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Profile: Stanley Druckenmiller

Stanley Druckenmiller was a participant or observer in the following events:

Alan Binder.Alan Binder. [Source: PBS]TPMDC reporter Brian Beutler notes that many Congressional Republicans, led by but not limited to those who consider themselves “tea party” members (see April 30, 2011), are heeding the advice of a small number of unorthodox financial experts who go against the “common wisdom” that a possible credit default by the US would lead to potential catastrophe among national and global financial markets. The issue centers on Congressional Republicans’ insistence that they will not raise the US debt limit, or debt ceiling, unless the Obama administration gives them a wide array of draconian spending cuts; in the past, raising the US debt limit has been a routine matter, often handled with virtually no debate and little, if any, fanfare. Beutler says that the most influential of these advisors is Stanley Druckenmiller, who made billions managing hedge funds. Druckenmiller’s advice was that the US could weather several days of missed interest payments if the US debt ceiling were not immediately raised without serious consequences. House Budget Committee chairman Paul Ryan (R-WI), House Majority Leader Eric Cantor (R-VA), and Senator Pat Toomey (R-PA) are all echoing Druckenmiller’s claims in media interviews and in Congress. Beutler writes that the newfound popularity of Druckenmiller’s claims “alarms everyone from industry insiders to Treasury officials to economists, conservative and liberal, to non-partisan analysts who say the consequences of the US missing even a single interest payment to a debt-holder would be catastrophic—even if it was followed immediately by a legislative course correction.” Former Federal Reserve chairman Alan Binder, now a Princeton economist, warns that if the US were to default on its debt even for a few days, the US dollar would crash in value, interest rates would spike, and the US economy would find itself spiraling into a full-blown recession. Binder writes: “For as long as anyone can remember, the full faith and credit of the United States has been as good as gold—no one has better credit. But if investors start to see default as part of US political gamesmanship, they will demand compensation for this novel risk. How much? Again, no one can know. But even if it’s as little as 10-20 basis points on the US government’s average borrowing cost, that’s an additional $10 billion to $20 billion in interest expenses every year. Seems like an expensive way to score a political point.” JPMorgan CEO Jamie Dimon agrees, telling PBS viewers: “Every single company with treasuries, every insurance fund, every—every requirement that—it will start snowballing. Automatic, you don’t pay your debt, there will be default by ratings agencies. All short-term financing will disappear. I would have hundreds of work streams working around the world protecting our company for that kind of event.” JPMorgan issued a statement after Dimon’s comment saying that even a brief default would trigger “a run on money market funds… that would leave businesses unable to meet their short-term obligations and teetering on the bring of bankruptcy.” JPMorgan compares the money-market run to the aftermath of the 2008 Lehman Bros collapse, which sent the US into a recession. Analyses and reports by the Treasury Borrowing Advisory Committee and Government Accountability Office have warned of dire consequences following a default even of a day or two. Toomey and others insist that a credit default would simply make the Treasury Department find other ways to avoid missing interest payments, but, economists and financial leaders warn, the consequences of that would be enormous. Binder writes: “If we hit the borrowing wall traveling at full speed, the US government’s total outlays—a complex amalgam that includes everything from Social Security benefits to soldiers’ pay to interest on the national debt—will have to drop by about 40 percent immediately. That translates to roughly $1.5 trillion at annual rates, or about 10 percent of GDP. That’s an enormous fiscal contraction for any economy to withstand, never mind one in a sluggish recovery with 9 percent unemployment.” Druckenmiller and some Republicans believe that forcing a credit default would end up benefiting the country, as the Obama administration would give in to Republican demands for enormous spending cuts in return for Republicans’ agreement to raise the debt ceiling. Business Insider reporter Joe Weisenthal recently wrote: “Of course, a default by the world’s most stable nation would probably have impacts in ways nobody can imagine, but one thing seems to be clear. The notion—as some people suggest—that a default would somehow increase US credit-worthiness is absurd.” [Business Insider, 4/20/2011; New York Times, 4/26/2011; TPMDC, 5/20/2011]

Entity Tags: Government Accountability Office, Eric Cantor, US Department of the Treasury, Alan Binder, Treasury Borrowing Advisory Committee, Stanley Druckenmiller, US Congress, Brian Beutler, JP Morgan Chase, Jamie Dimon, Paul Ryan, Pat Toomey, Joe Weisenthal, Obama administration

Timeline Tags: Global Economic Crises

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