Billionaire hedge-fund titan Stanley Druckenmiller believes that Treasury Secretary Janet Yellen made a significant oversight in not issuing more long-dated Treasury bonds when interest rates were near zero in the aftermath of COVID-19.
Druckenmiller expressed his disappointment during a discussion with Paul Tudor Jones at the Robin Hood Investors Conference. He criticized Yellen for choosing to issue 2-year bonds at 15 basis points instead of taking advantage of the opportunity to issue 10-year bonds at 70 basis points or 30-year bonds at 180 basis points.
In fact, Druckenmiller went so far as to say that this decision by Yellen may be the biggest blunder in the history of the Treasury, dating back to Alexander Hamilton.
This criticism is further compounded by the fact that many Americans and corporations took advantage of rock-bottom interest rates to refinance their mortgages and debts, respectively.
Druckenmiller questioned why Yellen has not been held accountable for this oversight and even suggested that she no longer deserves to hold her position.
He emphasized the consequences of not addressing this issue, providing alarming figures to support his claim. If the debt rolls over by 2033, interest expenses could amount to 4.5% of GDP based on current interest rates. By 2043, this percentage could rise to 7%, which would be equivalent to 144% of all current discretionary spending.
According to projections from the Congressional Budget Office, annual federal outlays are expected to increase significantly over the next decade, reaching nearly $10 trillion by 2033 compared to $6.3 trillion in 2022. This reinforces the urgency of taking action now to address the growing debt burden.
In conclusion, Druckenmiller believes that Treasury Secretary Janet Yellen missed a crucial opportunity to issue long-dated Treasury bonds when interest rates were low, and this decision may have severe consequences for the economy in the future.
The Future of Federal Deficit
It is predicted that by 2033, the federal deficit – representing the amount of government spending that exceeds its income – will reach a staggering $2.8 trillion. This is twice the deficit recorded in 2022, which stood at $1.38 trillion.
According to Druckenmiller, a renowned financial expert, the interest expense alone is projected to account for 144% of all discretionary spending. Therefore, claims by politicians who believe they can avoid cutting entitlements are simply false.
It’s worth noting that Treasury Secretary Janet Yellen is not the sole person responsible for the current era of near-zero interest rates. Her predecessor, Steven Mnuchin, who served under President Donald Trump, continued this policy until he left office in January 2021.
In response to the COVID-19 pandemic and its impact on global markets and the economy, the Federal Reserve slashed its benchmark policy rate to near zero in March 2020. These rates remained in effect until March 2022 when the central bank implemented one of the fastest series of interest rate hikes since the 1980s. Consequently, long-term Treasury yields have recently reached their highest levels in 16 years due to these rate hikes and increased investor demand for longer-term investments.
Druckenmiller gained fame on Wall Street for his impressive management of George Soros’s Quantum Fund. He also excelled in his former hedge fund, Duquesne Capital Management, which he eventually closed in 2010 before transitioning it into a family office.
The Treasury Department was contacted for a comment but did not respond to . However, on Monday, the department released revised borrowing estimates for the fourth quarter. They now anticipate borrowing $776 billion, which is $76 billion lower than their previous estimate made in July.
See: Treasury cuts its fourth-quarter borrowing estimate