Kyle Bass, Managing Partner of Hayman Capital, had an interesting interview on CNBC earlier today.  Bass is a great thinker and I’ve generally been a big fan of his commentary (particularly his ideas on regulation), but he seems to make the same fatal flaw with regards to sovereign debt that many of the defaultistas and hyperinflationists are making.  In discussing Japan Bass keeps referring to the fact that a debt restructuring is right around the corner.  This is essentially the old “bond vigilante” argument that people have been making in Japan for two decades and have been recently making here in the USA.

He compares Japan to the European sovereigns without recognizing that the monetary systems are entirely different.  Like the USA, Japan is not experiencing the “Keynesian end point”.  You would think that 20 years of this failed argument would have silenced it completely, but people still fail to understand that a nation with monetary sovereignty that is the supplier of currency in a floating exchange rate system never has a problem funding itself.  In fact, contrary to popular opinion, the funding mechanism is the currency supplier itself.  Such a system is not unlike an alchemist who simply makes gold from essentially thin air.  To be specific, in the USA the government is always able to harness its banking system to procure funds.  This is how the system is designed.  Therefore, the idea of the “Keynesian end point” based on a necessity to fund ones self via bond markets is inapplicable to these systems.*

The only solvency risk to such a nation is the risk of inflation (or hyperinflation) and that clearly isn’t a risk in Japan.  This whole outlook leads Bass to believe that stocks are impossible to own in the current environment and while I agree with him that the problems in Europe are substantial I believe he is making a huge error in his thinking on Japan:


Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  1. i wouldn’t have ANY gold if i didn’t believe a double dip and a bad one. what happens when the 1$tril euro bailout runs out in a year? you think the germans are going to throw good money after bad? i don’t. the can has been kicked down the road all over the world.

    everyone from bernanke to osbourne doesn’t understand issuers of soveriegn paper are not revenue constrained as long as money velocity doesn’t go hyper. something TPC and i(thanks to him) understand. this ensures deepening further problems……BIG ones.

    like it love it hate it or say its meaningless and an archaic relic but gold is still the asset(and there would just be something else if it didn’t exist) of last resort…….and financially that is where we are going.

    if you think everything is going to be fine without a convulsion………… great….buy IBM

    we are in the early stage of this financial collapse, not the end of it.

  2. anonymoose

    Interesting but since the recession started I hear every day that the Dollar is going down the tube. It’s at about the same place it was in 2008 in relation to most currency except that I can buy two homes instead of one, 73% more oil, 50% more natural gas and actually cash as done much better then the market even at 0%

    But Gold did very well so we are both happy.

  3. Dear Angry, Dude, i can tell why you are so angry. Makes you mad to have to deal with us lowly cretins who have no understanding of how the world REALLY operates like you do. Actually you have a lot of valid points on the economy and fiat money as opposed to hard currencies. In no way is either side a cut and clean prospect. Both systems have inherent flaws. I don’t think any gold bug ever said that the world was a utopia when it was on the gold standard (all right, some of them may have implied that it was). Obviously if someone wants to be corrupt bad enough they will be (Josef Stalin, Woodrow Wilson come to mind). But just because people believe differently than you do about the economy and currency does not mean that we all just crawled out of caves and eat our food from a trough. Just a quick glance through any top finacial web sites will show that many apparently intelligent people believe in hard currency, if only for a profit, (like me). Also if gold is so irrelevant to life today, why is there so much energy put into keeping the price down through leasing and derivitives. You can be right and still be wrong. Give us poor ignorant gold bugs just a little slack. We not going to be taking over anytime soon that’s for sure.

    • Also if gold is so irrelevant to life today, why is there so much energy put into keeping the price down through leasing and derivitives. TNO

      Central bankers love gold as a fall back position to fiat. If the population worships that shiny metal then it makes them easier to control. The only thing the PTB and their bankers can’t control (by definition) is liberty which I advocate. But hey, let the rest of the world adopt a gold standard; the US will survive with liberty and the rule of law, Lord willing.

  4. It is amazing to read the media being happy that there is some consumer’s price inflation. Thank God my new car will cost more. Are we going nuts or what?

    A bit of inflation is a good thing. It’s a sign of economic activity.

    Too much inflation is bad, of course. But so are disinflation and deflation.

    The belief that all inflation is a problem is commonly held, but it is wrong. It is not possible to have a healthy market economy without a bit of inflation to accompany it; that inflation is a sign of the cycle in action, and should end up in peoples’ paychecks (and more people getting paychecks).