Kyle Bass: Fallacies Such As MMT Are "Leading The Sheep To Slaughter" And "We Believe War Is Inevitable"

Tyler Durden's picture




 

Below are some of the key highlights from Kyle Bass' latest, and as usual, must read letter:

On central banks and the final round of global monetary debasement:

Central bankers are feverishly attempting to create their own new world: a utopia in which debts are never restructured, and there are no consequences for fiscal profligacy, i.e. no atonement for prior sins. They have created Potemkin villages on a Jurassic scale. The sum total of the volatility they are attempting to suppress will be less than the eventual volatility encountered when their schemes stop working. Most refer to comments like this as heresy against the orthodoxy of economic thought. We have a hard time understanding how the current situation ends any way other than a massive loss of wealth and purchasing power through default, inflation or both.

 

In the Keynesian bible (The General Theory of Employment, Interest and Money), there is a very interesting tidbit of Keynes’ conscience in the last chapter titled “Concluding Notes” from page 376:

 

[I]t would mean the euthanasia of the rentier, and, consequently, the euthanasia of the cumulative oppressive power of the capitalist to exploit the scarcity value of capital. Interest today rewards no genuine sacrifice, any more than does the rent of land. The owner of capital can obtain interest because capital is scarce, just as the owner of land can obtain rent because land is scarce. But whilst there may be intrinsic reasons for the scarcity of land, there are no intrinsic reasons for the scarcity of capital.

 

. . .

Thus we might aim in practice (there being nothing in this which is unattainable) at an increase in capital until it ceases to be scarce, so that the functionless investor will no longer receive a bonus[.] (emphasis added)

This is nothing more than a chilling prescription for the destruction of wealth through the dilution of capital by monetary authorities.

 

Central banks have become the great enablers of fiscal profligacy. They have removed the proverbial policemen from the bond market highway. If central banks purchase the entirety of incremental bond issuance used to finance fiscal deficits, the checks and balances of “normal” market interest rates are obscured or even eliminated altogether. This market phenomenon does nothing to encourage the body politic to take their foot off the spending accelerator. It is both our primary fear and unfortunately our prediction that this quixotic path of spending and printing will continue ad?infinitum until real cost?push inflation manifests itself. We won’t get into the MV=PQ argument here as the reality of the situation is the fact that the V is the “solve?for” variable, which is at best a concurrent or lagging indicator. Given the enormity of the existing government debt stock, it will not be possible to control the very inflation that the market is currently hoping for. As each 100 basis points in cost of capital costs the US federal government over $150 billion, the US simply cannot afford for another Paul Volcker to raise rates and contain inflation once it begins.

Hayek was, of course, right:

The current modus operandi by central banks and sovereign governments threatens to take us down Friedrich von Hayek's “Road to Serfdom”. Published in 1944, its message, that all forms of socialism and economic planning lead inescapably to tyranny, might prove to have been prescient. In the 1970s, when Keynesianism was brought to crisis, politicians were vociferously declaring that attempting to maintain employment through inflationary means would inevitably destroy the market economy and replace it with a communist or some other totalitarian system which is the “perilous road” to be avoided “at any price". The genius in the book was the argument that serfdom would not be brought about by evil men like Stalin or Hitler, but by the cumulative effect of the wishes and actions of good men and women, each of whose interventions could be easily justified by immediate needs. We advocate social liberalism, but we also need to get there through fiscal responsibility. Pushing for inflation at this moment in time will wreak havoc on those countries whose cumulative debt stocks represent multiples of central government tax revenue.

 

The non?linearity of expenses versus revenues is what will bring them down.

"Pavlov's Party" is ending, and when it does, it will happen so fast no reaction will be possible:

Through travel and meetings around the world, it has become clear to us that most investors possess a heavily anchored bias that has been engrained in their belief systems mostly through inductive reasoning. Using one of the Nobel Laureate Daniel Khaneman's theories, participants fall under an availability heuristic whereby they are able to process information using only variables that are products of recent data sets or events. Let’s face it – the brevity of financial memory is shorter than the half?life of a Japanese finance minister.

