Druckenmiller Calls Out The Treasury Ponzi Scheme: "It's Not A Free Market, It's Not A Clean Market", Identifies The Real Bond Threat

Tyler Durden's picture

We hadn't heard much from legendary investor Stanley Druckenmiller since last August when he decided to shut down his Duquesne Capital hedge fund. Until today. In a must read interview, the man who took on the Bank of England in 1992 and won, says that he join the camp of Bill Gross et al, making it all too clear that all the recent fearmongering about the lack of a debt ceiling hike by the likes of Tim Geithner, Ben Bernanke and, of course, all of Wall Street, is misplaced, and that the real threat to the country is the continuation of the current profligate pathway of endless spending. From the WSJ: "Mr. Druckenmiller had already recognized that the government had
embarked on a long-term march to financial ruin. So he publicly opposed
the hysterical warnings from financial eminences, similar to those we
hear today. He recalls that then-Secretary of the Treasury Robert Rubin
warned that if the political stand-off forced the government to delay a
debt payment, the Treasury bond market would be impaired for 20 years. "Excuse me? Russia had a real
default and two or three years later they had all-time low interest
rates,
" says Mr. Druckenmiller. In the future, he says, "People aren't
going to wonder whether 20 years ago we delayed an interest payment for
six days. They're going to wonder whether we got our house in order." Which begs the question: if interest rates are so low today, is the market not appreciating the current path of "financial ruin"? And here is where Druckenmiller joins the Grosses and the Granthams of the world. Asked if the future is not so bad judging by today's low bond rates he says, "Complete nonsense. It's not a free market. It's not a clean market." The Federal Reserve is doing much of the buying of Treasury bonds lately through its "quantitative easing" (QE) program, he points out. "The market isn't saying anything about the future. It's saying there's a phony buyer of $19 billion of Treasurys a week." Of course, there is another name for this type of arrangement and so far only Bill Gross has used it: Ponzi Scheme.

More from the interview:

The moment couldn't be better to consult Mr. Druckenmiller, who almost never gives interviews but is willing to speak up now because he thinks that fears about using the debt-limit as a bargaining chip for spending cuts are overblown—and misunderstand the bond market. "The Treasury borrowing committee letter speaks about catastrophic financial crises, comparing it to Fannie and Freddie. That's not what we're talking about here," he says.

He contemplates the possibilities for bond investors if a drawn-out negotiation in Washington creates a short-term problem in servicing the debt but ultimately reduces spending:

"Here are your two options: piece of paper number one—let's just call it a 10-year Treasury. So I own this piece of paper. I get an income stream obviously over 10 years . . . and one of my interest payments is going to be delayed, I don't know, six days, eight days, 15 days, but I know I'm going to get it. There's not a doubt in my mind that it's not going to pay, but it's going to be delayed. But in exchange for that, let's suppose I know I'm going to get massive cuts in entitlements and the government is going to get their house in order so my payments seven, eight, nine, 10 years out are much more assured," he says.

Then there's "piece of paper number two," he says, under a scenario in which the debt limit is quickly raised to avoid any possible disruption in payments. "I don't have to wait six, eight, or 10 days for one of my many payments over 10 years. I get it on time. But we're going to continue to pile up trillions of dollars of debt and I may have a Greek situation on my hands in six or seven years. Now as an owner, which piece of paper do I want to own? To me it's a no-brainer. It's piece of paper number one."

Why the efficient market would mcuh rather the government take its medicine and actually offer people like him a viable investment option instead of merely a Fed frontrunning scheme:

Mr. Druckenmiller says that markets know the difference between a default in which a country will not repay its debts and a technical default, in which investors may have to wait a short period for a particular interest payment. Under the second scenario, he doubts that investors such as the Chinese government would sell their Treasury debt and take losses on the way out—"because I'll guarantee you people like me will buy it immediately."

