Kyle Bass: The ZIRP trap [W:108/221]

[mbig]

Again, credit to Kyle Bass on this.

Zero Interest Rate Policy.
Have we already entered the ZIRP trap? (Or the slightly higher rendition). Yes.
Once interest rates have been low long enough, we depend on them to keep debt payments down.
It enables the govt to borrow much more money until and unless someone notices.
But if we (or the market) raises them to higher rates, the payments become onerous.

Japan is the biggest Debtor nation in the World, almost twice as indebted as Greece relative to GDP.
But they have true ZIRP.
Japan Government Bonds Yield & Interest Rates - Bloomberg
and if rates went up by 2% from basically zero, they'd be broke.

The zero interest rate policy trap (Magazine Version)
Kyle Bass
March 2, 2011
http://www.institutionalinvestor.co...-trap-Magazine-Version.html?ArticleId=2776006

As interest rates in developed Western economies bounce along the zero lower bound, few participants realize or acknowledge that a zero interest rate policy is an inescapable trap. The problem of overindebtedness that is ameliorated by zero interest rate policy is only made worse the longer a sovereign stays at the zero lower bound—with ever-greater consequences when short rates eventually (and inevitably) return to a normalized level.

Consider the U.S. balance sheet. The U.S. is rapidly approaching the congressionally mandated debt ceiling, which was most recently raised in February 2010 to $14.2 trillion dollars (including $4.6 trillion held by Social Security and other government trust funds). Every one percentage point move in the weighted-average cost of capital will end up costing $142 billion annually in interest alone. Assuming anything but an inverted curve, a move back to 5% short-term rates would increase U.S. interest expense by almost $700 billion annually against current U.S. government revenues of $2.228 trillion.
[............]
The study focuses on 12 major developed economies and predicts that “debt/GDP ratios rise rapidly in the next decade, exceeding 300% of GDP in Japan; 200% in the United Kingdom; and 150% in Belgium, France, Ireland, Greece, Italy and the United States.” Additionally, the authors find that government interest expense as a percentage of GDP will rise “from around 5% [on average] today . . . to over 10% in all cases, and as high as 27% in the United Kingdom.” When central bankers engage in “nonstandard” policies in an attempt to grow revenues, the resulting increase in interest expense may be many multiples of the change in central government revenue. For instance, Japan maintains central government debt approaching ¥1 quadrillion against revenues of roughly ¥48 trillion—a fatal 20 times debt to revenue. Minute increases in the weighted-average cost of capital for these governments will force them into what we have termed “the Keynesian endpoint”—where debt service alone exceeds revenue.

 

[Kushinator]

Japan is the biggest Debtor nation in the World, almost twice as indebted as Greece relative to GDP.
But they have true ZIRP.
Japan Government Bonds Yield & Interest Rates - Bloomberg
and if rates went up by 2% from basically zero, they'd be broke.

Something like 92% of Japans government debt is held internally by households, governments, corporations, and various pension systems. If rates went up from near 0% to 2%, there would be an interest rate shock (which figures to be a negative on equities), but no... they would not go "broke". Please remember, Japan can (and has continued to) print as much Yen as required to meet their obligations. The risk of inflation in Japan is about as probable as the risk of deflation in China.

 

[washunut]

Something like 92% of Japans government debt is held internally by households, governments, corporations, and various pension systems. If rates went up from near 0% to 2%, there would be an interest rate shock (which figures to be a negative on equities), but no... they would not go "broke". Please remember, Japan can (and has continued to) print as much Yen as required to meet their obligations. The risk of inflation in Japan is about as probable as the risk of deflation in China.

just wonder has this continues to play out as an aging population needs to start drawing on those savings.

 

[Kushinator]

just wonder has this continues to play out as an aging population needs to start drawing on those savings.

Where would the proceeds of said savings end up?

 

[washunut]

Where would the proceeds of said savings end up?

the elderly will reduce savings and spend it on their basic living needs. Sort of like when money stops coming into a Ponzi scheme.