 

Humans are optimistic by nature. People’s lives are driven by hopes and dreams which are all second derivatives of their innate optimism. Humans also suffer from optimistic biases driven by the first inalienable right of human nature which is self?preservation. It is this reflex mechanism in our cognitive pathways that makes difficult situations hard to reflect and opine on. These biases are extended to economic choices and events. The fact that developed nation sovereign defaults don’t advance anyone’s self?interest makes the logical outcome so difficult to accept. The inherent negativity associated with sovereign defaults brings us to such difficult (but logical) conclusions that it is widely thought that the powers that be cannot and will not allow it to happen. The primary difficulty with this train of thought is the bias that most investors have for the baseline facts: they tend to believe that the central bankers, politicians, and other governmental agencies are omnipotent due to their success in averting a financial meltdown in 2009.

 

The overarching belief is that there will always be someone or something there to act as the safety net. The safety nets worked so well recently that investors now trust they will be underneath them adinfinitum. Markets and economists alike now believe that quantitative easing (“QE”) will always “work” by flooding the market with relatively costless capital. When the only tool a central bank possesses is a hammer, everything looks like a nail. In our opinion, QE just doesn’t stimulate private credit demand and consumption in an economy where total credit market debt to GDP already  exceeds 300%. The UK is the poster child for the abject failure of QE. The Bank of England has purchased over 27% of gross government debt (vs. 12% in the US). UK bond yields have all but gone negative and are now negative in real terms by at least ?1%. Unlimited QE and the zero lower bound (“ZLB”) are likely to bankrupt pension funds whose expected returns happen to be a good 600 basis points (or more) higher than the 10?year “risk?free” rate. The ZLB has many unintended consequences that are impossible to ignore.

 

Despite reading through Keynes’ works, we didn’t find a single index referencing the ZLB or any similar concept. In his General Theory, there are 64 entries in the index under “Interest” but no entry for the ZLB, zero rates, or even “really low rates”.

 

Our belief is that markets will eventually take these matters out of the hands of the central bankers. These events will happen with such rapidity that policy makers won’t be able to react fast enough.

On the lunacy of such "modern" "economic" "theories" as MMT (which may or may not stand for "Magic Money Trees")

The fallacy of the belief that countries that print their own currency are immune to sovereign crisis will be disproven in the coming months and years. Those that treat this belief as axiomatic will most likely be the biggest losers. A handful of investors and asset managers have recently discussed an emerging school of thought, which postulates that countries, as the sole manufacturer of their currency, can never become insolvent, and in this sense, governments are not dependent on credit markets to remain fiscally operational. It is precisely this line of thinking which will ultimately lead the sheep to slaughter.

The inevitable end of that supremely flawed monetarist experiment - the Eurozone:

Each subsequent “save” of the European debt crisis has been devised by the Eurocrats coming up with some new amalgamation of an entity that is more complex than its predecessor that is designed to project size, strength, and confidence to investors that the problem has been solved. Raoul, a friend of mine who resides in Spain, put it best:

 

“Let’s just clear this up again. The ECB is going to buy bonds of bankrupt banks just so the banks can buy more bonds from bankrupt governments. Meanwhile, just to prop this up the ESM will borrow money from bankrupt governments to buy the very bonds of those bankrupt governments.”

 

The EFSF, the IMF, the ESM, and the OMT (and who knows what other vehicles they will dream up next) have all been developed to serve as an optical backstop for investors globally. The Eurocrats are sticking with the Merkelavellian playbook of hiding behind the complexity of these various schemes. All one has to do is review the required contributions to said vehicles from bankrupt nations to realize that the circular references are already beginning to show in broad daylight. Does anyone stop to consider that the two largest contributors to the IMF are the two largest debtor nations in the world? Are things beginning to make sense now?

 

...

 

In the end, the EMU won't look the same, if it exists at all.

And finally, a less than rosy outlook for the entire "developed" world.

