I'm writing this with my bad hand, still bandaged from my surgery last week, but I can't help it, because I just had to chime in on Kyle Bass's latest, hysterically comical missive, in which he opines on what the next big crisis is going to be. And of course he doesn't dissapoint, for being the broken clock that he is, he's once again warning the world (or whoever is foolish enough to listen) that Japan is about to collapse under the weight of its unsustainable fiscal deficit.
Reading this, I can barely hold myself back from choking with laughter; the only thing keeping me from doing just that is the supreme awesomness I feel towards this guy whenever I think about how he gets people to give him their money. Talk about genius. But I digress...
Bass seems baffled by the market's seemingly low probability assessment of the likelihood (no...certainty) of a Japan default. Well, let's just call it market, smart, Bass, not. That's because Bass's big idea is the same stale, misinformed, ignorant, idea that has taken out so many other (ehem) "very smart people" in the past. In fact this is a trade that is so deadly that it has even been accorded its very own well-deserved nickname--The Widowmaker--due to the fact that it made financial "widows" out of the spouses of those who attempted to short JGBs for that very same reason that Bass wants to short them--on the false belief that Japan's debt was "unsustaiable."
Here's a sample of some of Bass's brilliance:
| Japan has no chance of ever paying off its debts, Bass said. “When your debts are 24 times your central government tax revenue, you are finished,” he said. “It is just a question of what sets it off.” |
Ummm...where do the Japanese people get the yen to pay those taxes, Kyle?
Poor Kylie-boy. Playing the Boy Who Cried Wolf over and over again must get so tiring. He must be having a hard time rationalizing his vast intellect with the fact that his call has been so wrong for so long. I guess he never played Monopoly as a child. How in the world did Parker Bros. figure out a way for the game to keep issuing money without hyperinflating or imploding under the crushing weight of its massive debt? And to think Boardwalk still cost $400 even after all that money printing!
Sigh...If only Kyle studied some MMT. Oh, but wait...he did! And he concluded that MMT's claim, that currency issuing nations can't face solvency issues, is a fallacy. He says that they are dependent on credit markets. Well, Kyle maybe you could point to an example of that, 'cause we haven't seen any so far. Or, maybe you could explain how Japan's debt went from 62 trillion yen in 1990 to 750 trillion yen today and the yield on JGBs went from 8% to 0.73%? Seems to me that if it were going to blow up, default, hyperinflate, whatever, it would have done so by now. If nothing else we should have seen some sign--SOMETHING--that things were not right. How about rates creeping up a bit, like, say, to 1.0%??? Or what about some inflation as opposed to the deep and pervasive deflation that Japan's monetary authorities have long acknowledged? The very deflation they've been trying to eradicate with all this "money printing?"
While you're at it, Kyle, could you also explain how America's national debt went from $800 bln in 1980 to $16 trillion today at the same time that rates went from 21% to zero? It's equally important because you say the United States is facing the same crisis unless we "embrace austerity" (his words).
More "Kyle-isms:"
| For the US, Bass said that QE1 was a “desperate need for countercyclical spending,” and QE2 was another “anomalous one-time emergency printing.” |
With that comment Bass confuses Federal Reserve monetary operations with Federal Gov't spending. And it goes on and on and on.
Bass's brain is so loaded with myth that I'm amazed at how he keeps his head from falling below his ass because that's where it belongs. This guy is a symbol of how dumb and irrelevant much of the financial sector has become. It adds nothing of value to society to have clowns like this running money. Even worse, it's destructive, 'cause he's probably playing with somebody's retirement money.
If we are stupid enough as a nation to allow this actvity then at least perform a civic duty by betting against this guy. If we can hasten the market's ability to put this guy out of business than we've done a great service to our country. I'm only sad for those folks whose pension funds have to be wiped out, but I am reminded that sacrifice is always a requisite to a greater cause.
40 comments:
lolol bass is an idiot, betting against Japan is such an egghead move; old fogies should really ask for their money back before this bozo blows their money into the ether, or they would be eating cat-food very soon.
lol mike, I was already laughing at the way you skewered the guy, but then I looked at the tags you made for this post, seeing "Kyle Bass" and then "Kyle Bass Loser" LOL!! Keep up the good work, that guy really is a loser.
Kyle Bass isn't a loser, he has consistently won. Lets examine what he is doing. He isn't betting the house on the Yens demise, that is just his hedge. It's his insurance that protects against losses in his main play. It was the same in his earlier hedges where he protected his investors who profited by his hedge.
Whilst I do agree that Japan can't run out of Yen, that doesn't mean they can't have a politically driven problem - they are electing their 7th Prime minister in 6 years so it's hardly a stable situation.
Kyle Bass won't lose his shirt over Japan, he will just give away a few points - or he could win if the situation becomes extraordinary - and that's what a hedge is supposed to cover.
