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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Teamtc321's picture

As of February 18th, 2013, the number of rounds of golf played by the Golfer-In-Chief is...115

Dubious Maximus's picture

seriously, i don't see how this great global experiment ends without some serious societal pain (much higher taxes coupled with much lower gov't handouts---but the politicos won't do that because they wouldn't get re-elected. or a global war..

Pure Evil's picture

We don't have an entitlement problem, we have a too many people, baby boomers, collecting entitlements problem.

fonzannoon's picture

The entitlements will blow up on their own. The bankers will be the ones betting on them while they detonate. You have to prosecute the fraud.

Totentänzerlied's picture

Bankers et al own the courts, lawyers, judges, and legislators. It's a non-solution.

fonzannoon's picture

when I said prosecute I was not referring to using the judicial system.

Freddie's picture

Illegal aliens are getting loads of benefits too. .

Zap Powerz's picture

Along those same lines, we dont have a problem with our health care system.  We have a problem with too many unhealthy people.

Nature has a way of dealing with these problems.  They are effective and impartial.  If we would stop fucking with the perfect natural system we would start to progress again as a species instead of digressing like we are now.

rhinoblitzing's picture

Survival and Empowerment of the Weakest - Yeah - That will work.

RSBriggs's picture

Fell for the whole age/religion/race/class warfare thing, did you?  I've been working since I was 14 years old, paid better than $250K into social security over the last 47 years, and still have 5 years to go before collecting benefits.  Just let me stop paying in now and give me back the $250K+ that I've already paid in and we'll call it even....

So, you're one of those "just kill everyone under 10 or over 30 and call it good" types?

hooligan2009's picture

not being smart..but won't you live until you are 91, thus taking 25 years (die at 91 claim from 66) worth of benefits of c. $30,000 a year = $750,000? I have no idea how much you will get...just asking..

Pure Evil's picture

Who gives a shit if you've been working since you pinched your first loaf into a diaper and have been paying into the system ever since.

When approximately 10,000 baby boomers per day, of which I'm one, are starting to draw down on their SS benefits, and this is supposed to happen for the next 20 years, then you have a formula for disaster.

We're already printing and borrowing over a trillion a year to pay for these entitlements. And, will probably be printing and borrowing many trillions more to pay these entitlements.

So, exactly when do you believe the whole thing will implode from to many parasites sucking the life out of the host?

JustObserving's picture

US debt is $16.54 trillion now and US unfunded liabilities are $122.81 trillion.  They rise at least $8.2 trillion a year. That works out to be $440,000 per citizen and rising $26,000 per citizen per year.

Means testing can only postpone the problem by a couple of years.  The inevitable end result is US default or hyperinflation.  


I am a Man I am Forty's picture

how long have we heard this kids, grand kids, next generation harm shit.  since the debt was at a $100 Billion?  we are being fucked here and now, they are going to print and devalue because it's game over if interest rates go up.  game. fucking. over.


Phoenix_Rising's picture

Exactly, It's a bit late in the game to worry about my kids

Because at our present rate this will be over soon, we should think more immediate

You ain't gonna fix way

skipjack's picture

Not to mention that we don't need government spending on education, either.  Please stop the debt enslavement via student loans and the dumbing down of k-12 curriculum.  And just close down Fannie/Freddie already...and disband the TSA...and cut DOD by 50%...get rid of SSI and any government involvement in healthcare, including the protection from anti-trust of the health care/drug industries.  And...3 gajillion othre things that the government has no business being in...


Ah well, I can dream...

Teamtc321's picture

Your dream has a similar sound to a Ron Paul speech. Yes, we had a dream at one point.




busternc333's picture

Holy shit. Just turned on msm news for the first time in a year. What the f*ck? We're doomed.

RSBriggs's picture

What?  The whole snowstorm in winter coming thing?  Yeah, like that's never happened before...

rhinoblitzing's picture

You mean it is snowing in February????

nmewn's picture

Yes, yet another crisis...up to two feet of snow on the drought plagued fields & aquifer of the mid-west...ohhhhh the humanity of it all...ROTFL!!!

And to top it all off, Bidens giving homeowner self defense courses on Facebook! Unload that shotgun into the clear blue sky momma!

