Stanley Druckenmiller is an investment titan – 30 years with never a down year in the market.
The op ed is in yesterday’s Wall Street Journal and he is criticizing a certain action the Treasury is expanding, to try and regulate interest rates. I’ve excerpted some of it. Deuckenmiller’s sensible answers to our problem at the end. There is plenty of blame to share but nothing will be done until there is a deep financial crisis and then whichever party is in power will get the blame.
The market’s verdict was swift and correct: This wasn’t liquidity management, it was price management—and a mistake far larger than $4 billion suggests.
Treasury’s announcement gave the game away.
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Consider what the machine was pricing. Inflation is 3% to 4% and has been above the Fed’s target since 2021. Unemployment is 4.1%, full employment by any definition. The deficit is running near 6% of gross domestic product, a number America has never before produced in peacetime at full employment. The national debt crossed $40 trillion the same week Treasury intervened. Net interest will exceed $1.1 trillion this fiscal year, more than the defense budget. The 10-year yield, even after the summer selloff, sits at or below the economy’s nominal growth rate. That means a borrower (federal government) running 6% deficits at full employment, with above-target inflation, still funds itself at roughly the rate its economy grows.
Historically, that configuration is accommodative, not restrictive, of financial conditions. …
I have spent five decades trading on a simple premise: Markets aggregate information no committee possesses, and prices are how that information reaches decision makers. The long-term Treasury yield is the most important price in the world. It is also the only fiscal disciplinarian the U.S. has left. Neither party will run on entitlement reform. Both have spent the past decade expanding commitments while ignoring arithmetic. Democracies don’t repair their finances because a budget office publishes a table. They repair them only when the cost of inaction becomes visible and immediate, when mortgage rates bite, when auctions tail, when the political price of a rising long bond finally exceeds the political price of touching spending.
Every basis point of artificial yield suppression is a subsidy to procrastination. Suppressed long rates sugarcoat the interest-cost projections, shrink the apparent urgency, and let incumbents assure voters the debt is someone else’s problem. If Congress and the administration are unlikely to touch entitlements even with the market’s signal, they are certain not to touch them without one. Whatever this operation saves in basis points, it will cost multiples in delay.
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During the debt-ceiling fight in 2011, I said a brief technical delay in payments would be terrible, but less terrible than another decade of can-kicking without reform. In 2013, Geoffrey Canada and I toured college campuses calling the entitlement trajectory what it is: generational theft. Transfers that accounted for roughly a quarter of federal outlays in 1960 consume 70% today. I told students, “I love entitlements, but I want them for you guys,” when they turn 65, not merely for my generation at their expense.
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What should happen instead is straightforward. Return buybacks to their stated purpose: small, scheduled, off-the-run liquidity operations announced at quarterly refundings, never off-cycle responses to yield levels. Term out the debt honestly and pay the price the market sets. If the 30-year must trade at 5.5% to clear, that isn’t a crisis. It is an invoice. Then do the only thing that durably lowers long-term yields: address the primary deficit. Reform entitlements gradually and honestly, through means testing, indexing changes, eligibility adjustments phased in over decades—so that the burden is shared across generations instead of dumped on the youngest.
The reward is enormous: A credible fiscal package would do more for the long end of the curve than a buyback program 1,000 times this size.
Governments defending prices against fundamentals always lose. The only variable is how much they spend before conceding. The U.S. shouldn’t put itself on the wrong side of that trade, not with the most important price in the world, and not when that price is trying to say the one thing Washington most needs to hear: Let the bond market speak.