Trillions of dollars of debts will be restructured and millions of financially prudent savers will lose large percentages of their real purchasing power at exactly the wrong time in their lives. Again, the world will not end, but the social fabric of the profligate nations will be stretched and in some cases torn. Sadly, looking back through economic history, all too often war is the manifestation of simple economic entropy played to its logical conclusion. We believe that war is an inevitable consequence of the current global economic situation.

All this and much more, including the usual detailed summary depicting the Japanese ultra slow-motion trainwreck (which is picking up speed as none other than Seiji Maehara, state minister for economic and fiscal policy, admitted yesterday when he said that "[The Japan economy] is in a dire state") in the full letter below:

 

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Sat, 11/17/2012 - 15:03 | 2991991 Ignatius
Ignatius's picture

Surf the collapse.

These cycles never end, though when identified they can be surfed.

Sat, 11/17/2012 - 15:23 | 2992037 hmmtellmemore
hmmtellmemore's picture

Take advantage of the idiots that believe in these central banks.  Let them lose their money instead of us.

Sat, 11/17/2012 - 15:24 | 2992045 centerline
centerline's picture

Those are the ones who think the ocean rushing away from shores is a curious sight (or asleep on the beach).

Sat, 11/17/2012 - 16:27 | 2992107 Michaelwiseguy
Michaelwiseguy's picture

People pushing Agenda 21 in the shadows are terrorists. We are driving them out of the shadows and exposing them to daylight. These Agenda21ers are treasonous traitors of the United States.

Media Panic to Control Exposure of Agenda 21 Takeover

http://www.infowars.com/media-panic-to-control-exposure-of-agenda-21-takeover/

This is why Huffington Post are always attacking Governor Rick Scott of my State of Florida.

Rick Scott, Agenda 21 and the United Nations

http://www.crowleypoliticalreport.com/2011/05/rick-scott-agenda-21-and-the-united-nations.html

Florida Repeals Smart Growth Law

http://www.newgeography.com/content/002471-florida-repeals-smart-growth-law

Sat, 11/17/2012 - 17:03 | 2992221 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

We can share ideas on how to profit, or we can revolutionize the world and still profit.  Take your pick.

http://www.zerohedge.com/article/national-inflation-association-silver-short-squeeze-could-be-imminent#comment-289461

Sat, 11/17/2012 - 18:02 | 2992311 Michaelwiseguy
Michaelwiseguy's picture

The Agenda21ers use psychological brainwashing techniques on us. They use of the Delphi Technique on us, and is well documented.

HOW COLLECTIVISTS USE THE DIAMOND TACTIC TO SWAY PUBLIC MEETINGS AND HOW TO THWART THEM
by G. Edward Griffin

http://www.freedomforceinternational.org/pdf/diamond_tactic.pdf

Agenda21ers are psychological brainwashing Terrorists. Everyone is familiar with the words "Climate Change", it's psychological brainwashing terminology.

I figured it out. They're using fight club rules. Never talk about Agenda 21.

I say we declare war on the Agenda21ers. Kill 40 birds with one stone.

Sat, 11/17/2012 - 18:05 | 2992321 ratso
ratso's picture

Kyle Bass is a moron.

Sat, 11/17/2012 - 18:40 | 2992389 Dr. Sandi
Dr. Sandi's picture

I wish I had somebody that stupid handling my finances.

Sat, 11/17/2012 - 18:53 | 2992406 ratso
ratso's picture

Be careful what you wish for.

Now that the world did not end when Obama was elected and reelected, the fear mongers have to find new bogey men and monsters to induce us into make irrational fear based decisions that are not in our own best interest. 

Kyle Bass BOOO!

Sat, 11/17/2012 - 19:03 | 2992435 Jreb
Jreb's picture

This is the best you guys can do? "Kyle bass is a Moron" and the world didn't end?? Not "I think Kyle is wrong becausee... XYZ..." What is this - fucking high school??

Do you really think that global economic collapse has anything to do with Obummer being re-elected? He is a foot note in the history of our decay - a symptom of the larger disease.