Now suppose, Mr. Druckenmiller adds, that he's wrong. If the market implodes on day two of the technical default, Mr. Obama and Congress would be motivated to finally come to agreement. But he doesn't expect such market chaos. "My guess is that the bond market would rally as long as it believed the ultimate outcome was going to be genuine entitlement reform—that we wouldn't even have to find out about a meltdown because it wouldn't happen. And I have some history on my side here."

On why everyone should ignore threats of untold destruction unless the adminstration and Wall Street apparatchiks get their way:

Mr. Druckenmiller had already recognized that the government had embarked on a long-term march to financial ruin. So he publicly opposed the hysterical warnings from financial eminences, similar to those we hear today. He recalls that then-Secretary of the Treasury Robert Rubin warned that if the political stand-off forced the government to delay a debt payment, the Treasury bond market would be impaired for 20 years.

"Excuse me? Russia had a real default and two or three years later they had all-time low interest rates," says Mr. Druckenmiller. In the future, he says, "People aren't going to wonder whether 20 years ago we delayed an interest payment for six days. They're going to wonder whether we got our house in order."

The real MAD, Druckenmiller says, is letting the debt spiral out of control. As anyone with half a working brain will realize.

Mr. Druckenmiller is puzzled that so many financial commentators see
the possible failure to raise the debt ceiling as more serious than the
possibility that the government will accumulate too much debt. "I'm just
flabbergasted that we're getting all this commentary about catastrophic
consequences, including from the chairman of the Federal Reserve, about
this situation but none of these guys bothered to write letters or
whatever about the real situation which is we're piling up trillions of
dollars of debt."

He's particularly puzzled that Mr.
Geithner and others keep arguing that spending shouldn't be cut, and yet
the White House has ruled out reform of future entitlement
liabilities—the one spending category Mr. Druckenmiller says you can cut
without any near-term impact on the economy.

Next we move to the topic of the US ponzi and why the Fed is at its core.

Some have argued that since investors are still willing to lend to the Treasury at very low rates, the government's financial future can't really be that bad. "Complete nonsense," Mr. Druckenmiller responds. "It's not a free market. It's not a clean market." The Federal Reserve is doing much of the buying of Treasury bonds lately through its "quantitative easing" (QE) program, he points out. "The market isn't saying anything about the future. It's saying there's a phony buyer of $19 billion of Treasurys a week."

Warming to the topic, he asks, "When do you generally get action from governments? When their bond market blows up." But that isn't happening now, he says, because the Fed is "aiding and abetting" the politicians' "reckless behavior."

And blow up they will if nothing changes. Druckenmiller's conclusion:

"I think technical default would be horrible," he says from the 24th
floor of his midtown Manhattan office, "but I don't think it's going to
be the end of the world. It's not going to be catastrophic. What's going
to be catastrophic is if we don't solve the real problem," meaning
Washington's spending addiction.

Well that's wonderful. And we are confident Madoff also had comparable thoughts just shortly before his scheme imploded. However, for him, like for the US, it is now too late. The best option is to actually get out of Washington's way so they destroy the status quo as fast as possible and a fresh (and probably very violent) start is implemented.

The rest is rhetoric.

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Mongo's picture

Free market, now that is soooo passé

downwiththebanks's picture

Yep.  Capitalism's chief ideological weapon exists today to the same degree as it existed during the slave trade, during the theft of indigenous land, during the manufactured famines created by the East India Company, etc.

It's make-believe.  But it's the only thing that justifies the rape by Capital of the planet.

Chuck Walla's picture

And just where is this captialism you speak of? Surely not this socialist paradise called the USA?

downwiththebanks's picture

Look for those places where money capital and private property dominate social institutions.  In other words, look at planet earth.

Denying the role of private ownership in the world you inhabit doesn't make private ownership go away.  It just makes you appear unaware of the corporate form, stock exchanges, privatization, the bond 'market', derivatives, FOREX, etc.  

Not to mention the wholly owned nature of politics.

I'm sure, as a banker-gangster, you're not unaware of these things.  So what explains your faux ignorance?

Is it just a desire to exonerate capitalism from the world Private Capital has made and the crimes against humanity it has perpetuated in order to do so?

