Stanley Druckenmiller sheds light on the ballooning US public deficit in the context of a looming demographic storm, in a recent interview.   

“Back in the 90s someone sent me a paper on how the birth rates in the 50s  were so high, then I realised we would have a demographic storm in the 2020s,” he said. 

“This was on top of the fact that when Medicare and Medicaid joined social security, as entitlement in the 60s, the senior share of government spending,” added Stanley Druckenmiller.  

He noted that entitlement had grown dramatically from 30 to 58 percent of outlays. 

“I was concerned when the baby boomers became seniors, already government spending growth on seniors would become dramatic. The birth rate for the current generation was below two,” he said.  

“Back in the 90s someone sent me a paper on how the birth rates in the 50s were so high, then I realised we would have a demographic storm in the 2020s”

STANLEY DRUCKENMILLER

As the senior population increased, there was also a reduction in workers. 

“The way our system works, you take current tax to pay for seniors,” he added. 

Stanley Druckenmiller sheds light on the challenges of financing the deficit in a changing interest rate environment. 

“It looked bad, in 2013. What didn’t occur to me is a proliferation in government debt outside entitlement. When covid hit, it was cherry on top.

You now have an enormous amount of debt, and the period of low-interest rates suppressed my concern about this,” he said. 

“But once inflation hits, interest rates are rising,” said Stanley Druckenmiller. 

The extent of the debt is where Stanley Druckenmiller sheds light on a looming public debt crisis. 

“The public deficit is 32 trillion dollars, but if you assume entitlements, present debt value is approximately 200 trillion dollars,” he said. 

“The way our system works, you take current tax to pay for seniors”

STANLEY DRUCKENMILLER

Stanley Druckenmiller sheds light on American exceptionalism

America led the PC revolution, the internet, the development of mobile phones, the cloud, Cryptos Web 3.0, who knows and AI.

We have been a leader throughout but also the reserve currency.

He worries about the Fiscal Gap. How high would you need to raise taxes today to guarantee the benefits you promised seniors in the future?

“It is 7.7% of GDP, which means raising taxes by 40% in the future or cutting all spending by 36% forever,” he said. 

“I worry that you have to crowd out private investments, which made us innovative leaders,” he added. 

Reading between the lines, NASDAQ could be fixed to keep bucking higher to attract global capital.

“Every time you had an asset bubble, trouble lay ahead”
Stanley Druckenmiller

Stanley Druckenmiller sheds light on crippling interest payments 

Interest payments on the debt will be 117% of taxes by 2050, and it will be more than all tax revenues by 2040.

In other words, if the current trajectory continues, total tax revenues will not even pay for interest on the debt by 2040. 

More shoes to drop; Stanley Druckenmiller sheds light

“Our central case is that there are more shoes to drop. 

Every time you had an asset bubble, trouble lay ahead.

When you have had eleven years of free money, people do stupid things. Somebody paid 80 billion dollars for Dogecoin which was invented as a joke,” he said.  

But is this really about stupid people or a jaded system, a  casino economy plagued with rampant speculation that rewards investors making non-productive investments in companies that provide no real value?    

“That can only happen in the world of free money.

But this was arguably the most disruptive period we have had, since the late 1800s, and there were no bankruptcies. Apparently, they started in the last few weeks, which tells me there is a lot of stuff under the hood in this environment of the largest, broadest asset bubble ever.

“I don’t think a lot of corporations are going to be caught with their pants down” – Stanley Druckenmiller

Then you jack interest rates 500 basis points in a year.

Probability would suggest that Siliconbank, Bed Bath and Beyond is just the tip of the iceberg,” he said.   

“I can see corporate profits down 20 to 30 per cent, normally I would say 40 to 50% in a hard landing,” he said. 

But he also thinks the recession is anticipated. “I don’t think a lot of corporations are going to be caught with their pants down,” he added.  

He thinks commercial real estate is in a world of worry, made worse by lifestyle changes and the higher cost of debt servicing.   

Stanley Druckenmiller sheds light on the banking crisis

Banks are going into a difficult period, if we get a recession their balance sheet is already impaired.  The Fed convinced them that they would keep rates to zero until 2024, so they bought a bunch of treasuries yielding one or two per cent, they are carrying them at five, so their balance sheet is impaired. 

But if we get into a recession, then losses come from credit cards, and real estate could be steep.

He is long AI, which he sees as transformative, and he believes that stocks with high earnings in a recession will do well.