But you're right guys - let's everyone buy US bonds, Apple and Haliburton. Times are good - in fact they'll never end because the guys pulling the levers obviously know what they are doing and have our best interest in mind. My apologies for thinking otherwise. I'll just shut up and go back to sleep... BTW - does anyone know what time "Dancing with the Stars" is on tonight???

 

Sat, 11/17/2012 - 19:14 | 2992453 mlbs
mlbs's picture

You fool! Any true fan of Dancing With the Stars knows what time it is on so well that they can set their clocks by it. I always knew I couldn't trust you.....

On an unrelated note. Would you be interested in buying my old iPod? It's the last piece of Apple hardware I own and I don't want it anymore. I'll sell it to you for one share of AAPL.

Sat, 11/17/2012 - 21:20 | 2992666 Jreb
Jreb's picture

Busted...

Sun, 11/18/2012 - 00:18 | 2992976 DeadFred
DeadFred's picture

Efw semifinals with the best of the best competing and you don't even know it's on MONDAY!!!

Sun, 11/18/2012 - 00:52 | 2993044 Michaelwiseguy
Michaelwiseguy's picture

Why do Progresser News Headlines, like those found on Huffington Post, always have to be in the form of a vague question?

P.S.

I very rarely click on any of their stories.

Sun, 11/18/2012 - 02:00 | 2993139 markmotive
markmotive's picture

Again, the inflationists / deflationists battle rages on.

Harry Dent is out there saying the Dow will hit 6000

http://www.planbeconomics.com/2012/11/15/harry-dent-battles-ron-insana-o...

 

Sun, 11/18/2012 - 05:04 | 2993233 IBelieveInMagic
IBelieveInMagic's picture

The debt to GDP ratio for OECD countries when combined with commodity countries such as Middle East (virtual colonies) may not be as bad some imagine. I think this beast can take on some more debt before the final collapse.

Sun, 11/18/2012 - 09:34 | 2993355 GetZeeGold
GetZeeGold's picture

 

 

Kyle Bass doesn't care who won the last election......he's got gold.

 

While the unions grovel at Bam Bam's feet......Kyle just sits back and chuckles.

Sat, 11/17/2012 - 19:21 | 2992475 I am on to you
I am on to you's picture

Surely:

Its five past loneliness !!

Sat, 11/17/2012 - 19:22 | 2992477 Michaelwiseguy
Michaelwiseguy's picture

It has something to do with Democrats learning their math lessons and Obama getting the blame. That's the main reason for getting him reelected in conjunction with Revenge.

Alex Jones Caller Ron Paul Revenge Voters For Obama 11/09/2012

For Pure Unadul­ter­at­ed Re­venge. That's all this is about.

http://www.myspace.com/video/michaelwiseguy/alex-jones-caller-ron-paul-revenge-voters-for-obama-11-09-2012/109079927

Sat, 11/17/2012 - 20:12 | 2992555 tango
tango's picture

Do you not get it? Articles with depth, complexity and three syllable words are automatically dismissed by those who read about half before giving up.  They're not "entertaining" - no dark conspiracies or wild rumor of the hour.    Most posters missed the salient point:  investors and citizens, because they have never known differently, consider constantly rising debt without consequences as "normal".  Most "experts" will earnestly state that as long as interest rates remain low we can "handle the borrowing" (like Spain, with 25% unemployment can manage debt at 6% but not 7%).  We can continue to have trillion dollar debts, monetize the deficit and buy our way out of trouble and all will be well. 

Sat, 11/17/2012 - 20:25 | 2992579 macholatte
macholatte's picture

 

 

The genius in the book was the argument that serfdom would not be brought about by evil men like Stalin or Hitler, but by the cumulative effect of the wishes and actions of good men and women, each of whose interventions could be easily justified by immediate needs.

 

I'm not so sure folks like Obama, Clinton and Soros are so well meaning. 

Sat, 11/17/2012 - 20:48 | 2992625 Michaelwiseguy
Michaelwiseguy's picture

The international bankster arrest list is getting very long.