I confess I was burned by the Widowmaker around 15 years ago, before I got wise to MMT. Attempting to short JGB futures was not one of my best moves. But at least I learned from my mistakes. The same cannot be said for Mr. Bass, it would appear.
LOL. Japan's Ministry of Finance sums it up nicely (Bernanke could/should do the same to calm matters over here):
"One entity that denies the possibility of a problem is Japan’s Ministry of Finance. On the Q-and-A section of its website, it was asked what would happen to government bonds in the event of a financial collapse.
Its answer (through a Google translator): “The government bonds will be redeemed because the government is responsible. Please do not worry.”
I guess those poor chaps at Zero Hedge will get all excited about this. ZH is for losers, they remove comments. I once posted a comment that showed how powerful the post Keynesian theory has been in this crisis. My comment was removed within 10 minutes. Tyler Durden = Pathetic Loser.
I look at Zero Hedge religiously, just like I do Dilbert — for laughs. Although I have to admit, Scott Adams is a lot funnier. As you say, ZH is mostly pathetic.
@ Peter
Doesn't sound like this is a hedge for Kyle Bass. He's doubling down on it.
Kyle Bass On The End Of The Debt Super-Cycle
Oh boy, this is going to be hilarious to watch. I'm going to keep an eye on him with a beer in my hand.
He can't now accept MMT, because his investors would be pissed that he made such a huge blunder. So he has to continue this charade.
Mike: I only want to know who you smacked so hard it broke your hand. I'm sure he deserved it. I hope you heal up fast so you can do it again.
Mike: I only want to know who you smacked so hard it broke your hand. Heal up fast.
By the way, Mike, our favourite frenemy Paul Krugman has a great op-ed
http://www.nytimes.com/2012/11/19/opinion/krugman-the-twinkie-manifesto.html
Out of interest, what is MMT's take on Japan?
I've done some searching and I can't find much about what MMT thinks would help Japan escape their quagmire. Of course, it's questionable what exactly the problem is when one looks at their unemployment figures....
Presumably we (MMT) would prescribe further concerted deficit spending, yes/no?
Thanks!
@ JD
GThe cut to the chase answer is that the deficit is too small. The Japanese economy is starved for money even with the trade suplus, and the private sector finance is not supplying enough of it. That means that govt must step in to fill the gap.
Strangely, most people are concerned with public debt that can always be met with issuance and not with private debt that must be serviced out of revenue. It's just a superstition.
Claiming that a currency sovereign is running out of policy space Picking an arbitrary point is without foundation when there is no indication at all that this is a actually a problem and the problem is the reverse.
Tom, if the Japanese government stepped in to stimulate the economy with tax-rate cuts and spending increases, would it necessarily increase the deficit? When would the increased output cancel out the two? I would think that the further Japan was from their productive capacity, the less likely that stimulatory policy would increase the deficit. After all, the size of the deficit is primarily based on the saving, investment and consumption decisions of the private sector, right?
"The Japanese economy is starved for money even with the trade suplus, and the private sector finance is not supplying enough of it"
Tom, this is misleading and I suggest we stop using this kind of framing. It suggests that credit can finance growth. Credit (debt) is a temporary stand-in for savings.
Any gains from credit expansion will be lost without monetization from net government spending, so at the end of the day growth, or even moving forward, is reliant on the govt creation of NFA.
Sure, widgets may be produced, but they will end up value-less, the funds necessary to purchase them will not exist (from within the domestic economy that is).
Japanese consumers are over-saving and under-consuming. Japan has the highest productivity in the world and it runs an export economy. It needs to increase domestic consumption, which means govt offsetting domestic private saving desire.
Tom, this is misleading and I suggest we stop using this kind of framing. It suggests that credit can finance growth. Credit (debt) is a temporary stand-in for savings.
Credit can finance growth — to a point — and that is what ails the Japanese economy. It is still recovering from its financial meltdown of the 80's due to credit overextension.
The situation is similar to the US. Financial reform is needed and the govt needs to offset saving desire that is not offset by exports. They are still in a "balance sheet recession," as Richard Koo has observed.
"Credit can finance growth — to a point"
Tom, I think you are getting the causation wrong.
NFA is the collateral upon which credit relies. No NFA growth, no real growth. It isn't the credit (debt) that is creating the growth, it is the anticipation of NFA.
If the NFA are not forthcoming, the gains that occurred from taking on debt in anticipation of it will vaporize. The widgets may remain, but losses somewhere else in the system will offset the gains. Another zero-sum transaction.
Gains made that must be given up later are not real gains, and this is the "growth-to a point" you are referring to.
Growth is another one of those terms, like "money" and "debt" that must be used properly. The only meaningful context for growth is in the aggregate. If we don't have growth in the aggregate we are merely shifting resources and wealth around.
