Taps Coogan – May 14th, 2021

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Legendary investor Stanley Druckenmiller, arguably the most successful fund manager alive today, who produced average annual returns of 30% from 1986 to 2010 without a single down year, recently sat down with CNBC to slam the Fed for the most radical monetary policy he has ever seen relative to the economic circumstances. More importantly, Mr. Druckenmiller, who made his name on highly successful currency trades including ‘breaking’ the Bank of England, says that he expects the US Dollar to lose reserve currency status within 15 years due to a “totally inappropriate” combination of radical monetary and fiscal stimulus.

Some excerpts from Mr. Druckenmiller:

“We are now back to normalization on GDP. We’re above trend on retail sales… I can’t find any time in history when monetary and fiscal policy were this out of step with the economic circumstance, not one.” 

“What I have a problem with is the Fed is expected to do $2.5 trillion of QE after vaccine confirmation and after retail sales reached trend and were above trend. The black hole didn’t occur. That’s wonderful. We’re all happy but we’re still acting like we in a black hole…”

“(The Federal Government) couldn’t be doing (this degree of fiscal spending) without the Fed. The Fed is monetizing their activity. We’ve had $850 billion of direct (government) transfers. $575 billion came after retail sales were above trend… I’m old enough to remember the bond market vigilantes. I used to be one of them. Without the Fed buying… I think it’s 60% of all the debt issued, the bond markets would be totally rejecting this. (The Fed) is enabling this massive expansion in fiscal policy and the problem is if you end up getting inflation, practically even if you don’t, the debt is going to be so big, you remember I did my entitlement talks eight or nine years ago, that’s all happened except one thing: the interest rate level. We’re right now in the crux of when the demographic baby boomers accelerate in terms of getting Medicare, Medicaid, and Social Security and all that stuff.  Right as we’re doing that, we just put $6 trillion of new debt on… As we go forward…, and this is the CBO saying this not me, if the 10-year goes to 4.9%, which is (the CBO’s) normalized projection, the interest expense alone will be close to 30% of GDP every year (I believe he means 30% of federal outlays)… There is no way we can afford to have 30% of all government outlays be towards interest rate expense. So what’s going to happen is the Fed will have to monetize that. When they monetize it, I believe it will have horrible implications for the dollar. That’s why I said… yes, I think that it’s more likely than not that in 15 years we lose reserve currency status…”

Even before Covid, it was pretty hard to figure out how we were going to navigate the nightmarish trajectory of entitlement spending, debt, and demographics over the coming decades without resorting to perpetual and accelerating debt monetization. The only sliver of hope was strong and rising labor participation and an attempt at some pro-growth economic reforms. 

Not only have we now taken on about $6 trillion of debt since Covid and counting, but labor force participation has plunged, capacity utilization is headed in the wrong direction despite the economic recovery, incentives abound for people to remain outside the workforce, and trillions upon trillions of spending and new entitlements are in the pipeline based on a totally false narrative that tax hikes on the rich can come anywhere close to paying for them.