Ray Dalio says the financial system will need 'big restructurings' soon as debt burdens become unsustainable

• Ray Dalio wrote in a note this week that the financial system is close to needing "big restructurings."
• The Bridgewater Associates founder cited higher debt burdens and rising interest rates.

Ray Dalio wrote in a Wednesday newsletter that debt levels have become unsustainably high, setting up the financial system for major changes.

The founder of Bridgewater Associates said debts will increase so much that central banks will have to buy them.

"Given these conditions, it appears that interest rates that are high enough (and money and credit that is tight enough) to fight inflation and provide lender-creditors with adequate real returns will be unbearably high for borrower-debtors," Dalio said. "This means the system is close to the point where big restructurings will be needed. Of course, which debtors and creditors are affected will vary."

He also reiterated his "Big Cycle" framework that says the same economic patterns are repeated throughout history, namely the creation of enormous debt, conflicts within countries, conflicts between countries, the impact of nature, and technological changes like the internet or AI.

Each of the five forces, Dalio said, are now converging in magnitudes not seen in decades. Meanwhile, within the larger cycle, there's a smaller, short-term cycle defined by economic weakness, with central banks creating high inflation and eventually recessions.

In his view — following nine consecutive interest rate hikes from the Federal Reserve, historic inflation, an ongoing debt crisis, and credit crunch — this is where things stand now.

"We are now in the tight money to fight inflation phase of this cycle, just before the economic contraction that is likely to make the next year or two difficult ones in the economy," Dalio wrote, adding that the political cycle moves loosely in sync with the economic cycle.