Stanley Druckenmiller: The government needs to stop spending like ‘drunken sailors'

Summary

The discussion revolves around U.S. government debt, interest rates, and fiscal policy. Key points include the Fed's role in monetizing debt, low interest rates on long-term bonds, and the challenges of issuing longer-duration bonds. There's a focus on government spending, particularly in light of recent foreign aid commitments and domestic expenditures. The conversation also touches on the impact of low rates during the pandemic and the need for cuts in entitlement programs to address long-term fiscal sustainability. The dialogue highlights the risks of unchecked spending and the necessity of reform.

Takeaways

• 😀 The Federal Reserve is monetizing debt, with nominal GDP growing at 25%.
• 😀 Interest rates on the 10-year Treasury were around 1.1% in 2021, while the 30-year Treasury had a low of 1.66%.
• 😀 A tweet about the Treasury's handling of the debt was corrected, clarifying that Treasury suspended 30-year bonds in 2001, not due to political factors but due to high-term premiums.
• 😀 The U.S. Treasury's reported maturity of debt (72 months) excludes $8 trillion funded overnight in the repo market, which impacts the full understanding of government debt.
• 😀 The claim that the maturity of the debt has increased since pre-COVID is incorrect, as the debt maturity has actually decreased from 63 months pre-COVID to 57 months post-COVID.
• 😀 There is no current market appetite for issuing longer-term bonds, like 30, 50, or 100-year bonds, due to the current economic climate.
• 😀 Federal government spending has increased from 20% of GDP to 25% since COVID, raising concerns about irresponsible fiscal policy.
• 😀 There were no offsets for new emergency spending such as the $106 billion for Ukraine and Israel, leading to further borrowing without cuts in other areas.
• 😀 The speaker advocates for addressing entitlement spending, as it represents the largest portion of U.S. expenditures that need reform.
• 😀 The economic risk of issuing debt at extremely low interest rates (like 1.1% for 10-year Treasuries) during a time of high nominal GDP growth (10%) is extremely high and unsustainable.
• 😀 Many American households refinanced their mortgages, lengthening their maturities, which can be seen as a reflection of the broader trend of low-interest debt issuance during this period.

Q & A

What is being discussed in terms of the Fed's role in the economy?

The Fed is described as 'monetizing' in a way, meaning that it is indirectly financing government spending by purchasing Treasury securities, which leads to a growing nominal GDP.

What is the significance of the 10-year and 30-year interest rates mentioned?

The 10-year interest rate is noted as being very low at 1.1% in the second half of 2021, despite nominal GDP growing at 10%, which raises questions about the risk/reward of issuing debt at such low rates. The 30-year rate, despite some corrections, remained low during this period.

How does the maturity of U.S. government debt factor into the discussion?

The discussion points out that the maturity of the government debt is not as long as some might suggest. The Treasury Department and other sources claim the maturity has increased, but the speaker argues that it actually decreased from 63 months pre-COVID to 57 months, and they also highlight the $8 trillion in overnight repo market debt, which is often excluded from such calculations.

Why does the speaker emphasize the exclusion of the $8 trillion in overnight repo market debt?

The speaker argues that the exclusion of this debt misrepresents the true picture of U.S. government debt, as the repo market, which is part of the Fed’s balance sheet, involves significant short-term debt that the taxpayer is still responsible for, but it's not included in standard measures of debt maturity.

What is the speaker's stance on the possibility of selling much longer-term bonds (e.g., 50- or 100-year bonds)?

The speaker believes that there is currently no market for such long-term bonds and suggests that it would be very challenging to introduce them in the present environment. The idea was explored previously, but concerns about the lack of market demand led to its abandonment.

What does the speaker think about the government's spending habits, especially post-COVID?

The speaker criticizes the government's increasing spending, noting that federal government spending has risen from 20% to 25% of GDP since COVID. The speaker likens the government's approach to spending to that of 'drunken sailors' and emphasizes the lack of offsets to emergency spending.

What was the speaker's reaction to the $106 billion support for Ukraine and Israel?

The speaker was initially expecting an offset to the spending but was disappointed when there was none. Instead of finding cuts in entitlements or other areas, the government introduced $56 trillion in emergency spending, which the speaker deems unsustainable.

How does the speaker feel about the House Republican plan to offset spending for Israel?

The speaker expresses support for addressing entitlements as a necessary source of future spending cuts. However, the focus of the discussion seems to favor cuts to entitlements rather than specific proposals like the House Republican plan to offset some of the spending through IRS funding.

What is the speaker's view on the 2021 Treasury bond market, particularly with respect to interest rates?

The speaker criticizes the Treasury for issuing bonds at very low rates (such as 1.1% on the 10-year bond) when nominal GDP was growing at 10%. This was seen as a poor risk/reward decision, as bond yields were at historically low levels, and the economy was experiencing substantial growth.

What point does the speaker make about the refinancing of mortgages?

The speaker highlights that 80% of American households refinanced their mortgages during this period, lengthening the maturity of their debt. This is presented as a reflection of the broader economic environment, where people were taking advantage of low interest rates to secure long-term loans.