and all other heavily indebted democracies that are highly fragmented politically/socially/fiscally and troubled by similar ailments (e.g., France, other European countries, and the UK) is to unite the wise and steadfast moderates from the left and right to jointly resist extreme forces and properly address the difficult dilemmas.

This requires them to reach a consensus and guide the government and all citizens to endure the necessary pains to implement those tough but essential reforms that can restore the country's strength. However, I also believe the probability of this occurring in reality is extremely low.

Big Cycle Perspective: Historical Cycle from Order to Chaos

This internal political evolution mechanism is not uncommon in human history. There have always been four forces along the spectrum from left to right: the far-left, moderate left, moderate right, and far-right. As macroeconomic conditions worsen, the degree of polarization among these factions deepens, and their struggles intensify until one side prevails; afterward, the moderates and extremists within the winning side will again battle for control.

This struggle is logically bound to intensify because as the gap in wealth and values continues to widen, irreconcilable contradictions will become increasingly profound. We are now seeing this struggle erupt simultaneously within both the Republican and Democratic parties, and I anticipate that in the future there will be even more intraparty and interparty infighting.

In my view, the fundamental financial laws of borrowing apply equally to both governments and individuals: you cannot spend beyond your means indefinitely without consequences. The difference is that governments can print money to make debt repayment easier, but this leads to currency depreciation and reduced purchasing power of debt. These common-sense principles have been confirmed repeatedly over thousands of years of history.

Reflections on System Functioning: Commonalities of Swing Voters and Democratic Effectiveness

For those who firmly believe that only bipartisan moderates working together is the one correct path forward, it is noteworthy and essential that the majority of Democratic legislators who won in swing states have policy positions almost identical to moderate Republicans. Therefore, simplistically dividing the political landscape into Democrats and Republicans is an oversimplification of reality.

It is also worth affirming that across the United States, the democratic principle of voting and peacefully accepting election results has been adhered to. While this represents a significant victory for procedural democracy, the question of whether democratic systems can maintain effective operations in resolving real existential issues remains an unresolved challenge of the era.