- During a recent participation in an event at the University of Southern California, the investor warned about the dangers of US indebtedness.
- He blamed both ruling parties for decades of excessive spending, which leaves the burden on future generations.
- He regretted that the Federal Reserve is creating a false sense of ability to help for the fiscal problems of the North American nation.
With less than a month to go until the Treasury funds to support government spending run out, the impasse remains. If the government and the opposition in the United States do not reach an agreement to raise the debt ceiling, the country could default. But the investor, Stanley Druckenmiller, believes that the worst part of the tax debt is the burden on future generations.
For this legendary hedge fund investor and deficit hawk, people only see the smaller part of the problem. In his understanding, the debt ceiling is an issue that is easily resolved. In this sense, he is confident that the economy will not default despite the rhetoric of the parties.
At the other extreme, future uncontrolled spending by the government is the main problem that must be addressed immediately. “The recklessness of the last decade has been like watching a horror movie unfold,” says the 69-year-old investor. After his speech at the University of Southern California Marshal School of Business, the expert expanded his comments with the Bloomberg portal.
In an email response, he confirmed that he does not expect the US government to default. For years, this investor has criticized the management of spending in his country.
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The burden of tax debt weighs on future generations
The United States fiscal debt ceiling (31.4 trillion) was exceeded at the beginning of this year 2023, as reported by Investor Times. Since then, the Republicans and the Democrats have been locked in an ideological battle surrounding the conditions that each side sets. The former want spending on social programs to be eliminated and the latter are not willing to negotiate. Treasury Secretary Janet Yellen warned that Treasury funds would expire in June.
For the investor, this problem is not the one that should worry the most, but rather the burden of this debt for future generations. In his response to the aforementioned medium, he leaves no room for doubt about his fears:
“But honestly, all this focus on the debt ceiling instead of the future fiscal problem is like sitting on the beach in Santa Monica and worrying if a 30-foot wave is going to damage the pier when you know there’s a 200-foot tsunami. only 10 miles.”
The billionaire’s comments are a continuation of warnings delivered a decade ago to thousands of students. At that time, the investor made a tour of 14 universities with his warning message about the consequences of the exaggerated indebtedness of the government. At the time, he asked students to watch out for rising federal deficits, which would bankrupt citizens in the future.
He added on that tour that the consequences of the 2008 crisis would seem small compared to problems of excessive spending. Regarding those warnings about the fiscal debt, Druckenmiller confirms that now the situation “looks worse than I had imagined 10 years ago.”
The big problem is social spending
Social spending is the main campaign banner of the progressive wing and practically of the entire Democratic party. However, that is the issue that makes the situation worse for young people in the future, the investor argues. In his opinion, Spending on programs like Social Security, Medicare, and Medicaid exacerbate the consequences of indebtedness.
During his words at the educational institution, he said that the plans of the Democratic government to deal with the deficits are worrying. In the same way, he stressed that the lack of fiscal control of the Republicans is also alarming. According to accounts from the Congressional Budget Office, spending on the elderly will reach 100% of tax revenue by 2040.
But that is not the height of the consequences, he added. He explained that the current debt burden of $31.4 billion does not take into account future royalty payments. Thus, balancing the current value of the cargo, in the future it will be equivalent to $200 billion, he calculated during his lecture.
With the latter one can have an approximate idea of the magnitude of the problem that the current generation of politicians leaves behind. The citizens of the North American country will have to deal with the consequences of a debt that they did not contract. The nature of this circumstance is what motivates the legendary investor to target the young audience.
The increasing tendency of the increase in the fiscal debt makes the burden problem even more serious. Projections suggest that the debt will reach $78 trillion dollars by the year 2028, according to data from the debt projection index of the monitoring portal usdebtclock.org. With these data it is possible to understand Druckenmiller’s reasons when it comes to qualifying the scenario as the development of a horror film.
The “inability” of the Federal Reserve
The other recipient of investor criticism was the US central bank. He emphasized the fact that the Federal Reserve has a flawed easy money policy that goes back decades. This would have been the source of increasing recklessness in the financial markets, but also in individual governments and among lenders.
He added that the feeling that the Fed has the capacity to solve problems is distorted and far from reality. “Unfortunately, by still holding a large amount of public debt, the Federal Reserve continues to create the illusion that it can help with our fiscal problems,” he stressed.
He considers that the central bank has a hesitant attitude that increases uncertainty. The increases in the price of money up to the range of 5%-5.25% (including the increase of this May 3) are considered by the investor as policies that are on the “good path”. Still, he questions the agency’s determination to correct “the biggest mistake in Fed history.”
“At the first signs of trouble, the Fed last month, and in just four days, undid most of the little progress it had made in reducing its balance sheet.”
With these words, the investor joins the majority chorus of pundits condemning what they call bad central bank policies. In any case, the fiscal debt does not show signs of diminishing and the different governments continue with the dangerous strategy of taking loans from future generations. It is worth mentioning that so far there are no signs of an agreement to solve the minor and most urgent problem, that of the debt for this year.
“This asymmetric response from the Fed is what fuels the lack of serious structural action in DC from both sides of the aisle,” he said.
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Is it inevitable to contract fiscal debt?
It can be said that debt is a practically unavoidable issue, taking into consideration the inflationary reality of fiat money. To understand how this matter works, it should be noted that debt This is when the government’s budget (for example, to repair highways) is greater than its revenues (for example, federal income tax dollars). That resulting shortfall must be filled somehow.
At that point, the US government proceeds to borrow money by selling marketable securities. These include Treasury bonds, bills, notes, floating rate notes, and Treasury Inflation Protected Securities (TIPS).
Meanwhile, the tax debt is the accumulation of that loan plus the associated interest owed to the investors who bought those securities. At the same rate that the federal government budgets increase, so do the deficits, which leads to the fact that the debt ceiling must be permanently increased.
There are many reasons for deficits to occur, such as the aforementioned inflation. But there are also other drivers of the deficit such as falling taxes and low income for companies and individuals.. In conclusion, the issuance of debt allows the government to pay for its expenses, even if it does not have the funds. That is why it is said that he borrows from young people. Tax debt is an integral part of the history of the United States.