The Fed’s “Raging Mania”

“It’s time for a change” in Fed policy.  

So said legendary hedge fund manager Stanley Druckenmiller in a Wall Street Journal editorial the other day.

We first dropped Druckenmiller’s name in this space over a year ago in a piece about Wall Street’s big money players who were buying gold.  

We have identified the pandemic period as the introduction of Modern Monetary Theory to American policy, a development in which the lines between fiscal and monetary operations are erased.  So, we shared Druckenmiller’s thoughts again last Fall when he ratified our observation, saying, “the merging of the Fed and the Treasury, which is effectively what is happening during Covid, sets a precedent that we’ve never seen since the Fed got its independence.  It’s obviously creating a massive, massive mania in financial assets.”  

Given that policy, Druckenmiller had no trouble seeing price inflation of 5 – 10 percent ahead.  

That was in September.  With the Federal Reserve’s continuation of a money-printing spree that has taken the US into uncharted financial territory, we wanted to pass along a few of Druckenmiller’s latest observations.

“Excesses of fiscal policy are already visible,” he and a colleague wrote in the WSJ (5/10).  “Consumers are spending like never before, construction is booming, and labor shortages are ubiquitous, thanks to direct government transfers. Two-thirds of all relief checks were sent after the vaccines were proved effective and the recovery was accelerating. Opportunistic politicians didn’t let the pandemic go to waste. Especially after the Trump years, Congress has decided to satisfy its long list of unmet desires.

“Isn’t the Fed’s independence supposed to act as a counterbalance to these political whims?” he asked.

In a follow-up interview on CNBC, Druckenmiller said, ““I can’t find any period in history where monetary and fiscal policy were this out of step with the economic circumstances.”  

“Not one.” 

“If they want to do all this and risk our reserve currency status, risk an asset bubble blowing up, so be it. But I think we ought to at least have a conversation about it,” Druckenmiller said.

The world’s central banks are already issuing their verdict on the dollar, as they move their reserves into gold.

“The problem has been clearly identified. It’s [Fed chairman] Jerome Powell and the rest of the world’s central bankers,” he said. “There’s a lack of trust.”

Druckenmiller is right.  And when trust in paper currency erodes, gold moves up.

Speaking last year about the housing bubble, Druckenmiller said, “Look, everybody loves a party, but inevitably, after a big party, there’s a hangover, and right now we are in an absolutely raging mania.” 

No wonder Stanley Druckenmiller likes owning gold!