Stan Druckenmiller celebrated the one-year anniversary of what turned out to be one of the most misguided pseudo-calls in recent market history by deriding the Fed and indicting policymakers for a laundry list of offenses including jeopardizing the US dollar’s reserve status.
In a cartoonish video call with CNBC Tuesday, Druckenmiller called current Fed policy “totally inappropriate” and accused Jerome Powell and his colleagues of “endangering” the greenback.
Policymakers, Druckenmiller assessed, are “playing with fire.” Fed debt monetization “will have horrible implications for the dollar,” he told an audibly giddy Joe Kernen. “It’s more likely than not within 15 years we lose reserve currency status.”
“They couldn’t be doing this without the Fed,” Druckenmiller insisted, referencing fiscal transfers, including stimulus payments and enhanced unemployment benefits.
That simply isn’t true. Congress authorizes spending and, as I’m fond of putting it, no bearded sky god handed down any chiseled tablets that said all such spending must be offset with bond issuance and/or tax hikes.
Druckenmiller is trafficking in normative statements and trying to pass them off as immutable truths. The figure (below) illustrates his point, but note that it doesn’t have to be this way. We’ve simply chosen to go this route and thereby opened ourselves up to Ponzi scheme allegations.
Because we refuse to drop the charade that says all spending must be somehow “covered” — that the dollars the US spends must be “sourced” from without, despite the government’s monopoly on the issuance of US dollars — folks like Druckenmiller get to make manifestly false statements.
Druckenmiller referenced the “bond vigilantes” of yore, noting that he “used to be one of them,” on the way to insisting that without Fed purchases, “the bond market would be totally rejecting” ongoing fiscal largesse at a time when retail sales in the US have already surpassed pre-pandemic levels and are running above trend.
What Druckenmiller doesn’t mention is that, in reality, there’s no need to issue debt at all to “fund” spending. Treasurys are just interest-bearing dollars. They’re issued at the government’s discretion. And they’re not properly “debt.” You can’t “owe” a sum denominated in a currency you issue. That’s a philosophical impossibility. That doesn’t preclude currency crises, of course. Turkey, for example, can have a currency crisis. But strictly speaking, it cannot “owe” a lira-denominated “debt.”
US Treasurys are the collateral that grease the wheels of global finance and they also serve as the key vehicle for recycled savings. So, as a practical matter, the world does need Treasurys. But the idea that they must be issued (that the US must borrow) to “pay for” expenditures not funded through tax hikes or some other offset, is not some natural law. It’s just one tenet (among many) of the system we’ve created.
Predictably, Druckenmiller rolled out the entitlements ghost story and warned that bond yields could rise to “prohibitive” levels absent Fed buying. From there, the course of the conversation was set. Druckenmiller essentially suggested that eventually, the US government won’t be able to afford to pay its bills, in part because the interest expense on the country’s debt could become unserviceable.
Again, I implore you: Forget Druckenmiller’s reputation. What he’s saying is plain wrong. And not in the sense that I disagree with his opinion. The statements he made about federal government finance are factually incorrect. It isn’t a matter of opinions at all. He’s conflating conventional “wisdom” and decades of deficit and debt dogma with immutable laws.
Druckenmiller could, of course, be correct to suggest that the current policy conjuncture will end in tears, so to speak. But if it does, it won’t because we attempted to controvert gravity or wittingly ran afoul of some other cosmic dictate. It’ll be because we refused to unshackle ourselves from dogma and thereby let a system of our own creation destroy us.
I am guessing that he did not suggest what would take the place of the USD in the reserve currency basket.
Besides, with global population estimated to grow to 11B by 2100, it seems the world will need more, not less USD.
You are semantically correct where an issuer doesn’t ‘owe’ its own currency. But from a practically standpoint the users do need to have an incentive to use the issuer’s currency. I’m assuming you are familiar with the G2 narrative, as well as the fact that the percentage of world reserve use for the USD has dropped while the renminbi has gained. So what happens to the MMT theory when the ‘need’ of the USD as a reserve currency no longer exists. I think whichever world reserve currency is less manipulated will provide the incentive for the end user.
I am aware of this- the total foreign exchange reserves totaled 12,700B as of Q4 2020, of which 7,006B were USD and 267B were Renminbi.
I think the reason the USD will have demand regardless of manipulation in value up or down is the same that it will be the largest of the global reserves even if it were to fall below a majority and that is the US is the only player capable of securing international trade lanes. There is no adequate naval force to replace it. So if you want the US to care about your trade ships… buy USD.
If the US Navy falls into disrepair then sure MMT becomes limited by actual US Domestic resources. Luckily we actually have a ton of those. More if we annex Mexico and Canada which if we were really in any sort of trouble I am sure we would.
