Investing magnate Stanley Druckenmiller says that the Federal Reserve's recent policies are threatening the long-term health of the dollar. He notes that the Fed is risking the dollar's future by insisting on holding interest rates down and buying trillions in bonds even though markets are thriving and the economy is booming.
"I can't find any period in history where monetary and fiscal policy were this out of step with the economic circumstances, not one," Druckenmiller, chairman and CEO of investment management firm Duquesne Family Office, told CNBC on May 11.
The investor did not take issue with the Fed's initial response to the Wuhan coronavirus (COVID-19) pandemic. But he became concerned because the Fed continued to underwrite the Congress' spending binge, allocating more than $5 trillion in federal aid and mulling trillions more in infrastructure-related spending. (Related: Report finds illegal immigrants to receive about $4 billion in stimulus checks.)
Over time, he said, these policies and the heavy debts and deficits they incurred would threaten the dollar's status as the world's reserve currency, or the principal foreign currency that a central bank holds as part of its country’s formal foreign exchange reserves.
"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.
"If we're going to monetize our debt and we're going to enable more and more of this spending, that's why I’m worried now for the first time that within 15 years we lose reserve currency status and of course all the unbelievable benefits that have accrued with it," he added.
Being the reserve currency globally means that the dollar is accepted for international transactions and as a store of wealth anywhere. It also allows the U.S. to borrow money at a lower cost and increases the power of its financial sanctions.
Digital currencies could replace the dollar as the world's reserve currency
James Bullard, President of the Federal Reserve Bank of St. Louis, defended the Fed's policies and said that it's not yet time to remove the policy accommodation while the pandemic is still ongoing.
"I don't know how many pandemics Stan has lived through. These don't come along that often," Bullard told CNBC on May 11. "I think the response was really good both on the fiscal and monetary side."
Others warned in the past that the Fed's excesses could threaten the dollar but the greenback managed to retain its status as the principal reserve currency. One reason for this is the lack of viable alternative currencies. However, with the emergence of digital currencies, something might finally challenge the dollar this time.
Former Department of Commerce assistant secretary Nazak Nikakhtar sounded the alarm about China's emerging digital yuan, the electronic version of its fiat currency.
"They're just trying to create an alternative," she said. "This is basically creating an epicenter and hoping [that it's] like a magnet that draws everything out from the United States towards this other center."
Druckenmiller thought that a challenge would come in the form of cryptocurrencies, which are a type of digital currency. He said that the solution to keep the dollar strong was to build a new ledger system, though he said he didn't know what that would look like. (Related: The chance of a US dollar COLLAPSE is 100 percent.)
But Federal Reserve Chairman Jerome Powell is in no hurry to create a digital version of the dollar that will squash any electronic competition.
"Because we're the world's reserve currency, principal reserve currency, we don't need to rush this project, we don't need to be first to market," he said during the Bank for International Settlements Innovation Summit last March.
But Druckenmiller is less confident in the dollar's future. He noted that in the early days of the pandemic, foreign governments showed their concerns about the dollar by selling Treasurys, which is the opposite of what normally happens in a crisis if U.S. debt is seen as a haven.
Foreign holdings of government bills, notes and bonds fell by $127 billion, or nearly two percent over the past year, according to data from the Department of the Treasury. Foreigners hold almost a third of the public portion of the $28.2 trillion U.S. debt.
Druckenmiller opined that central banks were the root of a lack of confidence in dollar stability: "The problem has been clearly identified. It's Jerome Powell and the rest of the world's central bankers … There's a lack of trust."
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