Photo: Image courtesy of Hayman Capital
Kyle Bass is famous for his big, bearish comments (and bets) against highly indebted sovereign governments.He’s been notably bearish on Japan (where national debt to GDP is around 200%), though by all accounts he’s done badly with those bets.
Critics of Bass’s thesis point out that one of the main problems he’s running into is that he’s trying to bet against a government that has its own currency, which is in a much safer position than a country like Greece, which can’t print Euros.
In a new investor letter — posted on ZeroHedge — Bass takes aim at critics who think that Japan (or the US, presumably) can create money at will, and not have to worry about their burgeoning national debt loads.
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.
This “emerging school of thought” is one with some pretty big names, including Paul Krugman, who over the last couple of years has really bought into this idea that the idea of a fiscal crisis in a country like the US is preposterous.
By talking about an “emerging school of thought”, Bass seems to be referencing Modern Monetary Theory and related ideas, which are promulgated by folks like Cullen Roche, and UMKC economists like Stephanie Kelton, who have been arguing that the ability to borrow in one’s own currency is a game-changer for sovereign debt analysis in a way that many have not appreciated.
It’s ironic that Bass uses the “sheep to slaughter” metaphor, since that’s exactly what describes the history of investors betting against Japanese Government Bonds. Shorting them is known as the “widowmaker.”
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