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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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Sun, 11/18/2012 - 04:12 | Link to Comment Tenshin Headache
Tenshin Headache's picture

I was going to put up that link. Must read IMHO.

Sun, 11/18/2012 - 02:05 | Link to Comment Yen Cross
Yen Cross's picture

People are more important,

Sun, 11/18/2012 - 05:32 | Link to Comment Setarcos
Setarcos's picture

Of course they are - as Keynes also said - but do not tell that to Ron Paul and Libertarians generally, because they will crucify you on the altar of the fictional "free market" and/or the fictional world of Ayn Rand.

Sun, 11/18/2012 - 13:44 | Link to Comment BlackholeDivestment
BlackholeDivestment's picture

Setacos, you evil puke you, lol. You stand with the corrupt crowd calling for Christ upon the cross, as the new secular order call to prolong the short term claim of dominion at the expense of the laborer(s) of the harvest. You dipshit. Your principle offer is destruction war and death. You sold out mercy because your are given into temptation. The heart of your socialist claim of dominion is in the black hole. The mirror image of the standard of care for the people, as distinct individuals standing in agreement equally yoked by a system measured with their labor, is not possible by your claim. The proof is clear enough to see in the past and at the present time. You idiot. Throw another baby on the fire, that is the image of your offer, moron. 

The fact is, the whole idea of the Constitution and the defense of life liberty freedom and justice for all is not possible with an income tax system and evil money printing bastards. The forieign and domestic enemies defining the ''new world order'' global effort to establish the current borderless market principle of debt needed to be put down a long time ago, but through the political corruption and want of the population, driven by all mannor of reactionary forces and the government becoming the largest employer, what we have now is economic prison that requires prison labor to rise up and destroy the wardens of this state of corruption. You need to stand down, idiot, along with all those person that have accepted the strong delusion. If you remain in contempt and out of order, at this point, you are the enemy, as with all those fools that stand against preserving and protecting not only the United States but all people in general. 

Unemployment, demand destruction, low wages, negative returns, zero interest, increasing deficits and debt are the return(s) of delusional thinking and corrupt evil bastards. The poor and Middle Class just suffer the indignation first. You are a delusional inverted puke or an evil bastard for even offering the Cain's-ian offer. Brothers keeper for you means murder suicide, dipshit. The current winners are producing nothing more than a greater amount of loss and losers which define the short term gains of willful evil bastards. The good people that have done everything right and have a work ethic that backs it up, they have had their trust broken by the (g)od of the Federal Reserve Debt note in whom your dusty ass still is trying to pawn off at this point. Nobody is buying that shit at this point but the lawless scum that have broken and accepted the''change'' of the rules of the game. The fact is, the people, that have fallen for one of two political evil offers of temptation, they are now lamenting their own image and getting the return for their own judgment for having accepted the mark of the beast and the offer(s) of temptation, which is one giant combo of contempt and a bottomless pit sealed over their dusty asses and provoking their call of want for an escape from themselves. Nobody will, or, can escape kickig their own ass by kicking their own ass there bud, and these heel bruising bitchez have proven that on the way up to their own deadly ass kicking their effort costs everyone.

You better hope this is not the prophetic last generation bud, and you better hope the prophetic mark of the beast is not really here, because if it is, it does not matter what you think at this point, your ass is marked and sealed in the black hole and there is no escape for you from your own judgment. The fact that Israel and all the nations around it are blowing up, and the market is now in the same old image of Babylon is fallen is fallen once again, only this time the reality is a global borderless reality with the force of arms that can destroy whole cities in a blink of an eye, well, that is the exact prophetic image that perfectly agrees with the prophetic time being now at hand and upon this generation. Your shit is obviously now in the wind as far as this is goes. 

