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The Central Banks’ Potemkin Villages

Kyle Bass of Hayman Capital made a through a dystopian view of our central banks’ inability to keep their hands from “fixing” the world’s problems:

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…

In the end, the EMU won’t look the same, if it exists at all. This is even before the tide turns on some of the world’s largest sovereign debtors like the United Kingdom, and of course the biggest debt zombie of them all:    Japan. Trillions of dollars of debts will be restructured and millions of financially prudent savers will lose large percentages of their real purchasing power at exactly the wrong time in their lives. Again, the world will not end, but the social fabric of the profligate nations will be stretched and in some cases torn. 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.


For now, Mr. Bass has put his focus on Japan where he sees a rapid and unexpected deterioration due to an aging population, shifting current account status, and a massive debt load:

We believe that Japan is teetering on the precipice of financial collapse, and any number of data points or events in the coming weeks and months could be the proverbial tipping point.    It could be as significant as a negative structural current account, a revocation of BOJ policy independence, or even political and economic conflict with regional neighbors or perhaps something as innocuous as ratings actions or Basel III regulations that force financial institutions to reduce their hugely concentrated exposure to JGBs. What we do know is that when it does break loose, 20 years of suppressed spring‐loaded interest rate volatility on the back of the largest peacetime accumulation of sovereign debt will afford no time to readjust portfolios to get out of the way.

Read the full letter here: Kyle Bass - Hayman Capital Market Commentary Nov 2012

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