2012-12-25

For those with time to spare

Here's Kyle Bass talking about sovereign debt risk and Japan.

At one point, he relates a conversation with a Japanese central bank official. Bass says something to the effect of, "How can you complain about monetization of debt, when you're doing it?" And the central bank official replies, "It will be money printing when the market says it is money printing." Bass rightly views this as talking out both sides of the mouth, but the official is also correct. Global central banks are monetizing debt at a rate sufficient to generate substantial inflation (easily 10% per annum as a low estimate), but this is being offset by massive credit destruction and a reluctance to loan/borrow on the part of banks and individuals.

Eventually, this will change and it will be a psychological change. At the time of the shift, people will explain it as fundamental, but it really isn't. Central bankers are playing musical chairs, only they do not know how many chairs are remaining. Therefore, they will continue inflation until the music stops and the first central bank has no chair.

Thus, the central bank official is correct in his reading of the market. His mistake is that he is making policy. There will be no escape when the music stops.

Social mood can provide a clue as to when a shift will occur, and the direction doesn't matter. If there is a greater negative mood, foreigners may impose a devaluation on the yen. If social mood suddenly improves, Japanese borrowers will generate the inflation. Any volatility, up or down, will puncture the equilibrium and send the yen careening.

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