Do you really think that the efforts that have been made, which brought us to this point, have nothing to do with the agenda of the people behind those efforts, these scumbags that want to establish their new world order peace plan with Israel and all the nations. Do you think they have been willing to sacrifice the principle of labor, life, liberty, freedom, independence and justice in the name of the current Great Wal Mart of China and the Suicide Vampire Squid standard as part of their continuing defense against tyranny? LMAO Do you really beleive that all their efforts to establish their new world order; which they have expressed, defining their desire, to the point of a like minded President like FDR, that printed the Novus Ordo Seclorum Pyramid 666 claim on the Federal Reserve Debt Note, this effort is just artful dodging and playin war game theory in defense of their effort to preserve protect and defend the Constitution etc...? LMAO. Come on, Brown Harriman etc... knew exactly what they were doing. When they created the U.N. they new exactly what they were doing. When they created Israel they new exactly what they were doing. When Kissinger got the Saudis to used the dollar peg they new exactly what they were doing. When they put the Sha in they knew exactly what they were doing. The Iran Contra boys new exactly what they were doing. When they were helping Saddam against the missiles they sold to Iran they new exactly what they were doing. The BCCI boys knew exactly what they were doing. The 1993 World Trade Center FBI boys new exactly what they were doing. When Richard Pearl Harbor needed an event they put the current forces in the Middle East because of 911 and they knew exactly what they were doing. Breaking Glass Steagal and usuing Freddy and the Mac Daddy to kick our Fannie Mae I have another bailout bonus, my dear bought and paid for government goon, they knew exactly what they were doing. When the Corzine Vapor rubbed out farmer John's trust they new exactly what they were doing. When they made Citizen's United Algo Hal 9000's Company Robot equal with a human they new exactly what they were doing. When they established the Vote 2 Party 666 Magic Mormon Underwear Man and White Black Muslim Son claiming to be the Drag Queen Bride of Christ they new exactly what they were doing. Get a clue, dipshit. 

LMAO, forgive me for using your post as a punching bag. It's the Fight Club bitchez, lol. I'm sure you are not really a Cain's-ian, or a dipshit etc... lol. Hey, why is my face bleeding? LMAO.

Sun, 11/18/2012 - 03:35 | Link to Comment Die Weiße Rose
Die Weiße Rose's picture

E = MC2

"Energy" equals Mass multiplied by the Speed of Light (squared)

The most brilliant mathematical minds (including nuclear physicists) worked out ways ,

as how to synthesize those exotic financial Instruments into new Financial Weapons of Mass - Destruction using

the Einstein's Mass - Energy Equivalent:  E = MC2

- now the Problem is :

after financial WMD Nuclear Reaction (Mass loss into mass loss of Energy) had commenced,

none of those stupid fuckers really knew, how to stop the Financial Nuclear chain-reaction !

Hence we are now in the final stages of an advanced World Financial Nuclear Melt-down !

what those "brilliant minds" did not realize is this:

E = MC2 can also work in reverse !

(as in - 16 trillion USD "smoking" big black hole)

wr;)

Sun, 11/18/2012 - 05:49 | Link to Comment toomanyfakecons...
toomanyfakeconservatives's picture

It can all be avoided with the arrest and punishment of a couple thousand bankster-politicians and the restoration of the Constitution of the United States of America. It's time for good men to do something, rather than nothing... http://tinyurl.com/cd5cyjo

Sun, 11/18/2012 - 07:22 | Link to Comment ZFiNX
ZFiNX's picture

Capital is only productively exchangable for man-hours of work and there is only a finite many of those. Wrong again, Keynes.

Sun, 11/18/2012 - 11:13 | Link to Comment DOT
DOT's picture

There are plentiful manhours available to encumber and pledge -to eternity and beyond !

 

However, on a long enough timeline.............the results won't matter.

Sun, 11/18/2012 - 07:38 | Link to Comment Svendblaaskaeg
Svendblaaskaeg's picture

Many thanks to the original ZH poster "Big Slick", Wed, 03/14/2012 - 21:44

The Gods of the Copybook Headings

Rudyard Kipling - 1919
-------------------------------

AS I PASS through my incarnations in every age and race,
I make my proper prostrations to the Gods of the Market Place.
Peering through reverent fingers I watch them flourish and fall,
And the Gods of the Copybook Headings, I notice, outlast them all.

