Stanley Druckenmiller: "We Have An Entitlement Problem" And One Day The Fed's Hamster Wheel Will Stop

Tyler Durden's picture

Two and a half years ago, George Soros' former partner Stanley Druckenmiller closed shop when he shut down his iconic Duquesne Management, after generating 30% average annual returns since 1986. Some time later he raised many red flags by being one of the first "establishment" types to expose the Fed's take over of the market when he said in a rare May 2011 interview that "It's not a free market. It's not a clean market.... The market isn't saying anything about the future. It's saying there's a phony buyer of $19 billion of Treasurys a week." This was in the context of the constantly declining interest rates on an ever exploding US debt load. And while back then total debt was a "manageable" $14.3 trillion, as of today it is some $2.3 trillion higher moments ago printing at a fresh record high of $16.6 trillion, not surprisingly the phony buyer is still here only now he is buying not $19 billion by over $20 billion in total debt each week. But just like it was the relentless rise in the US debt that forced him out of his privacy in the public scene back then, so it was also the US debt that was also the topic of his rare CNBC appearance today (where he fiercely poked at all those other TV chatterbox pundits when he said "money managers should manage money and not go on shows like this") in the aftermath of his recent WSJ Op-Ed. There, he once again said what everyone knows but is scared to admit: "we have an entitlement problem."

Druckenmiller's definition of the problem:

The media was more concerned about the fiscal cliff and what might happen to the economy over the three months than the big picture which is the debt which is going to swallow our kids in 15 or 20 years. They totally take a pass on entitlements which is the problem. And the president comes out and says i'm not going to do this on the back of seniors. Those seniors, that we put out in the article, are all taking out more than they put in, and it's guaranteed under the system today that all the kids are going to get less than they are putting in...  the reason we're here is I think we have time to deal with this issue. If we don't deal with it in the next four or five years, we'll wake up and interest rates will explode and the next generation will have a very, very tough time and it's so unfair.... In 1994 entitlements were 50% of federal outlays, up from 28% in 1960, but to my horror under the George Bush administration they went from 50% to 63%. Now at 67% of all federal outlays are entitlements. To put that in perspective, if you look at the actuaries out there, entitlements are scheduled to grow $700 billion in the next four years just due to change in entitlements. That's as the demographics kick in.

A quick primer on the unsustainable Bernanke math:

If you normalize interest rates, i'm not talking about a spike, just normalize where they were before QE and took them to 5.7% federal funding costs of the debt, that's $500 billion a year in interest expense that goes out door. We're having a heart attack over an $85 billion sequester when we can lose $500 billion just if you normalize. The way markets work if and when that were to happen, you don't normalize, you keep going because the market figures out that you now have a credit problem which is exactly what's happened in the foreign nations.

A reminder on the irrationality of bond markets:

The bond market is a funny thing. In Greece the bond market was perfectly fine until February of 2010. Not moving, not doing anything, and then in two weeks it was over.

The topic of the free Fed money's diminishing returns is well-known:

The market is fine because you've got all the free money in the federal reserve. But that can only last so long. Eventually the hamster can't move on the wheel anymore and the free money has less and less impact.

His solution: means testing:

Means-test people like me on social security. You realize I've done all right in life, okay? I'm going to start getting social security checks in five years. It's absurd. And i'll get the same social security checks that some people who have not done so well are. And the same thing with medicare. Raise the ages, as I pointed out earlier. When all this stuff was started, life expectancy was way below where it was now, and frankly probably the guesses on life expectancy where they are are too low. It's not that hard.

Finally, on political incentives to act, or rather not:

... Congress is not getting the market signal we talked about in the article so you can scream all you want about congress and the president being clowns, I can't think of any political system anywhere where they acted without interest rates going up. When did greece act? When the bond market blew up. When did Spain act? When the bond market blew up. What was Clinton's response to Rubin, "you mean the f'ing bond market is in control." Doing what they are doing the politicians have no incentive, but the market is a very fickle and violent thing. I don't think it's today, but we've got 3-year-old kids we've promised we'll get them through college and once college is done we'll get them a job. it's going to happen before those kids.

But of course, the merest suggestion of any of the above becoming policy and whoever is in charge screams bloody "austerity" knowing full well their political career is over the moment people's entitlements are cut.

And thus: back to square one.

