Kyle Bass is "famous for his big, bearish comments", says Joe Weisenthal on Business Insider.com. His latest letter to investors is certainly full of them. Bass, who founded the hedge fund Hayman Capital six years ago and shorted the US housing market before the subprime collapse, says investors are in for a shock.
They believe in the omnipotence of central bankers because the Federal Reserve and other national central banks averted a meltdown in 2009. But in doing so, they have sown the seeds of a worse slump. Bass can't see how the current set-up "ends any other way than a massive loss of wealth and purchasing power through default, inflation, or both".
Central banks have been printing vast amounts of money and buying up bonds with it. This has "removed the proverbial policeman from the bond-market highway". Investors can't stop governments spending by selling off their bonds and making their borrowing costs higher, because central banks are hoovering up their own bonds. So governments have been able to keep spending, which, in conjunction with ongoing money printing, implies a jump in inflation.
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The problem is that the government debt pile is now so vast that "it will not be possible to control" inflation. Every 1% rise in the cost of capital costs the American government $150bn. Servicing the debt becomes unaffordable. America "simply cannot afford... to raise [interest] rates and contain inflation once it begins".
It's not just America. In much of the Western world, "cumulative debt stocks represent multiples of central government tax revenue". Trillions of dollars of debt will be restructured and people will "lose large percentages of their real purchasing power", tearing the social fabric. History shows that this tends to lead to conflict. "War is an inevitable consequence of the current global economic situation."
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Japan is still rising to new highs – here's how to investOpinion Political ructions in Japan are no obstacle to gains, and the return of inflation may even benefit stocks, says Max King. What is Japan doing right?
