Janet Yellen made the worst mistake in Treasury history when she failed to lock in cheap debt, elite investor Stanley Druckenmiller says
Story by Theron Mohamed, 10/31/23
Janet Yellen made the worst mistake in the history of the Treasury, which has helped pave the way for a debt disaster, Stanley Druckenmiller says.
Yellen, who was appointed Treasury secretary in January 2021, should have issued more long-dated government bonds before the Federal Reserve began hiking interest rates early last year, Druckenmiller said. The billionaire investor and head of Duquesne Family Office made the comments to elite trader Paul Tudor Jones during a fireside chat at a recent Robin Hood Foundation event.
“When rates were practically zero, every Tom, Dick, Harry, and Mary in the United States refinanced their mortgage,” Druckenmiller said. “Unfortunately we had one entity that did not, and that was the US Treasury.”
“Janet Yellen — I guess because political myopia, whatever — 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,” Druckenmiller continued, referring to the terms of the debt issued by the Treasury.
“I literally think 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 said.
“Every caddy I knew, every locker-room person, everybody in America was refinancing their mortgages, every corporation was extending their debt,” he added.
Druckenmiller warned that Yellen’s error has worsened the state of America’s finances. If rates stay where they are, the government’s yearly interest expense will amount to 4.5% of GDP by 2033, and 7% by 2043 — equivalent to 144% of annual discretionary spending today, he said.
“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.”
A combination of pent-up demand, fiscal and monetary stimulus, and pandemic-related shortages drove inflation to 40-year highs last year. The Fed has hiked rates from nearly zero to north of 5% since then, as higher rates tend to cool price growth by encouraging saving over spending and making borrowing more expensive.
Druckenmiller’s point is that the government should have locked in lower rates on its long-term debt when it had the chance, similar to how many American homeowners cheaply refinanced their mortgages. Notably, the latter trend has softened the impact of the Fed’s rate hikes on US households, fanning fears of stubborn inflation and rates staying higher for longer.
The Duquesne chief is one of several high-profile commentators to sound the alarm on government debt. JPMorgan CEO Jamie Dimon and hedge-fund billionaires Ray Dalio and Leon Cooperman have all warned the US economy may be headed for a crisis if it doesn’t address its leverage problem.