The full clip follows below:

And for those who missed it, here is the WSJ op-ed from a week ago penned by Stanley Druckenmiller and former Fed governor and current Fed critic, Kevin Warsh:

Generational Theft Needs to Be Arrested

A Democrat, an independent and a Republican agree: Government spending levels are unsustainable

We come from different backgrounds, parties and pursuits but are bound by a common belief in the promise and purpose of America. After all, each of us has been the beneficiary of the choices made—and opportunities created—by previous generations of Americans.

One of us grew up poor in the South Bronx of the 1960s and went on to lead a children's antipoverty program in Harlem. Another grew up in a small town in South Jersey, and went on to be a leading money manager. The third grew up in a small suburb in upstate New York and found his way to serve in the government amid the financial crisis.

One of us is a Democrat; one, an independent; another, a Republican. Yet, together, we recognize several hard truths: Government spending levels are unsustainable. Higher taxes, however advisable or not, fail to come close to solving the problem. Discretionary spending must be reduced but without harming the safety net for our most vulnerable, or sacrificing future growth (e.g., research and education). Defense andhomeland security spending should not be immune to reductions. Most consequentially, the growth in spending on entitlement programs—Social Security, Medicaid and Medicare—must be curbed.

These truths are not born of some zeal for austerity or unkindness, but of arithmetic. The growing debt burden threatens to crush the next generation of Americans.

Coming out of the most recent elections, no consensus emerged either to reform the welfare state or to pay for it. And too many politicians appear unwilling to level with Americans about the challenges and choices confronting the United States. The failure to be forthright on fiscal policy is doing grievous harm to the country's long-term growth prospects. And the greatest casualties will be young Americans of all stripes who want—and need—an opportunity to succeed.

Three main infirmities plague Washington and constitute a clear and present danger to the prospects for the next generation.

First, the country's existing entitlement programs are not just unaffordable, they are also profoundly unfair to those who are taking their first steps in search of opportunity. Social Security is one example. According to Social Security actuaries, the generational theft runs deep. Young people now entering the workforce will actually lose 4.2% of their total lifetime wages because of their participation in Social Security. A typical third-grader will get back (in present value terms) only 75 cents for every dollar he contributes to Social Security over his lifetime. Meanwhile, many seniors with greater means nearing retirement age will pocket a handsome profit. Health-care spending through Medicare represents an even less equitable story.

The government has an obligation, of course, to support needy seniors. But this pension system is ripe for common-sense reforms, including changing eligibility ages and benefit structures for those with greater means, ridding the Social Security disability program of pervasive fraud, and removing disincentives for those who would rather work in their later years.

Powerful, vested interests portray reformers as avowed enemies of seniors. But, the status quo is, in fact, tantamount to saddling school-age children with more debt, weaker economic growth, and fewer opportunities for jobs and advancement.

Second, while many in Washington pay lip service to the long term, few act on it. The nation's debt clock garners far less attention than the "fiscal cliff" clock. Elected officials continue to allow the immediate to trump the important. Washington appears poised to forego fundamental reform at the altar of the expedient, yet again. This could have tragic consequences.

In successive administrations, the country has spent trillions in temporary tax credits and short-term "stimulus" to goose growth by the next election. What do we have to show for this spending surge? Modest growth, declining incomes and a level of national debt that undermine our long-term prospects.

The Federal Reserve's policies reinforce this short-term orientation. To offset weak economic conditions, the Fed's principal policy objectives appear to be twofold: suppress interest rates and raise stock prices. As a result Congress may be missing market signals and failing to see the costs of its spending addiction in time to undertake real reforms. Ultimately, economic fundamentals—not the promises of central banks—will determine the prices of stocks and bonds.

But the deeper failing is one of essential fairness. The benefits of rising stock prices accrue to those who have already amassed wealth at the expense of those who are struggling to save. And failing to deal with runaway spending will burden the country's children with higher interest rates and a debt bomb that will come due in their lifetimes.

Third, too many politicians appear more eager to divide the spoils of electoral victory among their own than to increase the size of the economic pie for all. The grab-bag of special tax favors under the guise of the recent fiscal-cliff deal is only the latest example.

Crony capitalism and corporate welfare aren't just expenses we cannot afford. They are an anathema to economic growth. They deny opportunities to aspiring people and companies who seek to better their lot. They ration opportunity based on things other than merit and hard work. They further ensure that poor children—who already are disadvantaged by failing schools, inadequate health care and little access to necessary resources—will never get the chance to break the cycle of generational poverty through education.

Some individual Americans are surely better off than they were many years ago. The more probing question is whether America is better off. That can only be true if the hopes and aspirations of the next generation are achievable.

