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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Peter Pan's picture

There is only one central bank. It's bank manager is gold and it's teller is silver. Society is about to begin a prolonged period of profound and often troubling and painful paradigm shifts as it searches for a new sustainable equilibrium.

The world has to re-open under new management. Hopefully that new management will be a new attitude rather than one world government.

Dr. Sandi's picture

I wanna open an account in this bank. Will you take this here government check?

Zero Govt's picture

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

MBD's your man

Ignatius's picture

But everyone can shit, and that's a real clue as to what to expect.

centerline's picture

+1.  Hate to say it but there are a few people I know who deserve it.  Freakin parasite wannabes.

GetZeeGold's picture



But everyone can shi....


The really classy ones do it on cop cars and sidewalks. They say they talk for me....they don't

Michaelwiseguy's picture

If we're going to have a war, I say we declare it on the globalists banking cartel, and Agend21ers.

DarkestPhoenix's picture

I'm getting my Master of Real Estate, and I can tell you.............they are everywhere.

I do like poking holes in their logic, though.  Great idea, but completely impractical.

"Hey, how about we all graft jetpacks into our shoulder blades and just fly everywhere and turn all the old roads and airports into farms where we grow all our community food?"

Great idea, but completely impractical. 

fasTTcar's picture

But, isn"t China supposed to stop the collapse?

Charlie don't surf.

Spitzer's picture

Isn't allot of things supposed to happen ?

I read half way through it and realized.. what is the point ? Its all the same stuff, year after year. Ever since 2008. Not that anything is wrong with what guys like him write but its such a long painful wait. No monumental events since 08. Who would have thought that this game would have lasted through Obama's term ? Now I could see it lasting another 4 years. And in those 4 years, Kyle Bass will be saying the same thing.

Crisismode's picture

And so will you.


Much to your dismay.



Maos Dog's picture

What can someone say to this?

Only the following:

"at first very slowly, then all at once"

Big Slick's picture

"at first very slowly, then all at once"

... A constructive rebuttal to Spitzer's point, which is a good one and worthy of consideration.  I'd expand on the uncertainties of market timing, but I'm too tired and I'm driving to Austin in the morning to see rich europeans drive obscenely expensive race cars around in a circle.  Fittingly symbolic, a German is probably going to win.

Oh hell, I'll add one thing: "The greatest shortcoming of the human race is our inability to understand the exponential function." - Albert Bartlett

OneTinSoldier66's picture

You're not alone. I think of it as waiting for some libertarianism. The push against allowing any libertarianism is tremendous.


Did you see what happened when Gov. Scott Walker stood up to the Public Sector Unions in Wisconsin? So that the Taxpayers there could finally get some representation? The Capital had union thugs and protesters hanging all over the walls for days on end, on occasion there were threats of life and limb, democrat politicians went awol and fled the state, and there were recall elections. That was just a little slice of libertarianism, and a person could have thought that the earth was going to crack open and everyone was going to fall in!


Unfortunately, Jacob H. Hubert was right when he said... "Libertarianism is not for people with a high time preference."


However, although I have previously been guilty of the following, I believe libertarians should not try to assert themselves above the authoritarians/statists by trying to foist some idea/agenda of how believe things should be... by the use of force, coercion, or violence. That would be stooping to the level of the statists and turning into the very thing libertarians claim to oppose. So as Jacob H. Hubert would say, I have to be patient and improve the one unit of society that I am able to improve, myself. Then, hopefully, people will be naturally drawn to libertarians and libertarianism.

ViewfromUndertheBridge's picture

Well, while you were counting the time it took KB rode the sub-prime wave, then he rode the Greek CDS wave, now he is riding non-agency MBS wave (back-wash that one) and setting himself up for the Japanese Tsunami...sounds kinda fast moving to me.

What did you do?

lipskid's picture

You can't stop the waves, but you can learn how to surf. - Jon Kabat-Zin

Lord Koos's picture

Try surfing the collapse when you or your kids get drafted.

Things that go bump's picture

They prefer their all volunteer force.  People don't care how many wars they fight as long as they aren't forced to participate.  

slyhill's picture

No need for a draft when you can CTRL P. An employee is also a volunteer.

Miramanee's picture

RE: “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.”