We were living in trees when they met us. They showed us each in turn
That Water would certainly wet us, as Fire would certainly burn:
But we found them lacking in Uplift, Vision and Breadth of Mind,
So we left them to teach the Gorillas while we followed the March of Mankind.

We moved as the Spirit listed. They never altered their pace,
Being neither cloud nor wind-borne like the Gods of the Market Place,
But they always caught up with our progress, and presently word would come
That a tribe had been wiped off its icefield, or the lights had gone out in Rome.

With the Hopes that our World is built on they were utterly out of touch,
They denied that the Moon was Stilton; they denied she was even Dutch;
They denied that Wishes were Horses; they denied that a Pig had Wings;
So we worshipped the Gods of the Market Who promised these beautiful things.

When the Cambrian measures were forming, They promised perpetual peace.
They swore, if we gave them our weapons, that the wars of the tribes would cease.
But when we disarmed They sold us and delivered us bound to our foe,
And the Gods of the Copybook Headings said: "Stick to the Devil you know."

On the first Feminian Sandstones we were promised the Fuller Life
(Which started by loving our neighbour and ended by loving his wife)
Till our women had no more children and the men lost reason and faith,
And the Gods of the Copybook Headings said: "The Wages of Sin is Death."

In the Carboniferous Epoch we were promised abundance for all,
By robbing selected Peter to pay for collective Paul;
But, though we had plenty of money, there was nothing our money could buy,
And the Gods of the Copybook Headings said: "If you don't work you die."

Then the Gods of the Market tumbled, and their smooth-tongued wizards withdrew
And the hearts of the meanest were humbled and began to believe it was true
That All is not Gold that Glitters, and Two and Two make Four
And the Gods of the Copybook Headings limped up to explain it once more.

As it will be in the future, it was at the birth of Man
There are only four things certain since Social Progress began.
That the Dog returns to his Vomit and the Sow returns to her Mire,
And the burnt Fool's bandaged finger goes wabbling back to the Fire;

And that after this is accomplished, and the brave new world begins
When all men are paid for existing and no man must pay for his sins,
As surely as Water will wet us, as surely as Fire will burn,
The Gods of the Copybook Headings with terror and slaughter return!

Sun, 11/18/2012 - 07:40 | Link to Comment AnAnonymous
AnAnonymous's picture

all too often war is the manifestation of simple economic entropy played to its logical conclusion.
_____________________________________

More distortion as brought by 'american' fabled past.

In this 'american' author's mind, have ever 'americans' had prosperity? Because he missed all the wars waged by 'americans' without economy entropy (for whatever this stuff means by the way)

Good times: 'americans' use excess of wealth to fund wars.
Bad times: 'americans' look for wars in an attempt to sustain their blob.

Good times, bad times, it does not matter for 'americans'. For 'americans', war is an essential economic engine, they use it no matter what to better their welfare. 'american' people want wars and the opportunities going with them, to entitle the 'american' middle class.

War is not cyclical in 'americanism', war is relentless and will last as long as there are resources to sustain the activity named war.

Sun, 11/18/2012 - 09:53 | Link to Comment centerline
centerline's picture

Again.  Same stuff.  Generalizations, stereotypes, etc.  Rich men wage wars.  Stupid people like you play into the propoganda and along with others who take the bait become cannon fodder.  So, are rich men going to stop waging wars?  Or are people going to stop falling for the same old tricks?  I don't think either will happen in my lifetime or that of my children sadly.

Sun, 11/18/2012 - 07:44 | Link to Comment AnAnonymous
AnAnonymous's picture

Humans also suffer from optimistic biases driven by the first inalienable right of human nature which is self?preservation.
_____________________________

Wonderful. I ask how this jewel passed through 'american' detectors. Awesome.

The first inalienable right of human nature is self-preservation.

Very good.

'American' economics is all about consumption and that is through stuff like that one can realize how much 'americans' can be innovative when it comes to find new ways to consume.