Or is there more to it than that?

oogs66's picture

Yes, why have a debt ceiling if its only purpose is to be raised?  Why not keep it and focus on getting our balance sheet in order?  He doesn't mention it here, but the Bernank keeps pointing to tips as demonstrating inflation expectations are low.  Looking at a manipulated market to manipulate public opinion is just plain wrong.

oogs66's picture

And btw, his comment about Russia also applies to Argentina.  It would probably also apply to Greece, Ireland, and Portugal if they were willing to stop listening to bad advice from bankers about why its so necessary to save the bankers and not default.

Atomizer's picture

Not really. It implies another system called BRIC. Argentina hasn't been added.

downwiththebanks's picture

Yep.  The answer is Jubilee granted by the banker-gangsters themselves to the people they've robbed, raped, and pillaged for the last 5 centuries or so.

The Count's picture

Remember back in 2007 when Paulson went to Bush and said he needed a blank check pronto? Because Billions were leaving the country every second? Now who might have been the ones transferring Billions out? The banks obviously, just to show Bush who is really in control. If I had been the pres. I would have had Paulson arrested on the spot and had all major bank CEO subpoenaed right away. Then I would have made it clear to THEM that if they did not stop this right now they would get a personal tour of Gitmo. There is a group of people in this country that need a serious ass whipping but I do not see anybody with the bballs to to this.

WakeUpPeeeeeople's picture

"Decisions by the Secretary pursuant to the authority of this Act are nonreviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency."

 

Paulson should have been summarily executed on the spot for being a traitor because of the above statement.

WakeUpPeeeeeople's picture

Sorry about that, didn't realize the Word formatting also copied into the comment.

Quixotic_Not's picture

Paulson should have been summarily executed on the spot for being a traitor because of the above statement.

You'd have to enforce the Rule of Law to do that, and no one really wants to be held strictly accountable for their actions anymore, do they?

The truth is, 'MeriKa has become a nation of pathological liars and spoiled children.

Free skittles and unicorn rides for everyone!

I was so stupid not to go to Perp school and then onto Ivy League racketeer training - I had no idea you got a license to steal with those diplomas!

Are you ready to receive the eucharist Pancho? Caliph Hussein Obama is gonna put a chicklet in every mouth!

Truth is treason in an empire of lies...

Alex Kintner's picture

Well, don't give Bush a pass -- like Paulsen made him a patsy. Bush was in on the looting.

Disclosure: To all the Bush luvers, I think both parties suck, so don't accuse me of singling out your boy.

MikeNYC's picture

But we saw Obbama kicking ass in bball on TV? Whaddya mean no one has bballs?

The Count's picture

Ha haaa. When I saw the OBL thing unfold I immediately thought that I was watching a re-run of Wag the Dog.

malek's picture

+1

Good point. I actually have to watch that DVD once more.

NotApplicable's picture

Surely you don't believe that a US President has the power to do that? JFK disproved this theory long ago.

Ben Dover's picture

Could not have said it better. Thanks.

Drag Racer's picture

In the future, he says, "People aren't going to wonder whether 20 years ago we delayed an interest payment for six days. They're going to wonder whether we got our house in order."

the pretty much says it all. Until the confidence is back, the 'real' economy is nothing but a story to read in the history books.

Mec-sick-o's picture

Agree.

Fiat *should* be an instrument of exchange.

Inflation is a result of politician corruption and governed population apathy.

Fiat is an invention that will be replaced by another fiat (being FRN or not).

Government is getting greedy and taxing everyone trading with USD, by purchasing Treasuries.

This will surely end Bretton Woods era.

Azannoth's picture

You all fail to see the Forest for the trees, Obama/Congress/etc. know exactly what they're doing and they are doing it quite on purpose, you can't be so dumb/ignorant to drive a country into ruin for over 30 years and don't notice.

Yes some members of congress can't read properly and have an IQ score of less than 80 but still the majority know exactly how the game goes.

http://www.snopes.com/politics/obama/postamerican.asp - See what Obama(and people who put him in power) really want ?

