Druckenmiller On America's Debt Crisis: "It's Like Watching A Horror Movie Unfold"

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by Tyler Durden
Wednesday, May 03, 2023 - 04:25 PM

After several days of apocalyptic forecasts by the (self-reported) smartest guys in the room - the room in question being at the Milken conference in LA- about the looming commercial real estate apocalypse which we first laid out two months ago just before it claimed its first victim, Silicon Valley Bank (see "Why Small Banks Are In Big Trouble: As Hedge Funds Pile Into The New "Big Short", The Next 'Credit Event' Emerges" from March 9), today it was the turn of hedge fund icon Stanley Druckenmiller, a long-time deficit hawk, to turn attention back to the real elephant in the room: unchecked future government spending and America's gargantuan and runaway debt. Because while the commercial real estate crisis will come and go, those $32 trillion in US debt (growing by $1 trillion every six month) and $200 trillion in off-balance sheet debt, will stay forever... or at least until the US defaults or hyperinflates.

“The fiscal recklessness of the last decade has been like watching a horror movie unfold,” Druckenmiller, who once was George Soros' chief strategist and now runs his own Duquesne Family Office, said in a speech Monday at the USC Marshall School of Business.

In a follow-up email to Bloomberg, he said he hopes the US government doesn’t go into default, “but honestly, all this focus on the debt ceiling instead of the future fiscal issue is like sitting on the beach at Santa Monica worrying about whether a 30-foot wave will damage the pier when you know there’s a 200-foot tsunami just 10 miles out.”

According to Bloomberg, Druckenmiller’s comments are similar to the ones the billionaire investor gave a decade ago during a tour of 14 university campuses, when he encouraged students to pay attention to ballooning federal deficits that he believed - correctly - would bankrupt future generations.

He said at the time that the economic storm spurred by reckless spending could dwarf the economic pains of 2008. The situation today “looks much worse than I had imagined 10 years ago," he said on Monday.

Echoing a long-running concern, Druckenmiller said that the biggest issue facing the US is runaway entitlements such as Social Security, Medicare and Medicaid, which without cuts today will have to be slashed in the future... but never are as doing so is political suicide.

The investing legend expressed concerns about the Biden administration’s plans to deal with the potential shortfalls, as well as the lack of fiscal restraint by the Republican party, which at least in theory, should represent conservative values.

Spending on seniors will reach 100% of federal tax revenues by 2040 based on Congressional Budget Office estimates, he said, including interest expense. What’s more, the current $31 trillion US debt load doesn’t account for future entitlement payments. Accounting for the present value of that burden, the full US debt load is more like $200 trillion, he estimated.

Druckenmiller also questioned the actions of the Federal Reserve, saying the agency’s easy-money policies over the past decades created reckless behavior in financial markets, government and banks.

“Unfortunately, by still owning a large amount of government debt, the Fed continues to create the false illusion that it can help with our fiscal problems,” he said, reiterating the core tenet of this website since its founding in Jan 2009.

While raising interest rates 5 percentage points in the past year was a move in the right direction — “trying to correct the biggest mistake in Fed history” — Druckenmiller questioned the central bank’s resolve to stick to its guns.

"At the first signs of trouble, the Fed last month, and in just four days, undid most of the small progress they had made in reducing their balance sheet,” he said. “This asymmetric Fed response is what feeds the lack of serious structural action in DC from both sides of the aisle.”