 

[Kushinator]

spend it on their basic living needs.

Which will have a positive effect on earnings and incomes.

 

[mbig]

Which will have a positive effect on earnings and incomes.

This is just plain argumentative and False.
A smaller work force relative to a larger retiree population is a Negative for the economy. (and not just 'relative' but in absolute number in this case declining population case)
These people were Always consuming, but now are Not working and are consuming less.

 

[mbig]

the elderly will reduce savings and spend it on their basic living needs. Sort of like when money stops coming into a Ponzi scheme.

Good answer, Bass makes the same point and more when pushed on this issue.
Japan not only has Huge debt, not only has aging population, but Declining population.

Kushinator, Bass answers the points you raise at about 14:20-17:20, but I suggest the whole thing.
Those damn short sellers.... - YouTube
Bass has been right and made a mint on both US Housing and on Greek/Euro Debt.

PS/EDIT: Japan was giving away Gold coins to people who bought there last large tranche of debt.

 

[washunut]

Which will have a positive effect on earnings and incomes.

no, it will have zero impact on those things unless there is a lifestyle change.

 

[washunut]

Good answer, Bass makes the same point and more when pushed on this issue.
Japan not only has Huge debt, not only has aging population, but Declining population.

Kushinator, Bass answers the points you raise at about 14:20-17:20, but I suggest the whole thing.
Those damn short sellers.... - YouTube
Bass has been right and made a mint on both US Housing and on Greek/Euro Debt.

PS/EDIT: Japan was giving away Gold coins to people who bought there last large tranche of debt.

I enjoy Bass' line of thinking. Many of his thought will be correct long term.

 

[mbig]

I enjoy Bass' line of thinking. Many of his thought will be correct long term.

In addition to the video and the mag article above, here is the Bass Watch list.
He's easily the best I've ever seen, outdoing, IMO, all the famous economists and pundits.

On BNN/Canada's Business Network
Dec 13.
11 summarizing minutes;
Prepare for a European default: Kyle Bass - BNN News

Two longer interviews for yet more elaborated and brilliant explanations of why we are, where we are.

The original at Americatalyst
Nov 2010;
'Confessions of a Dangerous mind' 2010 Kyle Bass @ AmeriCatalyst 2010 | 'Confessions of a Dangerous Mind' - YouTube

and follow-up:
Nov 7, 2011;
Kyle Bass Redux:: 'Come Undone' 2011 AC2011 Session 1.2 Come Undone: Kyle Bass redux - YouTube

 

[washunut]

In addition to the video and the mag article above, here is the Bass Watch list.
He's easily the best I've ever seen, outdoing, IMO, all the famous economists and pundits.

On BNN/Canada's Business Network
Dec 13.
11 summarizing minutes;
Prepare for a European default: Kyle Bass - BNN News

Two longer interviews for yet more elaborated and brilliant explanations of why we are, where we are.

The original at Americatalyst
Nov 2010;
'Confessions of a Dangerous mind' 2010 Kyle Bass @ AmeriCatalyst 2010 | 'Confessions of a Dangerous Mind' - YouTube

and follow-up:
Nov 7, 2011;
Kyle Bass Redux:: 'Come Undone' 2011 AC2011 Session 1.2 Come Undone: Kyle Bass redux - YouTube

Thanks for the above.

 

[cpwill]

Good answer, Bass makes the same point and more when pushed on this issue.
Japan not only has Huge debt, not only has aging population, but Declining population.

Kushinator, Bass answers the points you raise at about 14:20-17:20, but I suggest the whole thing.
Those damn short sellers.... - YouTube
Bass has been right and made a mint on both US Housing and on Greek/Euro Debt.

PS/EDIT: Japan was giving away Gold coins to people who bought there last large tranche of debt.

Its hilarious you can watch him get pissed off at the reporter.

"Yes, but, what's important is the global debt crises..."

"Yes, but first let's talk about how much money you are making..."

:roll:

 

[mbig]

Its hilarious you can watch him get pissed off at the reporter.

"Yes, but, what's important is the global debt crises..."

