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Druckenmiller Dunks On Bidenomics

Posted May 08, 2024

Sean Ring

By Sean Ring

Druckenmiller Dunks On Bidenomics

Famed former hedge fund manager and family office owner Stanley Druckenmiller opened a Manhattan-sized can of Whoop-Ass on the notion of “Bidenomics” yesterday in a wide-ranging CNBC interview.

It was good of CNBC, however unintentional, to let Druckenmiller mouth off without cutting him off. But then again, he is one of the world’s wealthiest men. He also doesn’t court attention, which is what I like about him.

The Meat and Taters

Longtime CNBC co-host Joe Kernan said to Druckenmiller, “Let me ask you how this plays into to -- it's another, I think, issue of being, you know, things are going well, and then we totally overspent fiscally as well in Bidenomics.”

That opened the floodgates for Druckenmiller:

If I were a professor, I'd give them an F. Basically, they misdiagnosed COVID and thought it was -- we were going into a depression. The Fed did, too. I worried about it, too, in the early days. The Fed eventually pivoted, better late than never. Treasury -- Treasury is still acting like we're in a depression. It's interesting because I've studied the Great Depression and you had a private sector crippled with debt, with basically no new ideas. So, interventionist policies were called for and were effective.

The private sector could not be more different today than it was in the Great Depression. Their balance sheets are fine. They're healthy. And have you ever seen more innovative ideas that the private sector could take advantage of? Now, you got Blockchain, you got AI, you've got the whole thing.

All the government needed to do was get out of their way and let them innovate. Instead, they've spent and spent and spent, and my new fear now is that spending and the -- and the resulting interest rates on the debt that's been created are going to crowd out some of the innovation that otherwise would have taken place. 

We've got a 7 percent budget deficit at full employment. It's just unheard of...

Before We Begin…

I know Druckenmiller is a multibillionaire, but I want to present an alternative to the “effective” policies of the Great Depression. Murray Rothbard has a different view, to say the least.

Here’s the opening of Chapter 7 of Rothbard’s masterpiece, America’s Great Depression:

If government wishes to alleviate, rather than aggravate, a depression, its only valid course is laissez-faire – to leave the economy alone. Only if there is no interference, direct or threatened, with prices, wage rates, and business liquidation will the necessary adjustment proceed with smooth dispatch.

Any propping up of shaky positions postpones liquidation and aggravates unsound conditions. Propping up wage rates creates mass unemployment, and bolstering prices perpetuates and creates unsold surpluses.

Moreover, a drastic cut in the government budget – both in taxes and expenditures – will itself speed adjustment by changing social choice toward more saving and investment relative to consumption. For government spending, whatever the label attached to it, is solely consumption; any cut in the budget therefore raises the investment-consumption ratio in the economy and allows more rapid validation of originally wasteful and loss-yielding projects.

Hence, the proper injunction to government in a depression is to cut the budget and leave the economy strictly alone. Currently fashionable economic thought considers such a dictum hopelessly outdated; instead, it has more substantial backing now in economic law than it did during the 19th century.

Laissez-faire was, roughly, the traditional policy in American depressions before 1929. The laissez-faire precedent was set in America's first great depression, 1819, when the federal government's only act was to ease terms of payment for its own land debtors. President Van Buren also set a staunch laissez-faire course, in the Panic of 1837. Subsequent federal governments followed a similar path, the chief sinners being state governments, which periodically permitted insolvent banks to continue in operation without paying their obligations. In the 1920–1921 depression, government intervened to a greater extent, but wage rates were permitted to fall, and government expenditures and taxes were reduced. And this depression was over in one year – in what Dr. Benjamin M. Anderson has called "our last natural recovery to full employment."

Let’s get to the rest of Druckenmiller’s calm, cool, and collected rant.

“I’d Give Them an F.”

Me, too, Stan. Me, too.

The incompetence of Joke Biden’s Treasury is staggering. You’d think that Janet Yellen, a former Fed Chairman, would have a clue.

Instead, when interest rates were on the floor, Yellen issued short-term paper. She should’ve locked in those idiotically low rates with long-term bonds and enjoyed Powell’s hiking cycle. Now, she’s stuck trying to finance the enormous deficit at normal rates. Stupid.

Why are we running a 7% budget deficit when we’ve got full employment?

Goodies for all those registered voters. That’s why.

The Private Sector

Productivity is improving now, just as when email went mainstream in the 1990s. Automation and AI have made it easier for solopreneurs to run fully-fledged businesses, and blockchain has created an entirely new industry.

Not everything is perfect, but it’s for businesses to iterate along the path of success. It’s not for the government to dictate.

The Fear of Crowding Out

First, let’s define “crowding out.”

Crowding out happens when increased government spending or borrowing reduces or "crowds out" private spending and investment. It occurs when expansionary fiscal policies, such as increased government spending (as we have now) or tax cuts, lead to higher interest rates.

Those higher interest rates - like we have now - make it more expensive for private businesses and consumers to borrow and invest, reducing their spending. This "crowds out" private investment.

Crowding out is more likely to occur when the economy is already at or near full employment - where we are right now - as government spending has limited capacity to increase overall economic activity. It has adverse long-term effects by reducing capital accumulation and economic development. 

For a practical example, if you can buy a “risk-free” US Treasury bond yielding 8%, you certainly would. Most stock market investors don’t make that in a year, so putting your savings in a UST bond that yields 8% is a no-brainer. Now, you’re not investing in the stock or corporate bond markets.

That’s the crowding out Druckenmiller fears.

When so many decently yielding government bonds are on offer, liquidity drains from the private sector. Since Yellen and her treasury made such a catastrophic mistake issuing short-term instead of long-term bonds, this is the problem we’ll have going forward.

Wrap Up

It was a pleasure to see Stan Druckenmiller tell it like it is. There were no histrionics, just facts.

We need more powerful men like him to stand up to The Establishment.

If they do, we may yet get out of this mess.

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