Gawd...I feel like I'm living in the Twilight Zone.

Al Huxley's picture

Ah yes, the 'No More Hesitation' targets, so the DHS won't have any qualms about shooting children, pregnant mothers and old men and women.  And what a great tagline the company has - 'Targeting For a Safer America'.  What a fucking travesty.  Yes, we'll all be so much fucking safer when we can walk the streets secure in the knowledge that our protectors are ready to shoot to kill any eight-year old boys, teenage girls or old ladies that might come at us with a shotgun.

medium giraffe's picture

Actually made me feel sick when I saw the website.  There's a trite little 'but the gubbermint asked for them' notice on the site now.  They sound surprised by the backlash, the death merchant scum.

Joseph Jones's picture

We've been very good at this for decades.  How many suckling babies do you think we incinerated in Dresden (we fried 40k German civilians, but don't ask Jew PhD Debra Lipstadt who says holocaustianity applies only to jews).

Same question: Hiroshima?  Nagasaki?  Oh, I forgot, it's OK when we blow up atomic bombs!   

Dr. Engali's picture

Everytime that fool Biden speaks I feel like I'm in the twilight zone. I keep thinking that even the left will wake up to the stupidity of this guy, but alas it seems they are even dumber than him.

nmewn's picture

I used to think Biden was the dumbest possible pick for Veep by the most unqualified person to ever be considered to hold the office. Now I have to admit I was wrong...we should all pray every night for Obama's continued health.

Obama may be the most ignorant EVER of the complete concepts of human rights, free economies & narcissistic to his very bones but Biden genuinely does have cognitive issues.

Biden is a walking, talking, ready made case for background checks based on ones mental abilities and he even openly admits he's armed ;-)

brettd's picture

Biden was perfect and intentional:

So Barry could send the most glib-'50-fratboy-white-country-club-"yes man"-moron around th globe as The Face of America.

That is, when BHO himself wasn't out genuflecting to thugs and offering alms to the Iranians.

OldPhart's picture

Biden was Obama's ultimate life insurance policy.

Any fool that takes Obama out leaves Biden in his place.  And, for a while there, back-up was fucktoid Pelosi.  Triple threat.

brettd's picture

doublepost.  sorry.

Anusocracy's picture

Just living in an Idiocracy.

Freddie's picture

F TV and Hollywood.   They are evil and brainwash the masses.

dolph9's picture

Yes, but when Jews control your country, they just print money, give it to themselves, and then distribute food stamps and porn to the population.

Utopia realized.  Well done.

Zap Powerz's picture

Well, at least its good porn.

francis_sawyer's picture

MOAR Kelly Wells & Daphne Rosen...

francis_sawyer's picture

The worst of the worst certainly can't be any worse than the treatment you're subjected to each & every day...

natronic's picture

The sad part about it is the political class won't listen and the USD is doomed.

Dr. Engali's picture

They are listening alright... to the lobbyists.

Hubbs's picture

We have had a problem whereby people like Soros and Duckface can make zillions of dollars for doing no productive work, essentially enabled by a rigged system of finance that throws such distortions that ordinary savers can not prosper.

Those people who have nothing useful to offer their fellow humans can take the time to become "money managers" which means simply, managing to take others' hard earned money...people like "aw shucks" mister false modesty himself Warren Buffet, Mitt and countless others.

Zap Powerz's picture

I think its fascinating how for 2.5 million years of human existence humans have advanced, progressed and evolved until the invention of the modern super state.

The super state has taken control of human growth and development recently and we are now digressing.

shovelhead's picture


U no read history?

Anusocracy's picture

Progress allows for a bigger government parasite.

davidsmith's picture

 They totally take a pass on entitlements which is the problem


He must be talking about the entitlement which allows the top 10% income earners to steal from the rest of us.  I agree: they should be means tested--to death.


Overthrow the U.S. Government now.

Zap Powerz's picture

If when you say "overthrow the US govt now" you mean "let the US govt crush itself under the weight of its own debt and collapse" then Im all for it.

No pitchforks needed to end this shit show.  Just more debt and the problem solves itself.  I promise.  Just watch.

falak pema's picture

Call in Putin or Montebourg, I'm sure he would love to save the american people a second time!