"Misallocate resources [with low interest rates], create an asset bubble and then deal with the consequences down the road," he said.

"The way you create deflation is you create an asset bubble. If I was 'Darth Vader' of the financial world and decided I'm going to do this nasty thing and create deflation, I would do exactly what the central banks are doing now," he told CNBC's Kelly Evans in an exclusive interview airing Tuesday on " Closing Bell ."

The investor noted how this boom-and-bust cycle has happened time and time again.

"Deflation just doesn't appear out of nowhere and it doesn't happen because you are near the zero bound. Every serious deflation I've looked at is preceded by an asset bubble and then it bursts," he said. "Think about the '20s, a big asset bubble that burst, you have the Depression. Think about Japan. Asset bubble in the '80s. It burst. You have the consequences follow. Think about 2008, 2009."

Druckenmiller said if the Federal Reserve raised interest rates more quickly, the U.S. would have avoided the worst of the housing bubble and last recession.

"If they had moved earlier and more aggressively in the early 2000s, we would have had a recession in '08 and '09, but not a financial crisis," he said.

The investor believes the Fed should raise rates and normalize monetary policy as soon as possible.

"The longer this goes on, the worse it's going to be," he added. "The sooner they can stop what's going on ... the better."



Druckenmiller is chairman and chief executive officer of the Duquesne Family Office. His hedge fund track record is unparalleled, generating annualized returns of 30 percent during his investment career. He has a net worth of $4.7 billion, according to Forbes.

Shortly after the Nov. 8, 2016, election Druckenmiller told CNBC he made a "large bet on economic growth." He was optimistic about President Donald Trump's win due to the prospects for deregulation and tax reform. The has risen 24 percent since election through Monday.

— CNBC's Kelly Evans contributed to this report.