Saturday, May 21, 2011

Druckenmiller on the Debt Limit Discussions

Legendary hedge fund manager Stanly Druckenmiller was recently interviewed in the WSJ on the impact of a technical treasury default arising from our debt ceiling law. I agree with his main point and recommend reading the entire story:
"Here are your two options: piece of paper number oneā€”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."
(I'm also at a loss for why we even bother having a debt ceiling limit if everyone "knows" we just "have to" raise it any time we approach it?)

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