Ray Dalio warns: The Federal Reserve is stimulating the economy in a bubble and needs to leave before the "Liquidity frenzy" ends.

Ray Dalio, the founder of Bridgewater Associates, has once again issued a warning, pointing out that the Federal Reserve (FED) is restarting quantitative easing (QE) in a situation where asset prices are at all-time highs and inflation remains high, which can be described as “stimulating in a bubble.” He believes that the United States is entering the final phase of a 75-year “great debt cycle,” and the eventual cost may be significant.

Dalio's terminal signal: The Federal Reserve's monetary easing shifts from “market rescue” to “market support”

Dalio pointed out in his latest article “Stimulating Into a Bubble (” that the Federal Reserve (FED) has ended quantitative tightening ) QT ( and initiated QE. Although it is pretended to be a technical operation, it is in fact a substantial easing, indicating that the debt cycle is entering its final stage. He emphasized:

When QE occurs during asset booms, loose credit, and still high inflation, it is not stimulating a recession, but rather stimulating a bubble.

He stated that in the past, QE often occurred during times of economic weakness, credit tightening, and asset declines, such as during the 2008 financial crisis. Now the situation is completely different:

The economy is still growing ) the real growth rate in the United States is about 2% (

The unemployment rate is only 4.3%

Inflation is above target at about 3%

AI and technology stock valuations soar

He is worried about this: “This is a typical late-stage prosperity signal.”

Printing money to buy bonds: The Federal Reserve (FED) and the Treasury Department co-star in the inflation drama.

Dalio pointed out that the current massive fiscal deficit and short-term government bond issuance in the United States are intertwined with the Federal Reserve's QE operations, forming a pattern of “monetized debt,” meaning that the central bank is effectively financing the government by printing money to purchase bonds.

He warned: “Such stimulus is no longer just for 'activating market liquidity', but is directly paying for the debt.”

This kind of “dual easing” in fiscal and monetary policy will drive up asset prices and lower real interest rates in the short term, but at the cost of increased risks of inflation and currency depreciation, and will widen the gap between the rich and the poor.

) Ray Dalio, the founder of Bridgewater Associates, discusses risk strategies, asset allocation, corporate management, and AI in the context of economic and political turbulence (.

Capital Transmission and Bubble Mechanism: Why Will Gold and Bitcoin Benefit?

Dalio further explains the transmission logic of QE: when central banks purchase a large amount of bonds and release liquidity, market real interest rates decline, and investors will chase higher-yielding assets.

If liquidity remains in the financial system, then the valuations of stocks, bonds, or tech stocks will be pushed higher.

If some flows into the real economy, then inflation will rise.

This means that hard assets like gold and Bitcoin will benefit, as they are seen as hedges against inflation and currency depreciation. Dalio pointed out: “When the real returns on bonds turn negative, the appeal of gold and other store-of-value assets will significantly increase.”

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Dalio's advice: Leave the party before the “liquidity frenzy” ends.

He anticipates that the market may enter a period of “liquidity frenzy )liquidity melt-up(”, where an influx of funds drives the stock market and risk assets to new highs, but it will ultimately end due to inflationary pressures or tightening policies.

He described: “This stage is often the most dangerous and the most tempting moment. The market appears strong, but it is actually nearing the bubble's peak.”

Similar past stages include the 1999 internet bubble and the QE period from 2010 to 2011. Dalio suggests that those investors who understand how to leave the party before it ends will have the final say.

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Market Divergence: There are still variables regarding whether to cut interest rates or not.

Even though The Federal Reserve (FED) Chairman Powell ) Powell ( spoke cautiously and emphasized that a rate cut in December is not a foregone conclusion; data from the Chicago Mercantile Exchange ) CME ( shows that the market still expects the Federal Reserve to cut rates by another 25 basis points.

The target interest rate probability for the December FOMC meeting

What is more concerning is that the interest rate cut in October did not lead to a market rise, reflecting that this event had already been priced in. This misalignment between policy and market sentiment further highlights the fragility of the market.

At the peak of prosperity, investors must remain vigilant at the golden crossroads.

Dalio believes that the Federal Reserve's QE policy combined with the government's expansion of deficits constitutes a “dangerous combination”: it can stimulate asset prosperity in the short term, but in the long term, it may trigger inflation and a debt crisis.

He reminded investors: “Stimulating the economy in a bubble is a signal of the final stage; history always repeats itself in similar rhythms.”

In this article, Ray Dalio warns: The Federal Reserve (FED) stimulates the economy in a bubble and needs to leave before the “liquidity frenzy” ends. First appeared in Chain News ABMedia.