Will Ray Dalio’s “3% 3-Part Solution” Solve Our Debt Crisis?

October 29, 2025

By Robert Wiedemer

I was at a conference in California recently on a panel discussing our nation’s debt crisis.   While at least one member of the panel felt that we didn’t need to worry about our debt, some audience members weren’t so sure.  In fact, one member, an exceptionally interesting astrophysicist from UC – Berkeley asked a great question:  Will Ray Dalio’s 3% solution solve our problem?  It was the best question I got. He obviously knows more than just astrophysics.  But time was short, so I gave him a flippant, but correct, answer:  Dalio’s solution was not politically viable.

After the session, I promised I would give him a more detailed explanation in writing. Below is that explanation.

What is the 3% 3-Part Solution?

First let’s start with some background.  Ray Dalio is one of the world’s most successful hedge fund managers. He is a person who many people listen to and for good reason. He is effectively the father of the hedge fund industry.  He started Bridgewater Associates almost 50 years ago and today it manages $92 billion. 

He speaks and writes about broader economic issues, not just the markets, and recently wrote the New York Times Bestselling book “How Countries Go Bankrupt.”  In it he proposed his 3% 3-Part solution to our debt crisis.  In brief, that solution is to reduce the deficit to 3% of GDP from the current 6% by using the following 3 methods:

1)    Some cuts in spending and/or

2)    Some increase in taxes and/or

3)    Some cut in interest rates

He gives a number of examples that show a change in interest rates would be more powerful than a change in taxation.  In addition, a change in taxation would be more powerful than a change in spending. Further he expects that cutting interest rates would offset the recessionary impact of cutting the deficit enough to bring any recession to acceptable levels. 

Given the Fed’s independence he understands that they may not want to cut interest rates so he proposes that Congress makes a 6% increase in taxes and a 6% decrease in spending which would reduce our deficit to 3% of GDP.  If making those changes creates a big recession, Dalio believes the Fed would respond by lowering rates as it has done before.

It's Politically Infeasible

My response is the same as before – it’s not politically feasible.  But I will add some detail to that response.  Mr. Dalio says that it is far better in the long term than the alternative of letting the debt get much, much bigger.  I agree. But that won’t sell Congress or the President. 

He is asking Congress and the President to take some pain now to avoid much, much more pain later.  They haven’t done that before, and I don’t think they have any interest in doing it now.  In fact, we are going very much going the opposite direction of greater spending and less taxes.

The Deficit Has DOUBLED in Each of the Last Two Presidential Terms

To be specific, Congress and President Trump almost doubled the deficit in his first term and Congress and President Biden almost doubled the deficit again during his term. That’s a doubling of our deficit every four years!  Given those kinds of increases, it is almost fantasy to believe that Congress and the President of either party will be able to make any meaningful cuts in spending or increases in taxes.

Another big problem is that a deficit of 3% of our GDP doesn’t solve our debt problem.
Three percent of GDP is still a $1 trillion deficit. Not long ago a $1 trillion deficit would have seemed outrageous.  In fact, the deficit was only $460 billion when President Trump took office in 2017.   Maybe it would take a little longer for a $1 trillion deficit to become a crisis, but we would still get there. 

There Hasn’t Been, and Still Isn’t, Enough Political Pressure on Congress and the President to Take Real Action

However, if we would have addressed this issue with Dalio’s approach or a similar one in the early 1980s, it would have worked and could have worked well enough to reduce the deficit to very little.  However, it would still cause a recession, and NOBODY would accept that in the early 1980s because the debt was so small that it wasn’t obvious it was going to become a major problem.  And frankly, it didn’t for decades. 

But, like so many political problems, by the time it is obvious it is a huge problem, it is too late to easily solve the problem so it is easier to just continue to kick the can down the road. 

We have seen this rodeo before with Vietnam.  We ended up taking out all of our ground forces and leaving the war to the Vietnamese army in 1973, which lost the war two years later. 

We could have left earlier and saved a lot of blood and treasure, but it wasn’t obvious that we would take such heavy losses and not win or that the South Vietnamese army couldn’t win.  By the time it was obvious in early 1975, it was a little late to do anything about it since the war was over in April 1975.

Politically there was just not enough support to get out of Vietnam earlier.  Partly because we really wanted to win the war. 

The same is true with the deficit, politically there has not been enough support to solve it earlier.  And there is still not enough support because it is not obvious to enough people that we have a huge problem.

Remember, at least one other member on my panel of experts thought that the debt didn’t pose any problem.  So, it is hard to convince Congress to take pain now for a problem that may not exist or be that big.  And we really don’t want to take any pain now.

Much More Recessionary Risk to Dalio’s Plan than He Thinks

Also, what if Dalio’s solution causes much more recessionary pain than he expects.  I think it would.  Congress may not want to risk it.  Plus, they don’t want to upset their constitutes who will see immediate pain and no real gain from that pain.

Dalio is hoping that the Fed will lower long term interest rates which would reduce the need for tax increases or spending cuts.  However, the Fed may not want to lower long-term rates enough to make a big difference. 

Many people (maybe even Ray Dalio) seem to think the Fed can just announce lower long term rates.  They can’t. They have to do it by printing money.  After the big inflation scare in 2021-22, they are rightfully concerned that massive money printing will create inflation.

And if they ignore that fear for political reasons, they may find that it does create a lot of inflation and then you have lit the fuse that will blow up asset values, including stocks, bonds and real estate. 

Part of the problem is that this economy is more fragile than Ray Dalio realizes.  Just what John Paulson found out when he didn’t bail out Lehman brother in 2008.  That created the biggest Financial Crisis in our history. 

The same could be true with Mr. Dalio’s small solution.  It may seem like it won’t cause a big economic problem, but it could easily kick off a big recession and, most importantly, a major financial crisis in our bubble asset markets – stocks, real estate and bonds. 

When It Becomes Politically Feasible, It Will Be Too Late

Again, the time to address this was long ago when the problem was much smaller and the solution much less painful. 

I applaud Mr. Dalio’s efforts, but he will find the same political problem that got us into this mess still exists, thwarting his plan.  And that won’t change until the problem is obvious to many, many people – at which point it will be too late.