Bankers and Brokers and Inside Traders Arrested, Oh My!

http://consciouslyconnecting.blog.com/2012/07/25/bankers-and-brokers-and-inside-traders-arrested-oh-my/

DAVID WILCOCK with DRAKE Interview 29March2012

http://www.youtube.com/watch?v=NRziYS-PZ2U


Now Elizabeth gets to do what I supported her for. Elizabeth Warren: 'Libor Fraud Exposes Rot At The Core Of The Financial System' http://www.huffingtonpost.com/2012/07/20/elizabeth-warren-libor_n_1689534.html 

 

 

 

Sat, 11/17/2012 - 23:50 | 2992921 Michaelwiseguy
Michaelwiseguy's picture

The UN needs to be brought up on Criminal Charges for using Psychological Brainwashing Tactics on the American People!

Sun, 11/18/2012 - 00:24 | 2992991 DeadFred
DeadFred's picture

Iread the article but didn't see any arrests of anyone from a big bank. Hmmm I wonder how I missed it.

Sat, 11/17/2012 - 23:32 | 2992883 Imminent Crucible
Imminent Crucible's picture

macholatte: "I'm not so sure folks like Obama, Clinton and Soros are so well meaning."

That was my thought. What good men and women is he talking about? Obama, Clinton, Soros........horns, hoofs, pitchfork.

Sun, 11/18/2012 - 09:51 | 2993368 TeamDepends
TeamDepends's picture

Seems clear to us he is refering to "useful idiots".  In the U.S. these people are known as Obamanauts, the walking embodiment of the old adage:  The road to Hell is paved with good intentions.

Sun, 11/18/2012 - 00:10 | 2992962 IndicaTive
IndicaTive's picture

It's not on tonight. Duh.

Sun, 11/18/2012 - 06:14 | 2993254 samcontrol
samcontrol's picture

you should watch the Argentine version , it,s called showmatch. True entertainment.

Sun, 11/18/2012 - 06:16 | 2993257 samcontrol
samcontrol's picture

roland , go fuck yourself!

Mon, 11/19/2012 - 11:51 | 2995904 WhiteNight123129
WhiteNight123129's picture

Jean Jaures was an awful fear mongerer, after all the world did not end because of World War I, a lot of people died and pensioners were ruined, but hey, the world did not end. Same thing with Churchill, he wanted to attack Hitler before he became too powerful and erase the threat. Another awful fear mongerer again. Did the world end with World War II, not at all. More people got killed and more people lost their pensions.

Ok now if you are trying to say that a world war is not the end of the world and people getting wacked with their savings is business as usual in the greater scheme of things than yes you are right. You just have a lot more cold blood than maybe have on this blog including me. On the other hand, if you think that the world is a rosy place nice and happy, go back watching the Teletubbies or if you have a light bubble spinging in your head right now, go and read a LOT of history to understand how the world really works.

 

 

Sat, 11/17/2012 - 19:12 | 2992451 SingleCross
SingleCross's picture

Ad hominin

Sat, 11/17/2012 - 23:41 | 2992900 ratso
ratso's picture

No, its his classification - its his phylum.

BTW, you obviously never took Latin.

Sun, 11/18/2012 - 15:52 | 2994130 Blankenstein
Blankenstein's picture

And obviously you failed elementary school grammar.  

 

"No, its his classification - its his phylum."

"induce us into make irrational fear based decisions "

Sat, 11/17/2012 - 19:25 | 2992481 tsx500
tsx500's picture

good one , idiot .    how long did it take you to come up with that one ?

Sat, 11/17/2012 - 20:13 | 2992560 Anonymous peon
Anonymous peon's picture

If only Bernanke were as much of a moron.

Sat, 11/17/2012 - 20:17 | 2992564 Rick Blaine
Rick Blaine's picture

For all I know, you were joking...but in case you weren't...

OK, so if Kyle Bass is a moron, who ISN'T a moron?

The Bernanke?  Geithner?  All the "experts" who were literally laughing out loud, on the air, at Peter Schiff back in '05?