The country must find the courage, conviction and compassion to fix what ails it. The opportunity to advance real reform is still possible. But failure to reform the entitlement culture, reaffirm long-run objectives, and re-establish a common purpose will mean a dimming of opportunities for American children today and for future generations. And a great nation will have ceded more than its greatness, but its goodness.

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The Navigator's picture

"but don't think about cutting a nickel from defense" -  the Empire must live on.

AND because we haven't had a budget in 3-4 years, we have NO idea how much has been spent on what, we have a perfect road map for the future. WTF!!!

Hang 'em. Hang 'em All and high, the traitors that have destroyed our Republic.

stormsailor's picture

no politician can ever mention cleaning up the corruption,  their slice of the pie might get smaller.  and no politician can ever talk about cutting entitlements,  particularly for those that are fraudulently collecting them,  i estimate 30%.


and no politician can ever say any non-pc words, nor have a logical or honest conversation about the myriad of problems we have allowed to accrue for the past 50 years.


and screw you for living responsibly, working hard, and saving,  here's you .01%, and a 1099 to pay taxes on it,


fuckers are pissing and moaning about sequester cutting 22 billion from the 1.3 trillion federal budget.  why dont they just watch dumb and dumber and blow each other.   it would make a lot more sense

Teamtc321's picture

"fuckers are pissing and moaning about sequester cutting 22 billion from the 1.3 trillion federal budget.  why dont they just watch dumb and dumber and blow each other.   it would make a lot more sense"


I don't think they can blow while they have their heads shoved up each other's asses. I don't know but the pic on the shirt below is fitting, literally.

Its_the_economy_stupid's picture



Keep talking. A voice in the wilderness.

Anusocracy's picture

Health care costs went up BECAUSE of government.

Everything government touches turns to crap.  Ringo Starr

Groundhog Day's picture

a bullet isn't enough.  strip them of all thier assets and thier immediate family as well and makr them work for minimum wage for life.  that might scare em

Go Tribe's picture

I often wonder how many politicians ands bankers would have to die before the rest capitulated. Not more than 10 I think.

brettd's picture

Not true!

Elizabeth Warren is here to fight for us!

Cosimo de Medici's picture

While a "bullet to the brain" meme might win you a seat on the Zerohedge Parliament, it would merely help consolidate the power of the very people you wish to emasculate.  They'd pull together and lobby for some sort of protected status like a minority group.  It would be like going to Turd Ferguson's site and proclaiming I wipe my fatuga with gold leaf, or going to Friday prayer at the local mosque and facing Palmyra, NY instead of Mecca.

The absolute only way to send a message and put some fear of Bubba into the banking elite is to prosecute and send the guilty parties to Reamway State Peniteniary and hold un-chaperoned Prom Night after the All-You-Can-Eat Oyster Buffet Special.  Of course, that is unlikely to happen.  Oysters are too expensive now, since they all go to the Hamptons.

sgorem's picture

"some (pl) of these bansters get a bullet to their brains"

Joseph Jones's picture

Guillotine.  Clean meat off the skull.  Feed body to hungry pigs, especially if they are jew bankers. Sell skull on ebay to highest bidder. 

fonzannoon's picture

"Means-test people like me on social security. You realize I've done all right in life, okay? I'm going to start getting social security checks in five years. It's absurd. And i'll get the same social security checks that some people who have not done so well are"

I saw this live. Bartirma pointed out while casually laughing that young people don't expect to get social security, so just go ahead and cut it already. We don't need it she says.

That's fine you dumb twat, just don't make me pay into it. Do you understand that aspect you dumb fkin bitch?

AU5K's picture

Whenever someone claims to know what you need, you can be sure its not in your best interest.

AssFire's picture

Bottomline...If you did all you were supposed to do in life and became successful- then it is ok to steal from you.

RSBriggs's picture

And give me back the $250,000+ that I've paid over the last 47 years and we'll call it even, OK?.  And yes, I retire in 5 years and am NOT a multi-millionairre and it's going to be damn hard to live on those SSN checks.... 

fonzannoon's picture

You will get your 250k back in benny bucks. Everyone loses here.

knukles's picture

You have got to be fucking kidding me?  She really said that the youngin's don't expect it, so just toss the deal?  As if they've approved?

What arrogant elitist crap!

Probably made Mandy Bigtits break down and cry.
Well, life can't be too tough when married to a Steinberg, eh?

fonzannoon's picture

It was right before she said "we're coming off the lows" and right after she said "cash on the sidelines".

