Malinvestment or inflation – which shall it be!

Malinvestment or inflation – which shall it be!

Former hedge fund manager Stan Druckenmiller appeared on CNBC this morning discussing the growing deficit problem. He had a noteworthy warning about the problems being created by monetary policy.

“The Fed is printing a lot of money. They are forcing people into markets…The party’s going on, money’s being pumped in… so I think this party can continue for a while. The problem is, I don’t know when it’s going to end, but my guess is, it’s going to end very badly. And it’s going to end very badly because, again, when you get the biggest price in the world, interest rates, being manipulated, you get a misallocation of resources.

And this is going to end in one of two ways – with a malinvestment bust, which we got in ’07-’08. We didn’t get inflation, we got a malinvestment bust because of the bubble that was created in housing. Or it could end with just monetizing the debt and off we go in inflation.

So that’s a very binary outcome.They’re both bad. They’re both off in the future, I don’t know when… I just know that when you get this kind of manipulation and this kind of rigging, it should end badly.”

Regarding the Fed exiting its portfolio in the future, Druckenmiller had another warning. “The thought that you can exit by where ever the balance sheet will be at that time… in an orderly manner. The Chairman testified that will give the market plenty of warning. Do you know what guys like me will do when you see the first bond sell out of four trillion? And don’t think that letting the bonds run off isn’t selling.That debt has to be refinanced.”

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