"Yes, but first let's talk about how much money you are making..."
:roll:

My first impression of the video was the same as most Bass fans.. "who is that noxious chick?".
After many viewings however, I don't feel that way at all.

She, like him, has a "fiduciary responsibility"... to her viewers.
She was just taking a Rare opportunity to ask the tough questions many in the UK/EU want answered.
How many 'sharks' like him do you get a shot at? Precious few people like him give open interviews like that.
Her viewers want to know not only how much he made, but how, and if, it exacerbated/helped precipitate the crises.
The sums, ie 700:1, really are an amazing part of the story.
So her questions were mandatory and I forgive her interruptions completely.
It's really helpful too, I think to have a 'hostile' interview among all the rest that are in awe.

The undertone, beside the gratuitous combative questions, was, IMO, admiration.
She credits him several times with doing his homework, ie, "But You did". (the work no one else had done).
And If shes got a multiple of the $5 mil Hayman minimum, I wouldn't be surprised if she invested it there.

Also, he is 'finessing' her somewhat.
Hedge funds are oft Long/Short which doesn't necessarily mean 'Hedged'; tho to a degree it effectively is.
They can make money on Both sides by betting on the best of either.

I'm not a hero worship type, but Bass is so lucid, so informed, I've been riveted since I first saw him on the 'Confessions' video.
I read everything that comes out on him on an alert.
Partially changed and partially re-enforced my investment outlook. On many levels some of us had felt similarly.
He just fills it in and nails it. It now seems everyone else is just a pundit, he's the pro and proved it.. so far.
It costs a couple mil to have Lunch with Buffett and get his advice.
You just got a total of 3 hours (4 vids) with someone smarter.... for free.
And he does give investment advice/style (Japan of course throughout) and even a stock name in the 'Redux' video.

 

[iliveonramen]

I definately agree with his overall assessment...but I don't agree with him when he states the reasons.

Our problems isn't that transfer payments exist or that we spend money. Our problem is that we have gross inequity while also slashing tax rates. It's a double whammy....money flowing to the top while tightening the spigot that helps fund our government.

 

[washunut]

I definately agree with his overall assessment...but I don't agree with him when he states the reasons.

Our problems isn't that transfer payments exist or that we spend money. Our problem is that we have gross inequity while also slashing tax rates. It's a double whammy....money flowing to the top while tightening the spigot that helps fund our government.

So you think that cutting the payroll tax for the last two years was a mistake.

Regarding "income inequality", how does the creation of Facebook and the huge amount Mark Zuckerberg makes thereof adversely others???

 

[iliveonramen]

So you think that cutting the payroll tax for the last two years was a mistake.

In a way....but not near the level of the tax cuts that have benefited the wealthy. It's a tax cut that primarily benefits lower/middle income individuals...those that would spend that tax cut in consumption. It was the only way to get through anything that would would even partially stimulate the economy. Granted that money would of been better spent building roads and bridges.

Regarding "income inequality", how does the creation of Facebook and the huge amount Mark Zuckerberg makes thereof adversely others???

First lets not pretend every millionaire is a Steve Jobs/Mark Zuckerberg. The main thing I was pointing out is that income inequality....primarly in the case of what we're facing now...stagnant wages for everyone else and income gains going to small group...hurts consumption.

I also pointed at that we're slashing taxes at the top at the same time that money is flowing to the top. So basically we're cutting taxes for the group that has become a much higher % of the tax base than they have ever been.

 

[washunut]

In a way....but not near the level of the tax cuts that have benefited the wealthy. It's a tax cut that primarily benefits lower/middle income individuals...those that would spend that tax cut in consumption. It was the only way to get through anything that would would even partially stimulate the economy. Granted that money would of been better spent building roads and bridges.



First lets not pretend every millionaire is a Steve Jobs/Mark Zuckerberg. The main thing I was pointing out is that income inequality....primarly in the case of what we're facing now...stagnant wages for everyone else and income gains going to small group...hurts consumption.

