A prominent U.S. hedge fund manager has welcomed the gradual recovery in the global economy over the last decade, but believes the world is most of the way through the expansion and that a very difficult downturn is probably two or three years away.

"I believe that in the next two to three years, there is a significant probability of a downturn in the world economy," Ray Dalio, founder and co-chairman of Bridgewater Associates LP, the world's largest hedge fund firm, said in a telephone interview 10 years on from the 2008 financial crisis.

(Ray Dalio)
[Photo courtesy of Bridgewater]

Dalio said the world is in "the last stages of the debt cycle," with monetary easing steps by central banks pushing up asset prices, and that low interest rates leave policymakers with few monetary policy options to shore up the economy when the next downturn comes.

"I think that central banks' focus is inflation, or some focus on inflation and growth both," he said. "But they don't pay enough attention to the debt growth."

Given his some 50 years of experience of seeing debt crises, Dalio said he "could identify that we were in a bubble that was going to reverse, and that it would be difficult to handle."

The International Monetary Fund said in July that global growth -- which it projected at 3.9 percent for this year and in 2019 -- "is becoming less even, and risks to the outlook are mounting," with the rate of expansion appearing to have peaked in some major economies.

Dalio expressed concern about the impact of an economic downturn on individual countries as well as international relations.

"If we have a downturn, I'm worried about social and political problems that will be caused around the world, and how populism will cause more conflict internally within countries, and externally between countries," he said.

Pointing to the tariff war between the United States and China, the fund manager said the world's two largest economies are likely to see more tensions -- not only economically but politically.

"China is becoming more comparable to the United States as an economic power, and we're having an economic rivalry that could cause more political tensions," he said. "I worry that when a rising power challenges an existing power, there's conflict."

Touching on the Japanese economy, Dalio said the Bank of Japan's aggressive credit easing alone is not sufficient to stoke inflation and ensure sustained growth.

He believes that in the next downturn a new monetary approach to revitalize the world's third-largest economy might need to be required, and suggested that the Japanese government and the central bank provide cash directly to people for spending purposes, a measure known as "helicopter money."

"The Bank of Japan is reaching the limits of the effectiveness of monetary easing," Dalio said. "I think that in the next downturn it might need to go to what I call 'monetary policy 3'," which he said is "putting credit into the hands of spenders with incentives to spend rather than buying financial assets."

According to Dalio, "monetary policy 1" uses adjustments in interest rates, a traditional policy tool, while "monetary policy 2" involves quantitative easing.

The BOJ's prolonged ultra-easy monetary policy has raised concern about side-effects such as hurting profits at banks with lower yields and making the central bank's balance sheet vulnerable to future losses.