This is an engineered collapse of a Nation, those people want to go back to Feudalism, they got tired of all the freedom the common man enjoys, they want to nominate them selves queens and kings and rule absolutely(not like they're not doing it already from behind the curtains)

 

If logic and common sense could win you votes we would be living in Paradise, unfortunately the common man(Joe Voter) is too dumb/ignorant/limited to make a choice based on science and logic, people are still more emancipated monkeys than sentient beings, we won't have anything near an optimal society till Evolution brings us there, regardless of how hard we try and what social tool we try to use, what political/economical systems we employ, Paradise(Utopia) is simply beyond the human race right now, we might see it on the horizon in a few thousand years at best

Caviar Emptor's picture

Yup. Just another typical grab for power in the midst of crisis. The techniques are all too familiar to history buffs like us: permanent state of war, looting the public treasure, debasement of currency, erosion of public freedoms, spiraling behind-the-scenes power. 

We will never see truly free markets in the US in our lifetime again. The irrevocable, line-crsossing decisions were made in 08-09. The trend is for increasing centralized control of the economy and we're seeing it already in the bond, stock and commodities markets. It won't stop there as I've been saying: look for capital controls, price controls, tariffs, and eventually confiscation and nationalization. 

uno's picture

how can anyone junk your comment, the date I might argue (Rubin in as Treasury Secretray, repeal of Glass Steagall, 1913)

You summed up alot in a couple sentences

Reese Bobby's picture

There has been some douchebag with too much time on their hands who seems to junk everything they have already read.

I am constantly amazed by the rare individual who can fuck up any simple situation.  All it takes is time and douchiness.

 

Azannoth's picture

How would you know this ? Except if YOU where this guy ? :)

OldTrooper's picture

look for capital controls, price controls, tariffs, and eventually confiscation and nationalization.

As good a summary of the future as I've ever seen.  We live in interesting times!

Oh regional Indian's picture

So well said Azzanoth, all around.

This definitely has all the makings of an engineered collapse.
But I think the cosmos might have a surprise or three up it's sleeve.
We shall see, eh?

ORI

http://aadivaahan.wordpress.com

Azannoth's picture

I don't believe in Destiny, Prophecyes, Bible Myths, Mayan Calendar etc., I do think that the people in power do believe in those  things and they will have their 'Rapture' 1 way or the other, why think they are doing 'God's work' and that their action will bring about an 'End of Times' event, they are just crazy, however given their power they can engineer an Armageddon only without any spiritual or religious meaning those  things being pure fantasy

The powerfull have always been 'full of them selves' going back to ancient Shamans that 'could speak with the Gods', priests in ancient Egypt, oracles in Greece, people with power tend to Gravitate to those sort of misconceptions, in the past their actions have 'only' brought down the nation/culture/state their where in 'command of' today those powers are global and as crazy and any Druids from ancient past. Today they have the physical power to bring to an end the culture and civilization of virtually the whole World, that is why we live in 'interesting times' because the crazy have actually enough physical power to destroy the whole world in the name of their crazy archaic superstitions.

 

Remember those people are not smarter that you or me(especially me :) they are just rich, and because of their long history of inbreeding even more retarted than the average person, that is why they are so dangerous.

hamurobby's picture

I would be surprised to not see a 2012 self fulfilled demise by civilization as a whole. My dog has already stopped chasing the cat.

MrFriskles's picture

people are still more emancipated monkeys than sentient beings

 

So true. So many examples of this in modern society it makes me wonder how long its going to take for everyone to wake up. Thankfully simply being aware of our animal roots gives us some power of them. It's nothing personal against those who have awoken, they are just stuck where they are for this round of evolution =/ Sadly it could not have been at a worse time, technology and weaponry is at its all time high and we may be enslaved before we can experience true freedom and unity. Oh well. Gotta keep trying.