YES. Same is the U.S. The Fed makes "whole" the banks by taking toxic assets off of their balance sheets. The government allows the banks to avlue their assets however they desire, with NO regard for their value in the open market. It is a quadrillion dollar shell game. And the logical mind would conclude that this must end badly: a fiat currency game of chicken. Don't mind the man behind the curtain!! BUT....and we have to address this question lest we fally prey to rigid thinking...what happens in a world in which this charade goes on for another 50 years, or more? Does inflation price the middle class into abject serfdom? Does the discovery and exploitation of new technologies "save" the world from itself? Is it better to kick the can ad infinitum in hopes that cold fusion (metaphorically) takes humanity to a new place...essentially bypassing the midfield and staving off collapse? We've been on this road for approaching a century. Nixon defaulted on our gold obligations in 1971. What makes us so sure we cannot go like this for generations to come??? And....what does collapse look like? All questions that I believe we must be willing to discuss, rather than simply express our collective rage at a system that willingly lets billions suffer and die.

Meremortal's picture

"We advocate social liberalism, but we also need to get there through fiscal responsibility."


Now that right there is funny.



Water Is Wet's picture

And I believe water is wet.

eatthebanksters's picture

Guns, ammo, canned food, flour, rice, beans and a hide away in the mountains with a couple of good horses would be a good thing to have when it starts to unwind.

Obadiah's picture

I say "No! fuck the international banking cartel, get the fuck away from US.  The US States.  We dont want or need your fake fiat dreams of contol any longer.  We call the shots Fuck You! Get Out!"

supafuckinmingster's picture



fuu's picture

Your search - iou09yk7ou9p'50g8jyui8895t7uyuutu - did not match any documents.

Zero Govt's picture


 "We Believe War Is Inevitable"


Unless the people take charge back as it should be instead of leaving it in the scum hands of politicians/bwankers ...Press the 'Nuke' button people..

Stop Paying Tax ...Kill the Suckers in One Easy-Peasy Flick of the Wrist


Ballin D's picture

Theyre spending money they dont have already.  Whats the difference between spending more than they collect and spending more than they collect?

Zero Govt's picture

Who Cares!

We either take this destructive human scum out or they murder another 100-500,000 innocents in some geo-political genocide game

It's recovery or trainwreck, peace or war, us or them...this is a no brainer if ever there was (don't expect Statists like Kyle Bass to figure out you've got an option, that society can dictate terms)

Dr. Sandi's picture

Got a list a little deeper than the famous talking heads?

FrankDrakman's picture

Murder another 100-500,000 innocents

Think you're off by a factor of 10 or so..

HurricaneSeason's picture

It's all psychological. China's goal is to create 25 million jobs a year. Why not let the poverty-stricken Chinese  have the new flat screens and gas by letting the value of their currency explode when we get to where we can't even pay the interest on the debt. Then they can dump their U.S. treasuries on the market and claim the reserve currency. That has to be their plan and it seems the BRICs and every other country we've pissed of lately would go along. At least we'll have food, even if the semis taking to the ports need to be robbed. Egypt and Israel are in a desert.


Buy Gold And Silver..convert the fake fiat into bullion. That will take care of everything..including governments. they thrive on DEBT..

augustus caesar's picture

Change the word 'believe' to 'hoping'

Flying Tiger Comics's picture

War is inevitable because megadeath makes labour more expensive but only after making it effectively free- to build large public works that in turn add to the profits and churn of the banking class.


War also causes reactionary forces which preserve the existing feudal system or creates a false revolution where the same system merely renames and rebadges itself.

t_kAyk's picture

We are out of ideas!!  Shoot something!! 

JPM Hater001's picture

Can we just start a war instead?

knukles's picture

Another one or two, but really depends on big or small as well as the participant list.

Might start with the Gog and Megog one just for shit and grins.

AnAnonymous's picture

Another 'american' genius.

War is unavoidable.

What war? 'Americans' have been at war for centuries now.

Quite a prediction, calling for something that is already happening...

faustian bargain's picture

What war indeed. Until I see war in my neighborhood, there is no war, Mr Smug McSnarkypants.

Dr. Sandi's picture

When mortar attacks take out the local Wal-Mart, then we have REAL war.

TPTB_r_TBTF's picture



he is predicting a war so big

that you will lose your internet connection.


fonzannoon's picture

I lost power for 5 days during Sandy. Finally it came back on and I was so happy I can't explain it. Electric and heat came back on. The TV/Internet was still out. I could not care less. Then after 25 minutes I was all aggrevated.