The first right of human nature is self preservation... Genius, 'american' genius.

Sun, 11/18/2012 - 08:25 | Link to Comment bobbydelgreco
bobbydelgreco's picture

inflation is not coming the last time the us had inflation was when johnson imposed a war on a full employment economy without the appropriate tax increases we are so far from full employmentl it can't or won't be measured...... the majority of disability in this country is really unemployment..... one thing the austrians didn't know about was the velocity of money we have none keynes told us about the liquidity trap which mean zhers is that what ben prints we don't get any of it... the world is a mess when ben fails at devaluation & he will the $ will take off the ? is when  

Sun, 11/18/2012 - 08:52 | Link to Comment khotel
khotel's picture

If indeed that many pensioners will be financially superman-kicked by debt default or even mortgage bond default, what assets should the move into if they discover that a sizeable amount of their retirement funds are in govt/MBS bonds and/or bond funds?

Sun, 11/18/2012 - 09:16 | Link to Comment Never One Roach
Never One Roach's picture

"massive loss of wealth and purchasing power through default, inflation or both."

 

Sounds about right.

Sun, 11/18/2012 - 09:32 | Link to Comment JenkinsLane
JenkinsLane's picture

I wish you could print these documents!

Sun, 11/18/2012 - 10:09 | Link to Comment cabtrom
cabtrom's picture

Is this the end for all of us? Just for the record, I've had a wonderful time. Thank you all for whatever it is you've built, created, & discovered in order to help make life a fantastic adventure!

Sun, 11/18/2012 - 11:35 | Link to Comment ShrNfr
ShrNfr's picture
Treasury Secretary Timothy Geithner says he believes the U.S. debt ceiling should be eliminated in a new interview with Bloomberg's Al Hunt.   "Do you agree with Alan Greenspan that we ought to just eliminate the debt ceiling?" Hunt asks Geitner.

"Oh, absolutely," he replies.

The Treasury estimates the United States will surpass the debt ceiling - a legal restriction on the amount of money the U.S. government can borrow - at the end of 2012. The current debt ceiling is approximately $16.4 trillion.
Sun, 11/18/2012 - 12:45 | Link to Comment LouisDega
LouisDega's picture

Who is Kyle Bass?  

Sun, 11/18/2012 - 14:26 | Link to Comment linrom
linrom's picture

Who is Kyle Bass?

Kyle Bass is a money manager for the wealthy who make money by placing contrarian bets on economic policies that they advocate.

Sun, 11/18/2012 - 13:21 | Link to Comment JR
JR's picture

In the oddest places, in the nook and cranny of the financial media, the tiny nuggets that support continued printing can always be found. And here is one:

“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.” – Kyle Bass

Sun, 11/18/2012 - 13:34 | Link to Comment williambanzai7
williambanzai7's picture

As much as I detest communism, I am troubled by what Marx predicted about the crises of capitalism and how close to the mark he was although not quite as he could have imagined. So called capitalist states converting to central planning with the objective of preserving status quo for TPTB. 

I really wonder where we are headed. 

Sun, 11/18/2012 - 14:24 | Link to Comment JR
JR's picture

“We believe that war is an inevitable consequence of the current global economic situation." – Kyle Bass

War is inevitable; inflation is inevitable; money printing in inevitable. Is a Goldman world inevitable?

Not if the American people will stand. The answer is up to them.

Sun, 11/18/2012 - 19:58 | Link to Comment TrillionDollarBoner
TrillionDollarBoner's picture

Some are brave and some will stand. But not enough. 

Sun, 11/18/2012 - 15:06 | Link to Comment TNTARG
TNTARG's picture

I think the West is stucked in a byzantine discussion whit nothing new under the sun.

This diatribe on governmenst while most of Western governments are in the hands of Central Banksters has no credibility whatsoever. I mean, I'm not fond on governments but hey, guys...