Azannoth's picture

Well good that you see my point, however you can't just wake up from being a monkey, it takes Evolution and many generations to get from point A to point B

Either you're born with IQ 80 or 150 you can't do anything about it, I was speaking of humanity in general not specific groups of people

You are right that Technology outpaced Evolution in the last 200 years, and we are getting dangerously close to possesing technology which implication we don't understand, for example the LFH(Large Hydron Collider) some say it can produce physical anomalies that can destroy Earth! But we do it anyway, and supposedly the brightest minds on the planet are doing this, the Hubris of mankind is bigger than any of his other vices.

downwiththebanks's picture

All those words, and in it there is not a word of the banker-gangsters who own the political system and blew up the economy with losing bets they couldn't pay for. 

Sharp analysis.  

You'll make a great Ron Paul voter.

akak's picture

And if you do NOT vote for Ron Paul, or somebody very much like him (but who might that be?), then you are still hopelessly brainwashed, and still part of the problem.

downwiththebanks's picture

I understand the nature of profit, unlike Paul.

And I understand that voting for anyone who on the ticket for either corporately owned party solves NOTHING.  

Thus, I won't be voting GOP or Democrat, which rules out a vote for the John Bircher even if I thought he was worth a shit.

In 2008, I voted for Cynthia McKinney.  

akak's picture

Thank you for proving my suspicions about you, in spades.

I will henceforth ignore everything you have to say in this forum, as your credibility here, and your ability to think for yourself and not as your slavemasters would have you think, are both apparently nil.

Your inability or unwillingness to recognize that Ron Paul is effectively NOT part of the corporate-owned two-party political monolith, but in fact is philosophically and practically opposed to them in his every policy position and political action, is quite sad, but quite typical of the simplistic, and false, "My team good/your team bad" political paradigm shared by most Americans.

downwiththebanks's picture

Your ability to think for yourself and not as your slavemasters would have you think...

Says the GOP voter.  

Ha HA!

akak's picture

Says the Democratic sheep --- hoist by his own petard!

No, you could not be more wrong; I loathe the Republicans just as much as I loathe the Democrats, as much as I loathe the whole false and hopelessly blinkered left-right political paradigm. 

downwiththebanks's picture

I've never voted Democrat; I never voted Republican.  

You're voting GOP while talking shit on the GOP.  That'll show 'em!

Caviar Emptor's picture

It's yet another Matrix moment

Spoon boy: Do not try and analyze the market. That's impossible. Instead... only try to realize the truth. 
Neo: What truth? 
Spoon boy: There is no market. 
Neo: There is no market? 
Spoon boy: Then you'll see, that it is not the market that moves, it is only The Bernank. 

MsCreant's picture

Nice.

The blue pill can be intoxicating, even when you have not swallowed it. I have been displaced from my home and thus my routines. Because I am in hotel rooms and interacting with a whole lot of different people in the business world than I am used to (adjusters, contractors, agents, etc.) they all seem to act as if everything is a-okay. I know what the facts of our economy are, so does Druckenmiller and the Zerohege and audience.

I am away from my preps, garden, and easy organic food. I am around television and many invitations to "consume" in my walkable world. The toxins of the world are slowly creeping in to my body and my consciousness. By no means am I "lost" to it, but I have to force my self to get out and exercise and it is work to locate good food vs. easy food where I am. The tv can be ignored. What I am trying to say is that there is a lot of contempt around here for "sheeple." Monopolistic commercial interests have a grip on things that is, IMHO, formidable.

I'm feeling the pull of the normalicy bias. "Everything is going to be okay" "Things are bad right now but we will muddle through." Matrix indeed.

Caviar Emptor's picture

Sadly, the Matrix is about the only thing keeping things quiet. There's not enough confidence to go around

newworldorder's picture

MsCreant;

You have identified the only singularity of thought that makes sense for an extreme majority of the population. "Everything is going to be okay" "Things are bad right now but we will muddle through."

Its not so much that people are drinking the cool aid, its that the majority do believe this to be true. As long as some income keeps coming in, the debt bomb stays hidden. Only when a job is lost, or savings are gone does reality sink in.

People are "financially killed," one at a time. The rest do not notice because it is not a mass event.

We here at ZH look at all of this from a mass event perspective. This defines then, what we see vs., what most of our relatives or friends see.