NFA is the collateral upon which credit relies
Collateral can be a variety of things. NFA (tsys), other financial assets, and real assets. Credit prudently extended to finance prudent investment can lead to real growth in terms of real assets. The problems lie in over-extension of consumer credit and imprudent financing of rea assets, like housing in a bubble environment, where the collateral is actually worth a lot less than lent on.
From my above comment it should be clear that the problem lies more with lenders than borrowers. When lenders lend against collarteral that is overvalued, that is, the nominal value of the collateral is higher than the actual worth in case of default, then they are enabling malinvestment and should bear the brunt of the consequences. Bankers know that a certain percentage of loans will become non-performing and banks set aside a reserve against this eventuality. However, the tail is expected to be skinny, and when the tail is fat, then it is clear that the leaning was imprudent wrt to historical standards.
Instead, the stigma falls on borrowers and the lenders get rescued while the borrower are left swinging in the wind. This is ridiculous.
"NFA is the collateral upon which credit relies" - paul
"Collateral can be a variety of things. NFA (tsys), other financial assets, and real assets. " - Tom
Tom, everything you wrote in your comment is true and I agree with it, but I think you're missing my point.
Just to be clear here, the discussion is wrt nominal growth and net flows, NFA when the term money is used, and some NFA is cash, it's not all treasuries.
The collateral supporting credit (debt) is NFA, because at the end of the day all balances must be settled in dollars if dollar gains are to be realized.
Credit must be monetized by simultaneous NFA expansion in order for nominal growth to occur. It's all in the arithmetic, there can be no exceptions.
The "value" of real assets is not "real", it's mainly perception, and in any case growth in the value of real assets does not create net nominal growth…causation is the other way.
The existence of new widgets after credit spending has led to production is not proof of growth, and in any case is can't be a cause of nominal growth.
We can take this a step further. The existence of physical widgets is not proof of growth because…matter has been conserved and only the form of existing resources has changed. The energy used to transform the resources came from the Sun, either directly or from energy sources created by the Sun that have been stored over time, not from credit (debt) spending.
Had to slip that last part in there :-)
If the NFA are not forthcoming, the gains that occurred from taking on debt in anticipation of it will vaporize.
I like that as a point of emphasis. It reminds me of an argument I've seen previously in MMT discussions about how the government has to "ratify" price increases by supplying NFA. (wish I could remember who/where exactly, does it ring a bell for anyone?)
Growth fueled by private credit expansion as provisional pending government ratification strikes me as a really useful framing. Especially the implied idea that the growth will be repealed via debt deflation if the government doesn't follow through.
NFA is not the collateral upon which credit lies because banks don't lend reserves.
geerussell...You've stated the idea much better than I did. I will have to save it for future use.
"NFA is not the collateral upon which credit lies because banks don't lend reserves." - Geoff
Geoff, I don't see where reserves come into this argument. As far as you and I and the fence post are concerned, reserves aren't a consideration to agents in the non-government.
Paul,
Reserves are part of NFA, which you seem to think is required for lending. This is incorrect. Banks create money virtually out of thin air.
Now that is some grade A parroting. Nice job. You can regurgitate with the best of them. Good job.
Geoff,
Reserves are not part of NFA.
NFA is state-backed financial assets held by agents in the non-government with no offsetting liability. Net cash in other words.
If total NFA is equal to the sum of all deficits and surpluses over history, where do reserves fit in?
Reserves exist only as settlement balances within the FR banking system...accounting abstractions.
No one in the non-government has a "reserves" entry on their balance sheet.
Paul,
"Reserves are not part of NFA."
As far as I understand, NFA consist of three parts: currency, treasury securities and reserves.
"No one in the non-government has a "reserves" entry on their balance sheet."
Banks do, as an asset.
But forget about reserves. They have clearly confused the point. For that, I apologize. Let's use the term NFA instead. Banks do not need NFA to lend.
"Now that is some grade A parroting. Nice job. You can regurgitate with the best of them. Good job." - Bullish Bear
Thanks.
"Banks do, as an asset." - Geoff
Yes. Banks have two separate balance sheets. One between the bank and the non-government, and one between the bank and the Fed, where we see reserves.
"Banks do not need NFA to lend" - Geoff
OK, I see where the misunderstanding is coming from...my "collateral" comment wasn't meant to imply that.
The argument is whether the extension of credit and subsequent debt can grow the economy, and by grow I mean in nominal terms, ie increase NFA.
The simple answer is no, it isn't possible mathematically, because every debt transaction adds net zero, both to the original borrower and to the economy as a whole.
But then we have the evidence of growth correlated with the expansion of private debt which accounts for about 95% of the "money" in existence.
The evidence is not what it appears to be. During the same period of credit expansion we've had $10 Trillion in NFA added to the economy. Which one is the cause of the growth?
