Druckenmiller- What If the U.S. Treasury Defaults? Its not Armegeddon

Discussion in 'Economy' started by Trajan, May 15, 2011.

  1. Trajan
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    Trajan conscientia mille testes

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    interesting , I think hes right.





    'People aren't going to wonder whether 20 years ago we delayed an interest payment for six days. They're going to wonder whether we got our house in order.'



    'A financial crisis is surely going to happen as big or bigger than the one we had in 2008 if we continue to behave the way we're behaving," says Stanley Druckenmiller, the legendary investor and onetime fund manager for George Soros. Is this another warning from Wall Street that Congress must immediately raise the federal debt limit to prevent the end of civilization?

    No—Mr. Druckenmiller has heard enough of such "clamor and hyperbole." The grave danger he sees is that politicians might give the government authority to borrow beyond the current limit of $14.3 trillion without any conditions to control spending.

    One of the world's most successful money managers, the lanky, sandy-haired Mr. Druckenmiller is so concerned about the government's ability to pay for its future obligations that he's willing to accept a temporary delay in the interest payments he's owed on his U.S. Treasury bonds—if the result is a Washington deal to restrain runaway entitlement costs.

    "I think technical default would be horrible," he says from the 24th floor of his midtown Manhattan office, "but I don't think it's going to be the end of the world. It's not going to be catastrophic. What's going to be catastrophic is if we don't solve the real problem," meaning Washington's spending addiction.

    snip-

    He contemplates the possibilities for bond investors if a drawn-out negotiation in Washington creates a short-term problem in servicing the debt but ultimately reduces spending:

    "Here are your two options: piece of paper number one—let's just call it a 10-year Treasury. So I own this piece of paper. I get an income stream obviously over 10 years . . . and one of my interest payments is going to be delayed, I don't know, six days, eight days, 15 days, but I know I'm going to get it. There's not a doubt in my mind that it's not going to pay, but it's going to be delayed. But in exchange for that, let's suppose I know I'm going to get massive cuts in entitlements and the government is going to get their house in order so my payments seven, eight, nine, 10 years out are much more assured," he says.

    Then there's "piece of paper number two," he says, under a scenario in which the debt limit is quickly raised to avoid any possible disruption in payments. "I don't have to wait six, eight, or 10 days for one of my many payments over 10 years. I get it on time. But we're going to continue to pile up trillions of dollars of debt and I may have a Greek situation on my hands in six or seven years. Now as an owner, which piece of paper do I want to own? To me it's a no-brainer. It's piece of paper number one."


    more at-

    The Weekend Interview with Stanley Druckenmiller: What If the U.S. Treasury Defaults? - WSJ.com
     
  2. Mad Scientist
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    Mad Scientist Deplorable Gold Supporting Member Supporting Member

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    Oh no no no! Those smart people at the Federal Reserve like Tim Geithner said if we don't print more money the world will end! And of course, I believe them! :uhoh3:
     
  3. elvis
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    elvis BANNED Supporting Member

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    drunkenmiller? wasn't he an NFL quarterback?
     
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  4. Trajan
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    Trajan conscientia mille testes

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    and a really really rich one;)
     
  5. elvis
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    elvis BANNED Supporting Member

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    what incentive does Washington have to cure its spending addiction? It's not their money.
     
  6. Toro
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    Toro Diamond Member

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    He's talking about a technical default, i.e. what happens while interest payments aren't made for a few days while politicians hammer out an agreement which dramatically cuts spending in the long-run. And in that article, I agree with him.

    However, he is making some a priori assumptions. He is assuming that an agreement will bring about substantial spending cuts. What happens if they don't agree? What happens if both sides are so entrenched that neither wants to give into no spending cuts / no tax increases? What happens if they have a technical default and then a few days later, the Republicans cave and we haven't solved our problems?

    It is clear that the bond market believes - for the moment - that a deal is going to happen, either before or shortly after the deadline. However, it is definitely not factoring in if the US defaults over weeks or months instead of days.
     
  7. sparky
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    sparky VIP Member

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    Grand shell game here, in a nutshell>

    The Fed buys T notes to offset debt, or aviod the debt cieling, or as Ben B claims, 'to spur aggregate demand'

    As long as the Fed remains unauditable, this manner of quantitative easing via manipulation of the Treasury creates the illusion of demand , as well as allowing the US to deficit spend at artifically low rates

    Great plan, eh?
     
  8. 8537
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    There's no guarantee you're going to get that interest payment in 6 days or 15 days.

    But on the bright side, the next guy to buy a treasury will get a much bigger coupon payment!
     
    Last edited: May 17, 2011

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