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gold bugs and bitcoiners are of course extremely comfortable declaring that the era of dollar dominance is coming to a close but this is not a mainstream point of view it is more than a bit heretical so to have someone of druckenmiller's stature put it so plainly shows how much the discourse has changed but then we're back to the question of if not the dollar or euro or rmb then what if you're listening to this podcast you know the answer welcome back to the breakdown with me nlw it's a daily podcast on macro bitcoin and the big picture powershifts remaking our world the breakdown is sponsored by nexo.io and bitstamp and produced and distributed by coindesk what's going on guys it is tuesday may 11th and today we are talking about some fiery comments from billionaire investor stanley druckenmiller about how the dollar will lose its reserve currency status first however let's talk about why we're dedicating a whole episode to one investor's comments there is a tendency thanks to modern media to over valorize things that rich guys say it's easy it gets clicks and views and downloads however bitcoin and crypto show more than basically any other industry in history how often it is the anons and the plebs who have the right of the way the world is changing far before the beneficiaries of the old order feel the sand shifting under their feet that said even acknowledging that we still live in a world where traditional finance is dominated by trends pointed out by these seminal figures amplified through traditional outlets aka financial cable news for that reason when a storied investor makes a big proclamation in both the world's most renowned economics newspaper and on whatever you would call cnbc it suggests that the arguments contained within are more broadly resonant in the markets than we previously knew indeed we saw this all too well last year 2020 was a huge inflection point for many investors we had been living with the legacy of the great financial crisis for a decade and while many were concerned about the long-term fallout of what they saw as artificially low interest rates and perhaps overly involved fed they had to acknowledge that the consumer price inflation that they had feared had failed to materialize there were of course other strange dislocations asset prices most notably but up until last year there wasn't a great fear when the entire world responded to the covet 19 crisis with massive monetary and fiscal intervention this started to shift and those concerns came roaring back here's how paul tudor jones put it at the beginning of his seminal great monetary inflation note last may the depth and magnitude of the economic drop-off took modern monetary theory or the direct monetization of massive fiscal spending from the theoretical to practice without any debate it has happened globally with such speed that even a market veteran like myself was left speechless just since february a global total of 3.9 trillion dollars 6.6 percent of global gdp has been magically created through quantitative easing we are witnessing the great monetary inflation an unprecedented expansion of every form of money unlike anything the developed world has ever seen this note was of course paul tudor jones entrance into bitcoin and set off the wave of institutional buying that has characterized the market since another person who came to similar conclusions was stanley druckenmiller stan druckenmiller is one of america's best-known hedge fund managers he ran soros quantum fund for a while last fall he came on cnbc and talked about how for the first time in a long time people needed to take seriously the possibility of significant inflation something like five to ten percent he said wouldn't surprise him he also revealed in that interview that he had taken a bitcoin position which of course further reinforced the growing institutional inflation hedge narrative well today druckenmiller is back and is sounding the alarm bells with even more vigor he has a new op-ed in the wall street journal called the fed is playing with fire here's the opening with coveted uncertainty receding fast and several quarters deep into the strongest recovery from any post-war recession the federal reserve's guidance continues to be the most accommodative on record by a mile keeping emergency settings after the emergency has passed carries bigger risks for the fed than missing its inflation target by a few decimal points it's time for a change there are a few parts of druckenmiller's argument the first is an unexpectedly buoyant recovery he points out that we are back to pre-recession levels of gdp he also points to unemployment that has recovered 70 percent of the initial pandemic hit after only six months four times faster he says than normal contrast this with fed policy the fed is telling markets that the first rate hike will be in 32 months two and a half years later than normal the fed is buying 40 million dollars a month in mortgages even though housing is clearly running out of supply what's more the fed indicates no interest in discontinuing their 120 billion dollars a month in bond purchases druckenmiller also discusses the fallout of fiscal policy quote consumers are spending like never before construction is booming and labor shortages are ubiquitous thanks to direct government transfers he points out that two-thirds of relief checks were sent out after vaccines proved effective and the recovery was accelerating but getting back to the fed here is the key line quote the emergency conditions are behind us inflation is already at historical averages serious economists soundly rejected price controls 40 years ago yet the fed regularly distorts the most important price of all long-term interest rates this behavior is risky for both the economy at large and the fed itself looking for the best way to unlock your cryptos liquidity nexo.io is exactly what you need borrow against your digital assets at just 5.9 percent 