The focus on the sequester is obscuring the real issue which is the exploding cost of entitlements, Stanley Druckenmiller founder of Duquesne Capital, told CNBC's "Closing Bell" on Thursday.
"The hype over sequestration is a joke," he said. "Sequestration is $85 billion. If you net out Hurricane Sandy you're talking about a quarter of 1 percent of GDP."
The debt and entitlement costs, which are expected to grow to $700 billion over the next four years, "will swallow our kids in 15-20 years," Druckenmiller said.
There is still time to tackle the issue, he said, but if it's not dealt with in the next four or five years, "we're going to wake up interest rates are going to explode and the next generation is going to have a tough time," he warned.
(Read More: Kudlow: Armageddon? Nah. Sequester Is Pro-Growth)
The Federal Reserve's bond buying is keeping the government's interest costs low for now, but it's also giving Congress cover from having to act.
"If you normalize interest rates to where they were before QE [quantitative easing] and took them to 5.7 percent federal funding cost of this debt – that's $500 billion a year," he said.
Interest rates won't just normalize, the former hedge fund manager, who notably closed his fund in 2010 citing his inability to meet his own performance expectations, said, they'll keep rising if the debt problem isn't addressed.
Druckenmiller said fixing the problem is fairly easy. He suggested means testing Social Security and raising the Medicare eligibility age.
The debt problem also doesn't change how investors make asset-allocation decisions. "With the Fed printing $85 billion a month, this is not an immediate concern," he said. "But this can't go on forever."