I also pointed at that we're slashing taxes at the top at the same time that money is flowing to the top. So basically we're cutting taxes for the group that has become a much higher % of the tax base than they have ever been.

First, I support allowing ALL of the Bush tax cuts to expire. It is also good to remember that the top rate was cut about 10% not what I would call a huge "slash" but still something we can't afford and in view was mistaken from the beginning.

 

[iliveonramen]

First, I support allowing ALL of the Bush tax cuts to expire. It is also good to remember that the top rate was cut about 10% not what I would call a huge "slash" but still something we can't afford and in view was mistaken from the beginning.

I agree pretty much with letting all the tax cuts expire.

Fine semantics aren't important to me. We can't afford it.

 

[Ahlevah]

Her viewers want to know not only how much he made, but how, and if, it exacerbated/helped precipitate the crises.
The sums, ie 700:1, really are an amazing part of the story.
So her questions were mandatory and I forgive her interruptions completely.
It's really helpful too, I think to have a 'hostile' interview among all the rest that are in awe.

Bass is sharp. (My favorite quote: "As every day goes by, I see deflation in the things you own and inflation in the things you need.”) I think he made it very obvious that the interviewer had no understanding of finance or what a hedge fund is. She looked perplexed when he pointed out that Europeans have been able to buy put options for forty years or so. So that cut her "Why should you be able to buy insurance (CDS contracts) against an asset you don't own?" argument off at the knees. Further, he explained (more than once) that:

1. As a hedge fund manager, he is acting in a fiduciary capacity to not lose money.

2. His investors include pension funds (and their beneficiaries, i.e. "little guys" and not just rich "fat cats").

3. The investments that made headlines, such as his bets against subprime mortgages and sovereign debt, were "asymmetrical" hedges, i.e. extremely high-risk/high-reward investments that were a small part of the overall portfolio but still offered a hedge against long investments.

 

[Kushinator]

This is just plain argumentative and False.
A smaller work force relative to a larger retiree population is a Negative for the economy. (and not just 'relative' but in absolute number in this case declining population case)

Not necessarily. To make such a deterministic statement, you have to consider the drivers of growth; mainly labor, capital, and the rate of technological advancement. In a scenario in which a greater percentage of the population is outside of the labor force, the aggregate labor-to-capital ratio decreases. Now unless you are capable of making a valid argument of how the rate of technological transformation is regressing in Japan (which is utter nonsense given sheer volumes of patent issuance on a yearly basis), a lower labor-to-capital ratio leads to gains in productivity. We can take this to an entirely deeper level and consider the rate of capital replacement for an aging population that exhibits a decreasing labor-to-capital ratio, and how this impacts savings and investment requirements; but given that you will not be able to find a tube to explain the developments in endogenous or exogenous growth theory, it is a better idea to stick with labor-to-capital ratio analysis.

Similarly, such a concept can be applied to human capital development. Older populations tend to coincide with smaller (relative to previous generations) school-aged populations, which in turn lead to a decreasing student-to-teacher ratio, and greater education investment per-student. That is not to say everything will be roses and sunshine, but as labor intensity for manufactured goods continues to decline or is outsourced to developing economies, the transition towards an aging population will not be as bumpy as some make it out to be.

In an export driven economy that has always been at the cutting edge of technological innovation, the notion that a "demographic time bomb" will inevitably spell ruin is purely political.

These people were Always consuming, but now are Not working and are consuming less.

Never argued otherwise. All i stated was that any increase in expenditures from this demographic will be a positive from income and earnings growth.

 

[cpwill]

I definately agree with his overall assessment...but I don't agree with him when he states the reasons.

Our problems isn't that transfer payments exist or that we spend money. Our problem is that we have gross inequity while also slashing tax rates. It's a double whammy....money flowing to the top while tightening the spigot that helps fund our government.

collect 100% of the money of everyone making $250K and over and (assuming the impossible story that they don't change their behavior) you still wouldn't have enough to balance this year's budget.

Even Obama has admitted you can't tax your way to paying for Medicare. Not as in "we don't". As in "it is not mathematically possible".

