Many persons know I am politically very conservative, but I hope my more liberal friends and relatives will read the rest of this essay with an open mind.
The Wall Street Journal last month carried an interesting interview of Stanley Druckenmiller.
For those of you unfamiliar with him, I have copied a brief biography below from Bloomberg Businessweek – hardly a conservative publication.
The issue addressed in the interview was simply which course of action is worse for the financial future of our country – bringing about a technical default on U.S. bonds by not meeting the approaching deadline for raising the cap on the national debt or not significantly reining in entitlement and other spending?
Essentially all Democrats, and many Republicans, believe (or at least say) that not raising the authorized debt ceiling prior to default would be a catastrophe for the bond market.
They maintain that the largest holders of U.S. bonds (China and others) will begin dumping them and interest rates will go through the roof.
Mr. Druckenmiller strongly disagrees.
He says the result of a delay in raising the cap would be a technical default in which bondholders would see a delay of days or perhaps weeks in receiving one payment due but would have no doubt that they will eventually receive that payment and future payments as well.
If there were any such doubts, the interest rates would already be going through the roof. Please consider the following argument put forth by Mr. Druckenmiller, using my analogy: Let’s say you loaned me $10,000 for 10 years with interest-only payments every quarter, the principal to be repaid at term.
Because my family and I went on a spending spree, living lavishly and beyond our means, I find that I will not have enough money to make interest payment #8 (two years into the loan).
We sit down and discuss my situation.
I can do one of two things:
(1) Borrow additional money (from you or someone else), promise to reduce spending but offer no significant specifics, and as a result will be able to make interest payment No. 8 on time, or
(2) Delay interest payment No. 8 for two weeks while I take definite and significant measures to rein in spending to levels that my revenue can sustain.
Which course of action do you think would make you feel better about the security of your loan to me?
Eight years later, when the principal and interest are fully paid, will you care that interest payment No. 8 was two weeks late?
Who Is He?
Mr. Stanley F. Druckenmiller served as Chairman, President and Chief Executive Officer at Duquesne Capital Management, L.L.C. Mr. Druckenmiller is widely regarded as one of the prominent money managers in the world. In addition to his role at Duquesne Capital Management, which he founded in 1981, Mr. Druckenmiller served as Managing Director at Soros Fund Management LLC from 1988 to 2000. During this time, he served as Lead Portfolio Manager for the Quantum Fund N.V. as well as a series of other investment funds. He served as Chief Investment Officer for the Quantum Fund for 12 years. Prior to Soros Fund Management, Mr. Druckenmiller was employed at The Dreyfus Corp., where he developed and ran the best performing mutual fund in the industry from its date of inception to his departure from Dreyfus. He serves as Chairman of the Board of The Harlem Children’s Zone. Mr. Druckenmiller serves as Trustee at Environmental Defense Fund, Inc. Mr. Druckenmiller is on the Board of Directors of The Children’s Scholarship Fund, the Board of Overseers of Memorial Sloan Kettering, and serves on the Investment Committee for Bowdoin College. He is a magna cum laude graduate of Bowdoin College in Maine with degrees in Economics and English. Mr. Druckenmiller has graduate degree credits in Economics from the University of Michigan.
Dr. Novom, who resides in the San Fernando Valley, may be contacted at stevenovom@yahoo.com