And WWIII. Who against who? I believe the only real shit is Banksters will love to have their way out throughout it but it's so hard to set it up, these days... Are they gonna exterminate folks around the World with drones? Mercenaries available are enough to set up WWIII?

Banksters, mainstream media, technocrats have lost any credibility. I believe their actual downfall started with 9/11. It was a little too much, man.

Old theories aren't useful anymore neither to understand nor to explain or fix the current mess.

Libertarians... That kind of Liberty would work only for SOME people and that, folks, doesn't last. Are we gonna exterminate all the people uncapable to provide for themselves? It's kind of Medieval, boys, but worst. It's kind of tribal. Anyway it leads inevitably to conflict, cruelty, death.

Socialism it's an Idea never materialized in reality. And won't be materialized because is not in Human Nature. For Socialism (I mean the real thing) we should evolve and truth is we're kind of moving backwards instead.

Capitalism has degenerated as we all can see; Marx among others were right on the subject .

I'm convinced we need new ideas. We're stucked.

 

 

 

Tue, 11/20/2012 - 16:17 | Link to Comment Orange Pekoe
Orange Pekoe's picture

Face it, most people are superstitious. Picking a party is akin to picking a religious denomination, voting to lighting fires to make the rains come, and war to sacrifices to appease the gods.

Tue, 11/20/2012 - 21:26 | Link to Comment Mediocritas
Mediocritas's picture

My primary criticism of MMT, and I have raised this with several prominent MMTers, is that they spend far too much time looking at the domestic USA and ignore international factors, which means they don't actually understand MMT fully themselves.

QE2 is a fine example. It was ALL about international factors, propping up the second US dollar backed fractional reserve system (the eurodollar system), yet all the MMTers could think about was how it related to the US domestic economy. They simply didn't get that it had nothing to do with the US economy beyond preventing a domestic drain on reserves being pushed into the eurodollar system to protect against a Greek default.

So I consider myself generally supportive of MMT, but not supportive of the champions of it who don't fully seem to understand their own theory. Not surprising really given that they have simply re-branded an old concept (Chartalism) and claim it as something new.

Bass ends up misrepresenting MMT because he's seeing the errors made by alleged MMTers who don't understand their own theory. When the bond market becomes an internal circle-jerk (much as Japan's is), the "checks and balances" offered by external investors are removed. This does not guarantee destruction if the nation is thriving. One should then consider what happens to the exchange rate of the nation, as this is where the checks and balances will transfer. Yes, technically a Chartalistic nation can never go bankrupt, but this is meaningless if the nation is not self-sufficient from a resource perspective. If the nation relies on imports and runs a current account deficit then relative international inflation (degrading rate of exchange) will cripple the nation and trigger social chaos. On the other hand, if the nation is thriving, the effect may even be positive as foreign investors, eager to parasite on the nations strength must invest via other channels than the sovereign debt market. Furthermore, outcomes depend on the additional factor of whether or not a government abuses its power under chartalism which is, again, not guaranteed but is dependent on the finer details of politics, citizen accessibility and education. The US was chartalistic under Lincoln (the origin of the Greenback), it was no Zimbabwe. Things aren't as black and white as Bass presents it.

My second major criticism of MMT (neo-chartalism) is that it is too accepting of credit vs high-powered money. A chartalistic system that is too supportive of private credit, and endorses fractional reserve lending, ensures that it will be usurped by the banking sector (as we have now). A truly 100% chartalistic economy would require lenders to maintain 100% reserves.

Tue, 11/20/2012 - 23:14 | Link to Comment achalk
achalk's picture

Far from being a "monetarist experiment" gthe euro's most cogent critic was Milton Friedman.

Thu, 12/20/2012 - 22:51 | Link to Comment neutrinoman
neutrinoman's picture

More Kyle Bass! :)

Obama is an empty suit, elected and re-elected by frightened voters who don't want change and don't want to understand why it's coming wily-nily. He's the President of Hopelessness and Panic. Behind Obama are the real powers: entrenched special interests, wealthy cronyists (like Warren Buffett), and other government-enabled looters.

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