 

[imagep]

collect 100% of the money of everyone making $250K and over and (assuming the impossible story that they don't change their behavior) you still wouldn't have enough to balance this year's budget.

I have heard that before, but somehow I get this feeling that it may not be correct (like a tea party myth). Maybe it is, it just doesn't feel right. Do you have any links to back that claim up?

Edit:

According to How Much Money Do The Top Income Earners Make By Percentage? | Financial Samurai

SUMMARY OF [COLOR=#003F7F !important]FEDERAL INDIVIDUAL INCOME TAX[/COLOR] DATA, 2010

Now if the top 1% make 1.685 trillion, and the top 1% starts at about $380k in income, then I would think that it is highly likely that if we taxed away every penny of money that everyone who makes over $250k/yr, that we would balance the budget. It would be really close one way or the other. Of course I don't advocate doing that, I'm just pointing out that the top 1% acquire a heck of a lot of money. I'd much rather see a balanced approach of cutting spending and much more modest tax increases.

Myth busted.

 

[Kushinator]

no, it will have zero impact on those things unless there is a lifestyle change.

Reducing savings/increasing consumption is a lifestyle change!

 

[mbig]

Not necessarily.

Of course, "not necessarily", but almost "certainly".
This is Conceding my point if laying down Unlikely conditions below that would blunt it.

..To make such a deterministic statement, you have to consider the drivers of growth; mainly labor, capital, and the rate of technological advancement. In a scenario in which a greater percentage of the population is outside of the labor force, the aggregate labor-to-capital ratio decreases. Now unless you are capable of making a valid argument of how the rate of technological transformation is regressing in Japan (which is utter nonsense given sheer volumes of patent issuance on a yearly basis), a lower labor-to-capital ratio leads to gains in productivity. We can take this to an entirely deeper level and consider the rate of capital replacement for an aging population that exhibits a decreasing labor-to-capital ratio, and how this impacts savings and investment requirements; but given that you will not be able to find a tube to explain the developments in endogenous or exogenous growth theory, it is a better idea to stick with labor-to-capital ratio analysis. ....Similarly, such a concept can be applied to human capital development. Older populations tend to coincide with smaller (relative to previous generations) school-aged populations, which in turn lead to a decreasing student-to-teacher ratio, and greater education investment per-student. That is not to say everything will be roses and sunshine, but as labor intensity for manufactured goods continues to decline or is outsourced to developing economies, the transition towards an aging population will not be as bumpy as some make it out to be. ...In an export driven economy that has always been at the cutting edge of technological innovation, the notion that a "demographic time bomb" will inevitably spell ruin is purely political.

No matter how you slice it, you can't make a smaller [percent] work force in an overall declining absolute number/population (as well/no less), into a positive in being able to support a Large nanny state with an already Huge Debt. One just clicks away from bust. That's lots of 'stuff' just to avoid my true statement.. doncha think?
I could also make up some far-fetched cases. Took you a few days I see.

Never argued otherwise. All i stated was that any increase in expenditures from this demographic will be a positive from income and earnings growth.

You certainly did argue otherwise.
pg 1.

the elderly will reduce savings and spend it on their basic living needs. Sort of like when money stops coming into a Ponzi scheme.

Which will have a positive effect on earnings and incomes.

This is just plain argumentative and False.
A smaller work force relative to a larger retiree population is a Negative for the economy. (and not just 'relative' but in absolute number in this case declining population case)
These people were Always consuming, but now are Not working and are consuming less.

So not only did you claim otherwise, you made the General statement that a declining work force (and in this case, population) would have a "positive effect on earnings and income". Without qualification.
Never mind that this demographic pyramid is Inverting/has to be paid for/Taxed on a smaller base for a larger top.
You have kind of admitted that is a wrong position in General, but "not necessarily".
Kind of a stealth strawman as everything is, of course, not absolute/impossible.

EDIT: and to others in this string.. it's NOT about Income Inequality unless you can make a tight connection to it.