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An economic ‘misdiagnosis’

America’s current economic policies stem back to the early days of the COVID-19 pandemic, according to Druckenmiller, who believes both the Fed and the Treasury “misdiagnosed” the situation and “thought we were going into a depression.”

“The Fed eventually pivoted — better late than never — [but] Treasury is still acting like we’re in a depression,” he said, referring to the heavy government spending in recent years, which has contributed to the national debt of almost $35 trillion.

It is common for governments to spend more during a depression in order to stimulate economic activity, create jobs, stabilize the financial markets and generally restore growth.

“It’s interesting because I’ve studied the Great Depression and you had a private sector crippled with debt with basically no new ideas. So, interventionist policies were put in place and were effective,” said Druckenmiller. “The private sector could not be any more different today than it was in the Great Depression. Their balance sheets are fine, they're healthy, and have you ever seen more innovative ideas … Why we’re spending like we’re still in the Great Depression is beyond me.”

He highlighted government spending on defense, the electrical grid, data centers (for the adoption of artificial intelligence) and environmental innovation.

Drukenmiller also called out President Biden’s ongoing efforts to cancel student debt, which has seen $153 billion in loans wiped out for around 4 million borrowers, as well as a proposed rule change within Fannie Mae and Freddie Mac that would let borrowers take out a second-lien mortgage, while keeping their cheap pandemic-era rate on their first mortgage.

“There’s one spending thing after another [and] we don’t need spending right now,” he said.

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‘Get out of their way’

Druckenmiller thinks the U.S. economy is in “one of the most exciting periods” ever, thanks to “productivity enhancing investments” into AI, blockchain and other innovative technologies.

And to his point, various economic indicators suggest the private sector in the U.S. is relatively healthy right now.

While gross domestic product (GDP) growth in the first quarter of 2024 was a disappointing 1.6%, the U.S. labor market has been resilient despite economic headwinds like higher interest rates. Employers continue to add jobs to their payrolls, unemployment is hovering around 3.5-4% and “real” wage growth is rising.

Corporate profits increased 1.5% in 2023, according to BEA data and investors appear confident in the stock market. The S&P 500 index, which offers broad exposure to some of America’s largest corporations, climbed 10% in the first quarter of 2024, its best first quarter since 2019.

With all of this positive momentum, Druckenmiller said “all [the] government needed to do is get out of their way and let them innovate.” He added: “Instead, they’ve spent and spent and spent — and my new fear now is that spending and the resulting interest rates on the debt that’s being created are going to crowd out some of the innovation that otherwise would have taken place.”

He said, ultimately, it is the average American who is paying the price through “elevated” inflation and painfully high borrowing costs, which is making it difficult for people to secure a mortgage and keep up with the soaring costs of living.

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Bethan Moorcraft is a reporter for Moneywise with experience in news editing and business reporting across international markets.

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