There is some element of truth in what Druckenmiller is saying. However, what you are saying here is largely correct. How much to spend, tax, monetize or borrow is a policy choice, and given that we issue debt in our own currency, the constraints are policy and external constraints. How much inflation, economic base effects, and effects on income and wealth distribution do we want? And what are the trade offs? What really tees me off on the deficit hawks are two facts. They never account for the fact that some government spending is long run (capital spending), and the hawks would never dare suggest we cut defense spending. Its always “entitlements” which are “inefficient”. Never mind that some of the most wasteful spending is on defense where the establishment is captured by defense contractors and we always fight the last war. Cyber probably needs to be beefed up by a large amount. Do we need more fighter jets, aircraft carriers, nuclear missiles and the vast army we have? Maybe, but that subject never occurs to the right to debate. But add some money to food stamps (Snap) and you can hear the hue and cry of the right about how it is inefficient and subject to waste and fraud and folks that get help don’t deserve it. Same with a lot of other social programs. Suffice to say, that Druckenmiller is only telling the audience about 10% of the story. In full context his argument does not hold much water.
Look who is telling it to. “Nuff said.
Stanley should be embarrassed by that interview.
There is a huge reservoir of resentment from investors who believed the “dot plots” a few years back which indicated rates would soon be back to 5%.
The old Drunk is betting the ranch on crypto because his fingers are too frail to grasp that his truths are not written in stone. If it were not for the Fed he would still be winning. He will try to make crypto a winner,like him. The fallacy “Once a winner always a winner” does not spare gamblers who call themselves investors when they are losing. Another manifestation of white entitlement, mono-theism, old age yesterdayism.
Druckenmiller is a captive of age and his own success. You may be able to teach an old dog new tricks, but it’s almost impossible for an old hedge fund guy to embrace a different frame.
At least Stan has an excuse. Kernan, on the other hand — he won’t be happy until the caudillo del Mar-a-Lago is reinstalled on his golden throne.
The story Druckmiller tells was ginned up to support the narrative that social programs are bad for the economy and thereby the rich are able to maintain a preferred position in the spending and social benefits order of things. So he is really just putting rage to the narrative that supports the wealthy. By his own logic quantitative easing is a debt that must be paid but it is a function that benefits mostly the wealthy, is that not socialism for the wealthy? The big problem with the narrative that has been ginned up and sold time and time again to the American people is it that it is internally inconsistent if one inspects the philosophy carefully. Of course few will inspect the philosophy carefully and that is what the wealthy are counting on that no one will inspect it carefully.
I think Walt here understands that his statements are not 100% true but I think most would agree Walt’s statements are more true than Druckmillers. But much like the words of ‘all men are created equal’ to sell something one has to make points that can be easily understood.
What I think this country desperately needs is an understanding of what money flows are occurring and how inconsistent philosophies are to describe those flows. I take issue with how Bernie Sanders describes socialism as much as I do Mitch McConnell . I ask, are tax cuts and quantitative easing not socialism for the wealthy? Are not the myriad farm programs not socialism for farmers? Are roads paid for by the government not socialism for developers? Is not government-owned airports not socialism for the aircraft industry? When you add this all up it seems to me the ones that hate socialism the most are benefiting most from a socialist system, now it is a socialist system that more resembles fascist economics, however that is still socialism.
With these people are really against is helping the poor and the young with some socialism, even if it is much smaller piece of socialism than they enjoy (blinded by miserly greed). I point out that tax cuts to the wealthy don’t recycle quickly to the federal Treasury, however money given to poor people buying beer does recycle money to the treasury very efficiently. So not only is giving money to the poor or the young efficient for the economy it is also within the thesis of spiritual leaders including Jesus Christ.
To not provide for the weakest in our society (the poor, the Young, and the most unhealthy) is antithetical to the teachings of spiritual leaders such as Jesus Christ. And if you are pursuing policies that are antithetical to Jesus Christ you are aligned with the Antichrist. So not only are the likes of Druckmiller focused on socialism for the wealthy they do represent the Antichrist.
I think treasuries make the most sense domestically as consumption deferral vouchers. If you really cannot think of anything useful to do with your money… why not just buy more money later and give yourself time to think rather than horde all the real resources the economy needs. Imagine if instead of stock buybacks companies just started hording raw materials because it drove up the price. Better to persuade them to throw that money into treasuries which ultimately have little consequence.
Internationally it’s a status marker in addition to other things. If you buy US treasuries you are marking yourself as a trade partner and deserving of US support militarily and in trade route protections. The US Government can just look at international treasury buying and see who they need to pay attention to. Squeaky wheels that don’t buy grease don’t get greased.
“I think treasuries make the most sense domestically as consumption deferral vouchers. If you really cannot think of anything useful to do with your money… ”
An excellent description.