It has to be NFA...that's what monetized the growth on balance sheets. If the NFA hadn't been spent into the economy, growth could not have occurred.
Debt-based spending leverages the anticipation of future NFA. So I say that the anticipation of future NFA is the "collateral" upon which debt spending is based.
Maybe collateral is not the right term, anyone who wishes can come up with a better one, but look at it this way:
Most debt is issued against the value of collateral, usually real property like a house or automobile. If sufficient NFA are not issued, the balances needed to service debt payments will be insufficient and there will be a contraction , lowering the value of real property (and real assets in general). Reducing the value of collateral. A downward spiral, inherent whenever values are propped up by leverage. The margin call hurts.
This is a dynamic similar to the Paradox of Thrift. We see this pattern repeated throughout economics...with profits, with productivity and I'm sure there are others.
These are all a direct consequence of the nature of closed systems.
"OK, I see where the misunderstanding is coming from...my "collateral" comment wasn't meant to imply that." - Paul
Thanks for the clarification, Paul. It appears that we are basically on the same page afterall. NFAs are certainly of critical importance. But money is endogenous, which means that it doesn't "cause" growth. It is the result of growth.
Paul, when the Treasury deposits my social security payment in my deposit account, my NFA increases and I am not holding cash or tys. Those NFA are the reserves that the Fed deposits in my bank's reserve acct based on which the bank then marks up by deposit account.
"Paul, when the Treasury deposits my social security payment in my deposit account, my NFA increases and I am not holding cash or tys."
Tom, as long as you have a positve balance in your bank account you have "cash", net liquidity.
The idea of having physical currency in your pocket as "cash" is outmoded and obsolete, and my use of the word cash has never had that implication. For me "cash" is cash. It's just a number.
It doesn't matter whether your cash is in your mattress or in your bank account, and keeping track of these modes of cash separately adds nothing to understanding, in fact it makes it more complex.
Anyway thats what i mean by cash…net dollars.
I often wondered what people were talking about when they said that that NFA included reserves. Another distinction that, for me anyway, is an impediment to understanding something that at it's root is very simple. YMMV.
Paul you can create your own definitions but that will be confusing. Deposits are not "cash," either technically speaking or in ordinary language.
Tom, I don't think that is creating my own definition. When I use my ATM card to buy something, I'm spending cash. Even my wife believes that.
Doyou want me to confuse her by differentiating…a distinction without a difference?
If you believe there is a good reason to differentiate between wallet cash and a checkbook balance, then fine, but as far as arithmetic is concerned there is no difference.
It's how people use words, Paul. If you don't observe that, there will be confusion. there is enough confusion between technical use and ordinary language already. ATM cards and deposit accounts are not called "cash." The are used to get cash from the bank, which, of course, the bank gets from the Fed by exchanging reserves for it.
"It's how people use
I think now we are getting to the bottom of our disagreement.
You define the problem of "getting people to understand MMT and operations" as getting the definitions and semantic understandings right, and their understanding will follow..
I define the problem as getting the arithmetic and associated patterns right and attempting to convey that information to others so that they understand it.
My argument is that if we can't get people to recognize and understand the patterns they will never have any more than a superficial understanding of economics of any sort.
If a person doesn't grasp what amounts to simple abstract math patterns there is no level of definitional or semantic purity that will get them to understand.
If a person does possess a certain level of abstract mathematical understanding the definitions and semantic structures are not necessary.
We will never bring the two groups together. I have no interest in trying...it's a waste of time. The only real hope for capturing the semantic mind is through appeal to authority...if they believe we are right even though they don't truly understand our logic, they will be with us. I suppose one could use marketing to accomplish this, and I wish you luck.
My approach is based on arithmetic and patterns...I don't use accounting other than to reference certain objects that people are familiar with, like balance sheets.
I use mathematical techniques to solve problems, not accounting techniques. The sectoral balances identity can be examined using accounting rules but it is at the root a mathematical expression.
The patterns embedded in the stock/flow relationships cannot be extracted using accounting rules...it requires abstract thought and a degree of pattern recognition.
I suspect this is an area where we will always be in disagreement. I understand your argument and objections, but with all due respect I reject them. It would require me to metaphorically tie one hand behind my back- it's limiting.
I believe my approach is the right one and is better suited for analyzing and solving the problem at hand, at least for me.
And if you asked 1000 people if buying something using their ATM card was "paying cash" I bet 99% of them would say yes.
It only matters in the context of explaining entries on balance sheets.
Rsp.
I understand your position, paul, and I hope you realize that you are going to be talking to a very small group of people, most of whom are sharp enough not to need this pointed out to them anyway. But whatever.
Mike Norman lets talk in 2 years before 2015and see how your position on Kyle Bass changes. You are totally wrong on this. I hope you are buying the Nikkei as well. Talk to me in two years.
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