Confronting our Worst Fears

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In this interview, Stan Druckenmiller, legendary investor and founder of the hedge fund Duquesne Capital provides a bone-chilling, yet thouroughly realistic synopsis of the state of the American economy in 2019.

What America faces today (but also most of the developed world, including Britain, Spain , England, China and Japan) is a crisis of staggering proportions which politicians and the electorate have refused to address in any serious fashion. For good reason: the prospects are dire and the solutions politically noxious.

Our levels of debt are so large that the government cannot continue its present policies and meet its promises to its citizenry. Our debt burden, totalling over 200 trillion dollars, is about 33 times the size of our federal budget, or 10 times our Gross Domestic Product. The size of this debt is so large we cannot honor it.

To try to pay these obligations through taxation, Druckenmiller explains, would require increasing every form of federal taxes by 55% on every man, woman and child – but that would cause such a decrease in productivity and growth that it would collapse the economy. Alternatively, we could decrease all government expenditures for other items by 36%, permanently.

Addressing it through growth is possible, but very difficult:
it would require us to grow our economy by more than our rates of interest on the debt, measured at the interest on long term government bonds. Currently, that is around 2.7%. Unfortunately, in the last 10 years, the US real GDP growth rate has lagged below that rate, so our indebtedness is growing instead of shrinking.

The US did achieve real growth rates as high 6% in the late 90′s. See the Mercatus analysis of those years here. If we can achieve that again, there’s a way out of this mess. To achieve that, we should learn from history, taking a look at the 90′s and seeing what we did right back then.

Unfortunately, that was a period we had the winds at our backs, with very favorable demographics. Our situation today is the polar opposite. Since we cannot boost our productivity by throwing more young bodies at the economy, we will need to look at technological breakthroughs to increase our productivity while medical improvements extend the lives and abilities of an aging workforce.




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