Buckaroo Banzai's picture

Bingo. Means testing transforms a retirement plan (albeit a shittily managed one) into just another fucking welfare program.

Anusocracy's picture

Everyone can see how well SSDI works.

Oldwood's picture

Same for me as well. I wnat it back, inflation adjusted. And I don't want to pay capital gains on my house when anything more than I paid for it (fat chance) is opurely do to inflation deliberately created by the very same entity that has been fully responsible for wrecking the economy and taxing the crap out of me for every nickel and dime I have earned in 50 years of labor. Fucking thieves.

McMolotov's picture

They can't let us opt out. If we do, there's absolutely no money coming in and the emperor goes full-frontal. It is by definition a Ponzi scheme. The first person to draw from Social Security paid $44 in Social Security taxes over three years of working and collected $20,993 in benefits.

Unsustainable from the beginning.

FEDbuster's picture

No one seems to appreciate that fact.  The one's collecting talk of the "trust fund" that is set aside to pay them.  I quit going to Tea Party events, because all the geezers there wanted to cut everything but their medicare and social security benefits.  Like Madoff investors, they don't realize that they got fucked. 

The current pre-boomers are sucking the whole thing dry drawing $100's of thousands on their medical care to get a few more months of TV watching in before they die.  I talk with these 70+ year old guys, and they truly don't give a fuck about anyone but themselves.  They all say "we paid in, we deserve it all". I personally know two guys who have all ready racked up over $500K in medicare bills in the past five years.


Oldwood's picture

And what about the trillion bucks in student loans about to get sucked up by the taxpayers? And what about the unemployment and disability checks going predominantly to the under 50 group?

FEDbuster's picture

I am no fan of student loans or disability checks, but you better hope that some of that student loan money created some productive slaves to keep paying into the ponzi.  Right now it is a 2:1 ratio of workers paying in to support one person receiving.  Sometime in the next 10 years it goes to 1:1 ratio, so the boomers will be riding on the back of one of their kids.  The medicare spending is so out of control, it will BK the Country long before social security will.

The current "greatest" generation will be the last to get Cadillac medical benefits, the boomers will get free clinics at Walmart or have to dig into their own pockets to pay for their dialysis, bypasses, hip replacements, etc....  The broke ass seniors will have to live with old age conditions and die like people did for thousands of years before them did.

Oldwood's picture

Don't get me wrong. I know the money's gone and i have had the same discussions with tea party seniors to the point that if we demand to be made whole on our "promises" we will likely be found dead in the ditch. There is no way they can pay for it. We all understand that significant changes are going to have to happen if any part of this "system" is to survive. I just want two things out of it. One, that politicians admit they fucked us and that whatever it evolves into is called what it is, welfare. Second is that the non boomers stop acting like we robbed them of something. We paid and paid big in most cases and will likely get nothing. Plus we have been funding their worthless liberal education that will be proven to be less than worthless in coming years when it is discovered that the primary thing they learned was how to demand more for doing less. I pay more in property taxes that go primarily to education than income taxes. Just a little respect is all.

azzhatter's picture

Every time a CNBC pundit opens their pie hole, shits spews forth. Maria must be smarter than she sounds. Even thru osmosis she must have learned a few things over the past 20 years besides how to give a proper blowjob to a Citi banker

Dr. Engali's picture

Language Ray :-> Seriously you're going to have to turn that crap off. I turned it in this morning and I couldn't listen for five minutes; between Kernan pontificating and Quick cheerleading it about made me sick. I don't know what Sorkin was doing, maybe down on his knees servicing Buffet backstage.

reader2010's picture

The world does not reward honesty and independence, it rewards obedience and service. It’s a world of concentrated power, and those who have power are not going to reward people who question that power.

- Noam Chomsky

JustObserving's picture

Noam Chomsky kowtows to that power by supporting the official stories about the JFK assassination and 9/11.  He is as big a fraud as any.

reader2010's picture

The scepticism and cynicism [in modern society] about everything is so general, and I think it’s partly due to this thing I call ‘banalisation’, and it’s partly due to the refusal and the fear of dealing with complexity. Much easier to be a cynic than to deal with complexity. Better to say everything is bullshit than to try to look into enough things to know where you are.

- Rick Roderick (1949-2002), American philosopher

medium giraffe's picture

Until you start digging into the complexity and discover that things are very much worse than just 'bullshit'.  Fucking boomer...

A Lunatic's picture

That's a bunch of bullshit.........

