Ray Dalio’s fix

Ray Dalio calls it the “3 percent solution,” and it’s gaining attention with White House officials and senior Republicans as a potential fix to America’s fiscal woes even as the party pushes ahead with a mega spending bill that’s roiling the bond markets.

For the past couple of weeks, advance copies of Dalio’s forthcoming book, “How Countries Go Broke: The Big Cycle” — and Dalio himself — have been making the rounds with policymakers in Washington and investors in New York.

The hedge fund mogul has been warning for some time that America’s soaring deficits risk economic calamity, and Dalio recently met with the chairman of the House Budget Committee, Representative Jodey Arrington of Texas, and its members.

What’s the solution? It aims to bring the annual deficit-to-G.D.P. ratio down to 3 percent, from around 7 percent. According to Dalio, this can be accomplished only by pulling “three levers” — cutting spending, raising tax revenue, and the corresponding lowering of interest rates.

“The 3 percent solution is very practical,” he told me by email. “It has worked many times in many places, most recently in the U.S. from 1991 to 1998.”

Dalio argues the interest rates lever is the most consequential.

The problem: Everyday interest rates are tied to the budget. We’re seeing that connection play out in real-time. The bond market has started charging a higher interest rate to buy U.S. government debt as confidence in the government’s fiscal discipline sours.