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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centerline's picture

No more free porn?  Dear god.

Tinky's picture

You neglected to capitalize "Porn".

archon's picture

Now THAT would mean WAR!!!

Svendblaaskaeg's picture

Damn - There Goes the Neighborhood

AnAnonymous's picture

he is predicting a war so big

that you will lose your internet connection.


If that is the definition of a war so big, I can make it happen in a few days...

TheFourthStooge-ing's picture

AnAnonymous said:

If that is the definition of a war so big, I can make it happen in a few days...

Yeah, yeah, fantasy piling on fantasy, return to reality is troublesome for AnAnonymous Chinese citizenism middle class citizens...

centerline's picture

Still continuing to play the fool.  Either tragically lacking a frame of reference or failing miserably to be a proper troll.  A one trick pony.

Urban Redneck's picture

It is probably difficult to grind out an existence as a troll, when fastidiously propagating unapproved feces can result in someone from an organ of the Politics and Law Commission knocking your door and announcing that "you are now an organ donor!", leaving the poor troll with nary an opportunity to declare that the major powers' ever expanding dominion over their respective domains and citizenry is inherently a cancer- regardless of the State standard's colors.

sessinpo's picture

using your logic, almost every nation has been at war for centuries now. However, most of us, unlike you, are able to take things into context. What is really funny is how ironic it is for you to make a "genius" statement when you display the same thing.

AnAnonymous's picture

using your logic, almost every nation has been at war for centuries now.

What logic? The logic of labelling war war when it is convenient? That's the 'american' logic.

Non sequitur by the way, as what the others did is irrelevant.

The statement is by an 'american' genius who states that war is inevitable when 'american' nations are warring on multiple fronts, invading front, left and center and right.

And you'll have to back up a claim that people in the past had that lax attitude, denying war when there is war.
In a nutshell, people in the past might be constantly warring but they were not concealing they were warring. Avoiding some genius statements like that 'american''s, with war being unavoidable when multiple wars are already on.

TheFourthStooge-ing's picture

AnAnonymous said:

using your logic, almost every nation has been at war for centuries now.

What logic?

Agreedment of this. Veracity of AnAnonymous Chinese citizenism speechings having eternal nature inherently of anti-logic applied with diligence strongly.

Non sequitur by the way, as what the others did is irrelevant.

Again in this agreedmentation. AnAnonymous rewritement of history being self encapsulated. Wordings and actions of others not a bearing on this constitute.

AnAnonymous's picture

Yeah, yeah, fantasy piling on fantasy, return to reality is troublesome for 'americans'...

AnAnonymous's picture

However, most of us, unlike you, are able to take things into context.

Who is that "most of us"? That "most of us" must not include 'americans' as 'americans' are unable to admit that this world is an 'american' world, meaning that the general context is 'americanism"

So here, better to say something like that:

"However, most of us, americans, unlike you, are able to deny the most obvious fact to sink into fantasy. War does not exist by itself. War is only what we term to be war. If we decide today to call something war, that would be war. This is how we build one generality"

Want an easy way to avoid the unavoidable war as 'predicted' by this 'american' author?

Very easy. Just deny that the war this guy predicts is war. War avoided. And 100 pc 'american' way of dealing with reality.

TheFourthStooge-ing's picture

Lame repeation. Chinese citizenism middle class style of.

in4mayshun's picture

I have to disagree on one point: I do believe that life, as we know it, WILL indeed end. With no local farmers and centralized distribution all over the world, and no self-sustainability left...How can it not?

Mr Lennon Hendrix's picture

The dollar is not a real force.  It was created in alchemy and used to blind mankind.  It isn't that we don't need it, it is that once it is gone we will be better off.

People will trade goods and services as they once did; barter and with gold and silver used as money.

imbrbing's picture

"People will trade goods and services as they once did"

Those of us that are left will do so.

SeattleBruce's picture

"People will trade goods and services as they once did"

And whatever government entities remain will try desperately (backed by guns/courts/guns/prisons) to get in the middle of such transactions - or their tax base will be totally gone.  It aint gunna be like others have said, it's probably best at that point to be away from population centers which will have lots of police and government and government dependents demanding that those that have the ability to raise and/or secure food, feed them.

Supernova Born's picture


"This food is the property of Mohamed Farrah Obama Aidid!"

.50 cal into the crowd.

ChiCom stealth helo (tech courtesy of the Bin Laden raid) hovering above with the crew laughing their ass off.

Big war, the kind you can't ignore.

in4mayshun's picture

We're not talking about a new pair of Jordan's and a Slim Jim snack. People will only buy essentials, and when the trucks stop delivering food and clothing what could you possibly sell me that I would be willing to trade gold/silver for? If the world was comprised of local farmers and small family businesses, you're right, we could revert back to barter. In a world of Walmarts and Costcos however, barter would be quite useless.

centerline's picture

If you frame it in the context of "as we know it," then I think you arew 100% correct.  The question is how painful and fast the transistion will be.