For all I know, Bass simply got lucky with the housing market and Greece...and maybe he's really not that smart or whatever...

However, even if they were guesses, at least he got something right over the past few years...

...as opposed to Bernanke, for example, whose correct economic predictions of the past seven years are shown on the list below:

 

 

(end of list)

 

Sat, 11/17/2012 - 20:40 | 2992616 knukles
knukles's picture

Oh, I've an addition to the list:

Sat, 11/17/2012 - 21:32 | 2992688 xtop23
xtop23's picture

Ive rarely heard a moron speak so eloquently or perform research so exhaustively. kyle is no fool. you however......... oy

Sun, 11/18/2012 - 01:35 | 2993099 Daily Bail
Daily Bail's picture

And you Ratso are a fucktard propenent of MMT, and never-ending deficit spending to keep your team (who's the same as the other team) in power.  Trillion-dollar deficit spending at this point in our cycle is nothing less than generational RAPE of the young and unborn.

Galbraith, Marshall Auerback, probably that fucktard Brad Delong, and other MMT dipshits can kiss my ass.  Move to Zimbabwe, I hear there are job openings.

Meanwhile In Zimbabwe: 9 Million Percent Inflation

 

Sun, 11/18/2012 - 11:35 | 2993518 TeamDepends
TeamDepends's picture

One:  The more I hear of this Kyle Bass character, the more I like the cut of his jib.

Other:  Dja' know he has shit-tons of gold in his basement?

One:  All Hail Exalted Leader Bass!!!

Sun, 11/18/2012 - 01:33 | 2993096 Big Slick
Big Slick's picture

MOLON LABE!

Sun, 11/18/2012 - 03:30 | 2993200 dunce
dunce's picture

Smart growth and smart diplomacy both have a contemptous ad hominem refutation built in thier names, any one that disagrees with the policies is stupid.

Sun, 11/18/2012 - 13:39 | 2993770 SmittyinLA
SmittyinLA's picture

Ca's growth & development policies are why a 1300' 75 year old house  in the City of Bell Ca which should cost at the most $90,000 and do in every other state sells for $350,000.in CA.

 California's citizen written bankruptcy law will fix everything when we void all unsecured debts and void all unfunded liabilities and sell off state lands_to only resident citizens.

 

Sat, 11/17/2012 - 16:05 | 2992113 Top_Kill
Top_Kill's picture

"But whilst there may be intrinsic reasons for the scarcity of land, there are no intrinsic reasons for the scarcity of capital."

We will quickly see a scarcity of physical tradition (GOLD).  Bernake will learn this very soon. How long until the US is secretly buying gold. I put the over under at 27 months. What says you?

Sat, 11/17/2012 - 17:05 | 2992222 HurricaneSeason
HurricaneSeason's picture

With our budget problems? Tungsten abd ETFs are cheaper. China will outbid us with treasuries.

Sun, 11/18/2012 - 01:38 | 2993100 Big Slick
Big Slick's picture

"How long before the US government is secretly buying gold?"

They'd have better luck secretly buying Twinkies

Sun, 11/18/2012 - 10:55 | 2993434 gaoptimize
gaoptimize's picture

US Gold Reseserve:  8,133 X 1000 X 2.2046 X 16 X (let's use) $1,800/oz  = $516B

China's US debt holdings: $1,164B (June 2012 reported August 2012)

So yeah, they may take it in partial payment.

Sat, 11/17/2012 - 15:54 | 2992097 john39
john39's picture

Unless you belong to the controlling class, you are a slave, subject to their every whim. Sure the idiots are pathetic, but at some point those who know better must act as there will be no hiding from what they have planned.

Sun, 11/18/2012 - 11:49 | 2993550 TeamDepends
TeamDepends's picture

Amen.  We can't wait to see the looks on the faces of the useful idiots when they realize they have become useless idiots.  Priceless.

Sun, 11/18/2012 - 20:11 | 2994682 Bag Of Meat
Bag Of Meat's picture

I fear the day I will realise that idiots will always remain idiots, and that my only choice is to stick with the elite...

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