Druckenmiller says Yellen made ‘biggest blunder’ in history of Treasury

Stanley Druckenmiller

Stanley Druckenmiller recently criticized US Treasury Secretary Janet Yellen for making a significant financial blunder by missing a golden opportunity to secure low-cost, long-term government bonds before the Federal Reserve started increasing interest rates in early 2022.

“When rates were practically zero, every Tom, Dick, Harry and Mary in the United States refinanced their mortgage," the billionaire investor lamented. "Unfortunately, we had one entity that did not, and that was the US Treasury."

Druckenmiller didn't mince words during a discussion with elite trader Paul Tudor Jones at a recent event hosted by the Robin Hood Foundation. He said when interest rates were at rock bottom, many Americans and businesses refinanced their debt.

Also Read: Mark Mobius sees Sensex at 1 lakh in next 5 years; bets on Dreamfolks, MapmyIndia and more

"Every caddy I knew, every locker-room person, everybody in America was refinancing their mortgages, every corporation was extending their debt,” he said.

Yellen was issuing two years at 15 basis points when she could have issued 10 years at 70 basis points or 30 years at 180 basis points, he said, referring to the terms of the debt issued by the Treasury.

"If you go back to Alexander Hamilton, it was the biggest blunder in the history of the Treasury. I have no idea why she's not been called out on this, she has no right to still be in that job after that," Druckenmiller added.

Annual interest

The ramifications of Yellen's decision continue to haunt the nation. He said that if interest rates remain where they are, the government's annual interest expense could reach 4.5 percent of GDP by 2033 and a staggering 7 percent by 2043. These figures are equivalent to a substantial 144 percent of today's annual discretionary spending.

Particularly concerning was the impact on entitlement programmes.

"The politicians that are telling you and think they're not going to cut entitlements, it's just an outright lie, the numbers absolutely don't work, it's a fantasy," he said. "Honestly, I think the math has gone crazy."

Several factors, including pent-up demand, fiscal and monetary stimulus, and pandemic-related supply chain disruptions led to last year's inflation soaring to levels not seen in the US in four decades. In response, the Federal Reserve initiated a series of rate hikes, taking interest rates from near-zero to over 5 percent.

Also Read: Raamdeo Agrawal’s forecast: Indian market to double in 5 years, quadruple in 10

Higher interest rates are intended to combat inflation by lowering demand, encouraging saving and making borrowing more expensive.

Druckenmiller's key message was that the government missed a valuable opportunity to secure long-term debt at lower rates. This trend among homeowners acted as a buffer against the impact of the rate hikes on households, raising concerns about persistent inflation and prolonged elevated interest rates.

Druckenmiller was not the only one expressing concern over government debt. JPMorgan CEO Jamie Dimon and hedge-fund billionaires Ray Dalio and Leon Cooperman also raised an alarm, suggesting the US economy could face a crisis unless it addresses its increasing debt burden.

Yellen's decision to forgo low-cost long-term debt has raised serious concerns about the financial health of the US and the future of entitlement programmes. With persistently high inflation in the US, these concerns will likely play a crucial role in discussions on economic policy and fiscal responsibility.

Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.