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on government debt that's up from eight percent currently in that context taxes can't possibly fill the gap so the pressure to monetize the deficit directly will increase dramatically in druckenmiller's estimation there are warning signs that the market sees this coming he points notably to the dramatic shift of behavior of foreign asset buyers this set of buyers have historically clung to treasuries as a portfolio hedge but have now become net sellers even after the fed spent trillions to prop up bond markets ultimately druckenmiller and his co-author christian borda argued that the damaging deflationary episodes of the last decade didn't start because inflation was too close to zero but because asset bubbles popped this they argue is the real threat right now now druckenmiller took to cnbc this morning to reinforce these points and add a few more first he says that he absolutely supported the aggressive actions taken last year because as he put it we were on the precipice of a black hole however now the way that he sees it the facts have changed while policy hasn't quote what i have a problem with is the fed is expected to do 2.5 trillion of qe after vaccine confirmation and after retail sales reached trend and we're above trend we're still acting like we're in a black hole and in fact the economy is accelerating he also really reinforced the idea that the fed was going to be forced to monetize the debt referencing the same 30 8 statistic from above the gist of his comments was this quote i can't find any period in history where monetary and fiscal policy were this out of step with the economic circumstances not one there was however one other eye-popping part of the conversation and that has to do with the ultimate implications of all of these policies and as druckenmiller might put it this policy failure joe kernan referenced some recent comments in a speech where druckenmiller said that the reserve currency status of the dollar would be gone within 15 years and what's more with europe a mess and trust in china almost non-existent crypto was the best candidate to replace it this is a big pronouncement gold bugs and bitcoiners are of course extremely comfortable declaring that the era of dollar dominance is coming to a close but this is not a mainstream point of view it is more than a bit heretical so to have someone of druckenmiller's stature put it so plainly shows how much the discourse has changed but then we're back to the question of if not the dollar or euro or rmb then what if you're listening to this podcast you know the answer druckenmiller said quote five years ago i said crypto was a solution in search of a problem well now the problem has been clearly identified it's jerome powell and the rest of the world central bankers there's a lack of trust talk about a mic drop moment but of course it can't be all good bitcoiners and frankly ethereans and solana dads and dogecoin maximalists and pretty much everyone else will not like his take on which crypto is likely to replace the dollar as that vaunted world reserve currency he says it's probably some mit or stanford kid engineering it in their dorm room and it hasn't been built yet which i guess sort of turns the volume down on our faith and stan's research and analytical process that said i don't think we should throw the baby out with the bathwater on this particular point i think you have to view druckenmiller's comments as an evolutionary journey where druckenmiller has gotten to is that the existing reserve currency has in his estimation fatal flaws the other sovereign candidates europe or china don't qualify for their own reasons which means it has to be something else private non-sovereign cryptocurrencies have shown viability in market and so they represent the most likely candidate so what should we make of all of this first of all this is a really interesting tweak to the narrative around inflation druckenmiller is in some ways shifting the narrative to say that asset bubbles themselves are the biggest problem versus even runaway consumer inflation indeed the issue with inflation in his estimation is that it becomes so obvious that the fed has to move quickly and that that itself causes the asset bubble to burst quote the longer they wait to move the bigger the bubble and the bigger the reaction in other words he says that the bubble bursting in three months would be less painful than in three years quote that would be the most probable problem is what it always is the fed gets mugged by reality frankly i think they've already been mugged by reality but they're ignoring it this in turn in his estimation impacts the viability of the dollar as the world's reserve currency as the fed is forced to increasingly monetize the debt the dollar depreciates the world turns away what do they turn to well maybe the shift isn't from one sovereign fiat to another maybe it's to something totally different something entirely and natively of the internet i know that possibility is why many of you who are listening to this now have decided to spend so much time focused on this industry and the possibilities contained within today your argument my argument our argument got a big credibility boost in the mainstream financial world anyways guys let me know what you think about druckenmiller's comments hit me up on twitter and as always i appreciate you listening until tomorrow guys be safe and take care of each other peace we're witnessing the greatest paradigm shift in finance in modern history join thousands of newsmakers and influencers talking the future of money at consensus by coindesk a live virtual experience of leaders change makers virtual reality meetups keynotes from ray dalio gary vaynerchuk and much more get an up-close look at the boom in crypto the surge in institutional investment in bitcoin the nft mania the breakneck innovation and decentralized finance and the coming disruption from central bank digital 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