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.