Interesting Interview With Kyle Bass

[Ad Orientem]

See the video here.  http://www.youtube.com/watch?v=5V3kpKzd-Yw

The subject is mainly on the sovereign debt crisis.  Bass has some interesting insights that will probably appeal to those who see a major currency crisis and severe inflation coming down the road.  He also makes some observations on the COMEX and why he holds his gold physically.  On a side note the interview is heavy on economic and financial jargon which I think it is assumed the audience grasps.  I got most of it, but there were moments where he lost me.

HT: Gold Chat http://goldchat.blogspot.com/

[MediumTex]

Kyle Bass is a smart guy.  I enjoy listening to him.

[melveyr]

I feel like he is a very smart guy, who definitely does his HW, operating off of flawed assumptions. I found it interesting how transitioned from Greece to the US and Japan. There was little mention of the fundamental difference in how these nations acquire and spend currency.

He is one of those commentators who at one moment worries about too little money (deflation), and then immediately worries about too much (hyperinflation).

EDIT: I guess what I am getting at is that if the government had 10 trillion dollars "saved up", the spending of that money would have the same inflationary consequences as if 10 trillion dollars were created out of thin air and spent.

This is why I conceptually just think of the government as having infinite reserves, it is basically the same thing.

I feel like people think of the market as some type of omniscient money-printing-detector. It's not. It just reacts to spending.

[clacy]

My simple take aways from this interview.  He maintains that:

1. Europe is screwed in the near future.
2. US has some bad problems but we may be able to kick the can a little longer down the road. Europe will hurt our GDP.
3. Japan is completely screwed because of demographics and there is no coming back from that.
4. Short term, the US dollar and our treasuries will be considered the only place for money to go, which will prolong our reckoning, but regardless eventually (3-10 years), we'll have to pay the piper.

[moda0306]

melveyr,

This is bound to explode into another MMT discussion, but I agree.  He really is smart, but doesn't even discuss the nature of balance sheet recessions and how net financial assets affect the real economy.  It'd be one thing if he went into it and then rebutted it, but he doesn't even touch on the subject.

He acts like the gov't is a backstop of all lending, including its own... or slightly changing the rules of debt in its ability to "kick the can down the road."  

His comment on it being an "simple" solution of raising revenues by 2.5 percent and lowering spending by 5% surprised me.  No austerity-driven slump?  No talk of reduction in net-financial assets (savings of American households... or reduced debt!)?  No consideration of anything but debt/gdp ratio, when it's twice as high in Japan than the US?

He mentions Italy and a sudden crisis when rates rise, but doesn't mention that the crisis he speaks of is self-fulfilling default risk.  Just because there's a ECB there to print money doesn't mean it's going to rescue Italy when various other countries have to weigh in their vote.  Thank God we only have one Fed/Treasury.

His observation on physical gold was phenominal.

I'm not saying he was patently wrong, just that while he seemed very smart, his rhetoric lacked a few of the discussion points I need to see before believing in a sovereign debt crisis in the US.

Thanks, though, Ad Orientem.

[stone]

He sarts off saying "there isn't money there, only promises to borrow and lend". Please correct me if I'm wrong but my understanding was that money IS promises to borrow and lend- period. Maybe he hopes that by re-revealing that "there are only promises to borrow and lend" he will create plenty of vulture fund opportunities as everyone goes into a tail spin and hands everything they own over to him

The people in this interview exude sincerity. Do they really believe what they say? I guess they must. I'd love to hear a back to basics explanation of what fiat money is from their view point. Clearly they view money as something over and above a "promise". If fiat money is more than just a relationship that could be mustered by any set of people from thin air; then what do they think it is? If they do think it is just a relationship, they why are they wittering on about getting Brazil to bail out Greece or whatever? To me it seems such a gaping conceptual hole in how they explain the economy.

[Gumby]

He sarts off saying "there isn't money there, only promises to borrow and lend". Please correct me if I'm wrong but my understanding was that money IS promises to borrow and lend- period. Maybe he hopes that by re-revealing this he will create plenty of vulture fund oportunities as everyone goes into a tail spin and hands everything they own over to him

Agreed. Either he is letting his politics sway his economic judgement, or he is trying to appeal to individuals who let their politics affect their economic judgement.

Economic opinions are often mislead by politics. Over the past seven years most prominent liberal and conservative economists flip-flopped their economic opinions, depending on who was in charge.  

BI: Ready To Have Your Mind Blown? Look Who Was Screaming About Deficits In 2004

[moda0306]

I wouldn't go as far to say the guy was saying something he didn't truly believe... I don't think he'd prefer to look his clients in the face 7 years from now with Japan and US still looking just fine.  He is a fiduciary and I think he's just trying to do his job.

He also makes some great points about everything BUT fiat sovereign currency gov't debt... I think that's where he's missing the boat.  I'm sorry but if you don't even acknowledge the difference between countries like Japan and U.S. on one side, and individual countries of the Euro zone on the other, then I can't put too much weight behind your sounds of alarm.

Unfortunately he didn't even get into the differences in those currencies... though he seemed to have a pretty deep understanding of the ECB.

[stone]

It amazes me that it only seems to be hedge fund managers such as Kyle Bass and John Hussman who recognise that the wider economy did not need to have the banks bailed out  and that it actually destroys capitalism to bail them out.  TV documentaries about the 2008 crisis have Gordon Brown and Hank Paulson riding in to save the world by rescuing our banks. How can they make people swollow that?

[Gumby]

though he seemed to have a pretty deep understanding of the ECB.

Yes. agreed. I was quite impressed by his Euro knowledge.

[Gumby]

It amazes me that it only seems to be hedge fund managers such as Kyle Bass and John Hussman who recognise that the wider economy did not need to have the banks bailed out  and that it actually destroys capitalism to bail them out.  TV documentaries about the 2008 crisis have Gordon Brown and Hank Paulson riding in to save the world by rescuing our banks. How can they make people swollow that?

While I completely agree with that in principal (i.e. Capitalism without default is like Catholicism without hell), I can't help but wonder if the security of the United States (and the world) would have been threatened if most of the Fed's Primary Dealers had defaulted via a contagion and shadow banking collapse. It's hard for for me to imagine that would have been something that we could have easily weathered with credit and Treasury markets freezing up and dying. It's all hypothetical at this point, so we'll never know.  :-\

[stone]

I get the impression that he loves getting involved with the euro because it is understandable. The euro countries are not each issuing their own currency and so can be understood in the same framework as he understands companies etc. He holds lots of Greek CDS. My guess is that he has more sense than to hold Japanese JGB CDS despite all his doom-mongering about Japanese sovereign debt.

[stone]

While I completely agree with that in principal (i.e. Capitalism without default is like Catholicism without hell), I can't help but wonder if the security of the United States (and the world) would have been threatened if most of the Fed's Primary Dealers had defaulted via a contagion and shadow banking collapse. It's hard for for me to imagine that would have been something that we could have easily weathered with credit and Treasury markets freezing up and dying. It's all hypothetical at this point, so we'll never know. 

Of course we can't be sure but I really think they made a bad mistake. They could have guarenteed all deposits (as Australia did in 2008) but allowed any bank equity or bank corporate debt to be written down if that was how it turned out. Sweden did that for their banking crisis in the 1990s. There would have been small/conservative banks that would have survived and they would have had the culture required to put everything on a sound road to recovery. Without the bloated financial sector creaming off the earnings of the real economy, the real economy could have recovered
To my mind the crisis is one of indebtedness. The 2008 crisis was the free market attempting to annul an excessive build up of financial assets. If 2008 had been left to its own devices then the wiping out of bank corporate debt would have been an immediate massive deleveraging. Holders of bank corporate debt would have found it gone. Instead that debt has been perpetuated. The holders of that debt still have that financial capital and they are deploying it to extract a return. Servicing that debt is requiring austerity that is shrinking productivity. Nothing real gets destroyed by letting bad loans get written down. It simply absolves the creditors of their financial control, leaving it to the rest of the population.

[Maestro G]

Very interesting interview. Bass is clearly extremely bright. If he is correct about Europe and Japan imploding (and he makes a very compelling argument, actually more of a fait accompli statement), do you think money will rush to emerging market and US equity, or will there just be a domino effect with a complete global equity collaspe? In other words, how dependent is US and China/Asia (principally) on exports to Europe/Japan?

It would seem that in his scenario, US treasuries would soar, USD would be king, global depression II would begin followed by central bank massive printing to address the crisis, leading to extremely high/hyper global inflation. Is this what he is suggesting is inevitable?

If so, talk about PP re-balancing points!

Thanks,

Maestrto G

[stone]

Maestro G, I think a lot of money has already been fleeing Europe to the USA and UK etc. If you look at when say Italian bonds have gone to >7%, it is striking how everything in a UK PP rises that day. Much of the CDS insurance for Eurozone sovereign debt has been issued by US banks. So if the Eurozone implodes, the US banks will be after another bailout too. I personally thought Kyle Bass's interpretation of Japan's situation was very tenuous.

[moda0306]

At least we have Japan as an example as another sovereign fiat currency to look at... if he's right, MMT'ers will have to eat their words AND will have a little time to invest as Japan supposedly collapses.

[Gumby]

At least we have Japan as an example as another sovereign fiat currency to look at... if he's right, MMT'ers will have to eat their words AND will have a little time to invest as Japan supposedly collapses.

You don't have to label yourself an MMTer to understand that "debt" is where our money comes from. Here's "Web of Debt" author, Ellen Brown (no relation to Harry) to explain what our debt is, in layman's terms:

http://youtu.be/3dUn3ppcsCE

[moda0306]

I find her explanation cobbled.  Maybe it's just me, but she doesn't really put anything into proper perspective with how financial assets and the real economy interact.

The problem with saying money is debt is not that it isn't true, but it's that people associate debt with some sort of liability.  Some future value that has to be delivered for the corresponding financial asset to have value.  When that future value appears like it won't be able to be delivered, the financial asset it's tied to may go down in value or disappear entirely.  Nothing has disappeared from the real economy, unless the person was simply let off the hook from a contract and doesn't produce something he promised to, earlier.  Before money, financial assets probably consisted of an "IOU 10 Chickens" to a blacksmith that fixed the hinge to your chicken coop.  Eventually that value had to be repaid.  There was no net-asset here, but this allowed an economy to function much more smoothly, as the blacksmith had extra time, but didn't want/need chickens right away, or the chickens were still too young.  It kept value being created in the economy that otherwise couldn't have because the chicken coop door would have been busted.

Real value and economic activity, not the financial assets and liabilities built around them, are really what the economy is all about, and there's no reason for me to believe that with massive productive capacity in the economy, and tons of people suffering out of work, that we should act like we are in some kind of box where we have no choice but to let unemployment get to 20% for 5 years just to liquidate some irresponsible financial assets/liabilities.

I think the TRUE risk of coming in with fiscal/monetary policy in these situations is that it possibly leads to a complacency in the economy that may lead to malinvestment, which will later not be able to service its debt and therefore create more problems... but nowhere does that eventually reach the "solvency" of the government, nor will it result in terrible inflation, as we just got done deciding that the asset involved was a malinvestment, leaving that asset's future value depressed from what we expected it to be. 

Eventually, the chicken IOU turned into gold notes and the system got even more efficient... but an amount of future value, usually in gold, had to be repaid... or pulled from somewhere else in the economy.

Fiat currency, and the bonds the government issues for them, have no such liability in a traditional sense.  Their liability is the clout to enforce tax and legal tender laws.  They usually only expand these net financial assets if the economy needs it, or is not living up to its full productive potential.

That's all these net financial asseets are IMO... a way to get economic activity flowing between people who are otherwise sitting wishing they had a job.  How this guy can say we'll have a crisis of TOO MANY consumers (retired people) and too few workers (young, able bodied people) would probably make sense if it didn't fly in the face of the current economy's structural problems, where consumption is too low and unemployment is way too high.

[MediumTex]

When you spends a little time with MMT, I think it begins to dawn on you that many members of Congress have a very defective understanding of the nature of the economic and monetary system that they are attempting to tweak through new legislation.

Whether they realize it or not, many people have a basic mental framework when it comes to economic and monetary matters that only really makes any sense in a gold standard world.

To correct a few faulty assumptions people seem to like to make:

1. A government can never run out of money when the government has not pegged its currency or turned over the currency function to another entity.

2. A government that is presiding over a shrinking economy should not view tax increases as a way of making up shortfalls in revenue.

3. The interest rate that a nation must pay on its debt often has little to do with how responsible the government has been with its past spending.

4. In a fiat money world, debt is just an abstraction with little anchoring to anything in the real world.  The size of a nation's debt is meaningless if the currency that it is denominated in is also just an abstraction that can be manipulated by politicians and central bankers. 

5. The whole concept of a "balanced budget" in a fiat money world is meaningless.  What's the difference between a budget that is in surplus, deficit or exactly breaking even?  It's just political theater.  The much more important question is whether capital is being allocated efficiently and whether the economy is at or near full capacity.  If an economy is functioning well, a government can get away with all sorts of tomfoolery, but when the economy is performing poorly all of the sudden the incompetence of most political leaders becomes painfully obvious.  To cite a few examples, the U.S. didn't have large budget deficits in the 1970s and the economy was rotten, while the U.S. began to run ridiculous budget deficits in the 1980s and the economy was great.  Then in the 1990s, the U.S. dramatically reduced the size of the budget deficit and the economy was great, but then in the 2000s the U.S. again began running huge budget deficits and the economy was rotten.  In other words, the past 40 years suggest that there is little correlation between budget deficits and the health of the underlying economy, but for whatever reason the budget deficit issue really seems to bother a lot of people.

[moda0306]

MT,

Those are all things to walk away with and build on.

One thing that almost trumps everything else I try to think about within this subject is the "balance sheets" of American households.  We may argue about government debt, but one thing EVERYONE can agree on on this forum is that American Household Balance Sheets are Crap right now.

These balance sheets are made up of a few things... Hard assets, Financial assets, and financial liablities.  The latter makes up way too much of our balance sheets because we've sent way too much of our financial assets (cash) to China and other countries to buy their products, and our productive and consumable assets have recently dropped in value.

So here we are with these bad balance sheets.

As much as I agree with the idea that bad debts have to be liquidated, with the exception that some of them are listed as assets on the books of the fed, there's an asset offsetting every one of these liabilities.  Further, it's hardly fiscal or even general (QE) monetary policy that took these toxic assets off the market... it was specific fed/treasury behavior... buying up THOSE assets on purpose... that's just bad POLICY, not the fault of expansionary monetary or fiscal policy.

We need to improve these balance sheets, and for the most part liquidation of these bad-debts doesn't really do that because it takes an asset off of somebody elses balance sheet.... not that this shouldn't be encouraged or allowed, but just that it still leaves us with big problems.

The only way to improve these balance sheets is to add net financial assets, and maybe secondarily to encourage using our productive capacity to produce things that will contribute to our hard asset portion of our balance sheets.

The only way to add net financial assets in a general way to the economy is to deficit spend... and it takes even more of this when you have a negative trade balance sucking those dollars out of the economy.

So really if we try to reduce or elminate the deficit we are truly giving no tools with which our society can improve its balance sheets, and since that is the FUNDAMENTAL problem, I don't see how austerity can work, whether done by hiking taxes or slashing spending.

[stone]

To my understanding money is just an administrative relationship. It conveys who controls what. As such the absolute amount is of minor importance. What matters is entirely the distribution. I think the vital thing is for money to convey control in a way that solely reflects value for the real economy. It is a failure of the monetary system if individuals' level of understanding of the monetary system is what leads to them gaining more money. The problem is that the financial system has been endlessly re-invented by those who understand it so as to encrypt it further so as to alow them to play the system and leach.
To my mind if all that matters is relative distribution of money, then what is the point of concocting an expanding monetary system? That makes the system very very complex. That gives cover for people to parasitically play the system.
When Medium Tex says that deficits in the 1980s made the economy good, what I took that to mean was imported commodities being cheap for US citizens. That is very different from saying that those deficits have had a beneficial effect on the global economy. Possibly if the global economy had been different then millions fewer people might have starved. Perhaps the birth rate globally would have stabilized at five billion people and everyone would have clean water and a good education. Who knows, I just think it is a bad idea making the system wantonly complex for the hell of it.

[Jan Van]

When you spends a little time with MMT, I think it begins to dawn on you that many members of Congress have a very defective understanding of the nature of the economic and monetary system that they are attempting to tweak through new legislation.

Which made me wonder, do you think those commie Chinese have a better understanding of how the monetary system really works? Hmmm, that would be sarcasm...

5. ... To cite a few examples, the U.S. didn't have large budget deficits in the 1970s and the economy was rotten, while the U.S. began to run ridiculous budget deficits in the 1980s and the economy was great.  Then in the 1990s, the U.S. dramatically reduced the size of the budget deficit and the economy was great, but then in the 2000s the U.S. again began running huge budget deficits and the economy was rotten.  In other words, the past 40 years suggest that there is little correlation between budget deficits and the health of the underlying economy, but for whatever reason the budget deficit issue really seems to bother a lot of people.

We did have a nice "internet bubble" bursting in 2000/2001 or so, right at the tail of the surpluses...

Can't find it, but i remember having seen some graph on some mmt site showing that anytime the economy went into a budget surplus it was followed by a recession. I did run into this link while searching for it: Republicans in 2003: Clinton's budget surplus caused the first Bush Recession; budget deficits are a good thing. Ties nicely into that article I think I saw mentioned here somewhere too, Ready To Have Your Mind Blown? Look Who Was Screaming About Deficits In 2004. Which shows again how much respect we should have for our politicians...

[Edit]Might have been this article:

The Federal Budget is NOT like a Household Budget: Here’s Why
3. The United States has also experienced six periods of depression. The depressions began in 1819, 1837, 1857, 1873, 1893, and 1929. (Do you see any pattern? Take a look at the dates listed above.) With the exception of the Clinton surpluses, every significant reduction of the outstanding debt has been followed by a depression, and every depression has been preceded by significant debt reduction. The Clinton surplus was followed by the Bush recession, a speculative euphoria, and then the collapse in which we now find ourselves.

[stone]

jmourk, I agree that government surpluses lance bubbles. The Clinton surplus was due to massive capital gains tax revenue as people sold off tech bubble stocks. Are the MMTers saying that the Clinton administration should have somehow spent that money so as to avoid a surplus? What should they have spent it on? Should they have cut capital gains tax inorder to avoid the surplus and keep things bubblicious?

I agree that the Chinese seem to embrace the use of government deficit spending to avoid unemployment etc. I just worry that an inevitable consequence is increased central control. To my mind what is needed is no centralized directing  of the economy but a flat asset tax to ensure that money does not reap more money of itself. Basically real economic activity needs to be what does the earning.

[stone]

What I found most disonant about what Kyle Bass was saying was that he claimed that the demographics of Japan meant that they were screwed since suposidly it was impossible to support a population where so many people were elderly and so not working. He then said that "short term pain" in the form of "much higher unemployment" was needed to solve America's problems. How is that supposed to work? How does having working age people standing on the sidelines twiddling their thumbs not cause exactly the same issue as having lots of elderly people?

[MachineGhost]

Widespread economic ignorance.

It amazes me that it only seems to be hedge fund managers such as Kyle Bass and John Hussman who recognise that the wider economy did not need to have the banks bailed out  and that it actually destroys capitalism to bail them out.  TV documentaries about the 2008 crisis have Gordon Brown and Hank Paulson riding in to save the world by rescuing our banks. How can they make people swollow that?