Joseph Jones's picture

Wow!  A Jew (chomsky) who hides the fact that Mossad murdered JFK?  Like that's a shock? 

francis_sawyer's picture

Druckenmiller... OMG this is tiresome [crickets]...


I'll wait for 'DIVINE WIND' to put Druckenmiller into perspective [because I'm clearly 'TOO SHALLOW' to have an opinion]...

Just another entry in an AMAZING mathematical, statistical, quantum anomoly... [Deputy of SOROS, no less ~ how quaint & thoroughly unexpected]...

kliguy38's picture

Yup....this one really pissed me off. The height of us off now rape whats left......

Cosimo de Medici's picture

You may not find his chosen career to be as socially useful as whatever it is you do, but the path Stan took was open to anyone, and he did it in that time when even his Prime Brokers were not bailed out.  Also, though a natural cynicism will make you believe otherwise, he didn't do it with the benefit of inside information (if you had been an investor in his fund and had a chance to follow his asset choices, long and short, over time, you would understand).  He had a facility for understanding markets and crowd psychology, or maybe just beat the odds performing at a six sigma-topping level.  Sure, it's easy for him to talk about the need for entitlement reform, but what is your alternative?

As for Soros, this fad of making him the devil incarnate, much of which can be attributed to Glenn Beck, is simply bizarre.  Even those who exaggerate Soros' culpability in WWII beyond what he admitted himself, I wonder how you all behaved when you were 9-14 years old, separated from your family, and the powers that be of your time were exterminating those of your ethnicity?  You were all paragons of virtue even at that tender age and under dramtically more favorable and comfortable circumstances?  Easy to step on someone when you never walked in his shoes.  Also, Soros has given away more than 20% of his fortune, quite often in ways that go unreported, and even most of the reported aid has been in areas such as internet freedom in the old USSR, trying to help the transition in the old Bloc as it moved from Communism to Capitalism, etc.  He gets condemned for his social views primarily, but how he is a more evil historical figure than Mao, Stalin or Hitler is something only the pathologically bitter can grasp.

People on this site are funny.  Everybody congratulates himself and praises his own genius when gold goes up $3 and silver up 10 cents (that's when the "paper price" matters), and boasts about his "average cost way below where the price is after a 40% drop from the $48 silver high---but APPL investors who have held from $700, but who might have bought at $30, are idiots), but gets all critical when someone else speculated far better over a longer period of time.  Oh, I forgot, you all are buying gold and silver to "bring down the system", not to make money.  Bullshit.

Joseph Jones's picture

"...exterminating those of your ethnicity..."

The highest icon of western civilization: holocaustianity.

To use your word: Bullshit

Oh, if only someone could and would successfully exterminate their world philosophy. 

francis_sawyer's picture




I'm too tired right now... But YGFBKMe... I'll deal with you later...

hhabana2112's picture

Oh fuck you, you Jewish cocksucker! Soros is a psycho and the best thing about Glenn Beck was to expose the crazy organizations he supports.

Cosimo de Medici's picture

Shhhhhh!  If you keep your voice down, nobody will know you're a racist as well as a failure.  It's got to be tough enough on you as it is.  By the way, do you get recipes from Glenn Beck, too, or just all your "knowledge"?

nmewn's picture

"I don't know why it is in this town, folks leave stuff until the last minute,"-Obama said, stepping off Air Force One, back in DC from $1,000 golf lessons and playing grab ass with Tiger Woods.

fonzannoon's picture

nmewn you have said so many true things since I have been on here. But if there is one thing I absolutely know is true that you have said, is that those two guys played grab ass. Their caddies must have been dry heaving.

AssFire's picture

I disagree.

Clearly, Tiger likes white porn star type whores.

If Obama was doing the ass grabbing- I'm sure it was Reggies Love's ass.

knukles's picture

Hey come on, guys!
Mooch is out west with the chillen' figurin' she don't want them around Tigger
Manoamano returns from Florida with Reggie Love

Go figure, fellahs

nmewn's picture

My brother, everyone see's it and is just to afraid or too PC to say it.

What gets me is the blatant, in your face, hypocrisy. He sends his kids & wife off to wherever the hell and he comes here, to Fla. Double vacations. Double guard details. Double flights.

Then he's gonna talk shit about budget cuts? Or "man made global warming"? Or outright lie...since when did the federal government pay the salaries of local police & firefighters...his choice of words "first responders"?

Its absolute bullshit. No one calls him a liar.

He is.

Hulk's picture

I believe somebody did call him a liar one time !!!