I have voiced my opinion many times that so much of our current existence is based on complex supply chains.  So much specialization and dependancy.  So much complacency, laziness, obesity, frustration, greed, etc.  We have one hell of a lesson coming.  Big business, big oil, big government, etc. played off of all the human vices... into a massive ponzi scheme of perpetual growth.

SeattleBruce's picture

"We have one hell of a lesson coming."

Well said...

Dr. Sandi's picture

Life as we know it ended when everybody got a cellphone. Except me, apparently.

Now we're at the mercy of billions of other people all wanting a piece of our time and a little of our life force.

Change happenened when you weren't looking.

centerline's picture

I didn't get one either.  And wouldn't take one.  Every leg up I have been given has paid back twicefold.  Everything borrowed is returned cleaner than I got it (and repaired/restored in many cases).  I teach the same to my kids.  Karma and honor are critical.

The real problem begins when the gravy train ends for those who take more than they give.

Dr. Sandi's picture

My hat is off to you.

Or at least, it would be, if somebody hadn't borrowed it without giving it back.

And as I remember, Gravy Train is also a dry dog food. Is that where this is all headed?

"Chow down friends, this may be the last kibble we see for awhile."

Mr Lennon Hendrix's picture

I am getting bored with everyone elses ideas.

How about we put it simply:  Finance is a ponzi based on nothing other than good will and credit, the credit is based on the ability to pay and the good will was never present, and no one can pay their debts.

Dr. Sandi's picture

It's always painful to have any growth removed.

DosZap's picture

Bro Hendrix,

I agree w/ the Ponzi, just not the rest, for 50+ odd years it worked, because people were basically  honest, we had some mores and values.Government although corrupt in many areas, did seem to punish the obvious evil doer's, and criminals.

And you did not get loans unless you were a good credit risk(this is PC crap from .Goobers again),who mandated,even fined and sued to get loans to anyone who asked,this was the beginning of the Housing bubble.

Not so now, no one pays(almost) due to no jobs,loss of income, and general loss of faith in the NEW system put in place.

Crime is rewarded at the TOP levels by the Govt, and things that do not amount to a pile of crap, are prosecuted to the nth degree possible( the Sheeple).


All this means nothing if you are speaking of NOW.Then you sir are dead on.

e-recep's picture

i am with you, it was not always this bad. people tend to forget the good times when credit flew to only those who were worthy of it.

americanspirit's picture

War is always inevitable. What is not always inevitable, but which does happen occasionally though far too infrequently, is that the rich and the powerful are marched to the center of town and their heads cut off.

dracos_ghost's picture

And that's why the rich and powerful use government institutions to give away "free money" to the masses so it doesn't happen. Throw in apathy in the middle class and TPTB are Bi-Winning. The only way we get back to what you're saying is create a Reality TV show.

The sheeple are the problem. Have to root for elitist vs elitist carnage at this point otherwise Orwell was right.

SeattleBruce's picture

"but which does happen occasionally though far too infrequently, is that the rich and the powerful are marched to the center of town and their heads cut off."

To be replaced by other 'rich and powerful' corrupted manipulators and interest groups - if we're not careful during the reset.

Dr. Sandi's picture

The major problem with the scenario is also its major charm.

While I like the idea of cutting off a lot of nasty heads, I don't like the idea that the people in charge are a little too okay with mass murder.

Nick Jihad's picture

Because that worked out so well in soviet Russia, maoist China or the Cambodia under the khmer rouge.

Jam Akin's picture

Wouldn't it be more just (and fun) to dispossess the criminal rich/powerful of all ill gotten gains while poking fun at their excesses then banish them to a trailer park for the rest of their short nasty brutish lives?  Could be the makings of some entertaining reality TV.

sasebo's picture

I'm just very glad to see there's someone who can elucidate what's really going on -----

In practical terms it says that banks & the fed can't print & sell money at interest forever ------------- you'll wind up with so much money it becomes worthless. Infinity divided by zero equals ?  

A Lunatic's picture

Baaaaaaaaaaa, bitchez.

Winston Churchill's picture

Mint sauce with my mutton.

Please don't Nuke it.

hmmtellmemore's picture

In all honesty, we've been hearing this for years, decades.  Yawn. Can we get a prediction of which year from Mr. Bass when the endgame will finally arrive?

Winston Churchill's picture

Go to @shadowstats.Read the annual economic report and find

the answer to that question.

Precis of 150 pages ; End of 2014 if not before.

HungryPorkChop's picture

Here's the video from Shadowstats founder posted on youtube in Oct: