KYLE BASS ON THE COMING GLOBAL COLLAPSE: “Potemkin villages on a Jurassic scale”

Investor Kyle Bass made his first billion shorting the housing market just before the 2008 collapse. And his warnings about the current sovereign debt crisis appear just as prescient. The mathematics — and his logic — are unassailable.

In a nutshell: we are very close to the endgame of Keynesian can-kicking. Which means: the real crisis has yet to begin`.

…Converting all balances to USD, central bankers around the world have expanded their balance sheets beyond$ 13 trillion, from only $ 3 trillion ten years ago. Global central banks’ assets now comprise at least a quarter of all global GDP – up from only 10% in 2002…

…As investors, what do we think about the quadrupling of central bank balance sheets to over $ 13 trillionin the last ten years? It certainly doesn’t make me feel any better to say it fast or forget that we moved ever so quickly from million to billion to trillion dollar problems. It has become increasingly clear over the last four years that the common denominator in policy response to financial crises is, and will continue to be, more central bank easing (printing money) to finance fiscal deficits. Let us recap the actions of three of the four most prominent, powerful and influential central banks in the world over the course of the last several weeks…

…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…

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

…It took the United States 193 years (1789-1981) to aggregate $ 1 trillion of government debt. It then took 20 years (1981-2001) to add an additional $ 4.8 trillion and, in the last 10 years (2001-2011), a whopping $ 9.8 trillion has been added to the federal debt. Since 1981, the US increased its sovereign debt by 1,560% while its population increased by only 35%…

…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.

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 bethe 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…

…How many Japanese have questioned how (if ever) a quadrillion yen of debt will ever be repaid when it represents over 20X central government revenues? (Answer: it can’t be)

Very few participants are aware of the enormity and severity of the problems the developed world faces. Those that are aware are frantically trying to come up with the next “solution” to the debt problems. In our opinion (which hasn’t changed since 2008), the only long-term solution is to continue to expand program after program until the only path left is a full restructuring (read: default) of most sovereign debts of the developed nations of the world (a la late 1930s and early 1940s when 48% of the world’s countries restructured their debts)…

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

Read the whole damn thing. Bass could be wrong, but I wouldn’t bank on it.


Doug Ross @ Journal