Will Germany Go All In?

[JB2033]

Kyle Bass practically cracks up when an interviewer asks him about Germany "resolving the problems within Europe."

Bass responds, putting emphasis on each reference to "resolution":

"The only way to quote resolve any problems in Europe is to have massive debt restructuring...

One of the things we've said in our office recently is you know how screwed up Europe is when you have a German pope and an Italian central banker. We have a scenario today in which debt has grown globally in the last nine years from $80 trillion to $210 trillion. Global credit market debt has grown at 12% a year for the last nine years, while global GDP has grown at 4. We're in a scenario where the PIIGS have sailed into a zone of insolvency. When you sail into the zone of insolvency there is no quote solution for you. The bill is due and you have to pay the pill. What has to happen is it is of our opinion that these debts have to be written down, it's that simple.

Basically you're saying if Germany goes joint and severally liable with the profligate idiots of southern Europe will that quote solve the scenario? Think about this. Let's assume Germany goes to doing a eurobond and Germany takes on these... first of all German constitutional court has already ruled that that's illegal in Germany, but let's assume that they get over that and they go ahead and issue this bond. What would that do for the profligate members including Greece when Greece says, "OK we're all in, we're good, you're lending us more money, we have a big debt problem and you're lending us some more and now we can borrow a little cheaper," and then Greece keeps spending, and they go back to Germany and say, "OK Germany I need some more money." Germany says, "No, we're going to impose this real austerity on you now." Greece says, "Fine, we'll default." Every single time from now on Germany is in the exact situation it's in today. We call it in Texas a Mexican Standoff, meaning there's no winner. The profligate members will always have Germany by the short hairs every time this scenario comes up. So I disagree. I don't think that Germany will end up going all in. It would not be to the benefit of Germany to do so in the long run. Let me ask you this question: How many of your relatives would you go joint and severally liable with?

 

[samclem]

The only way to analyze a problem like this is to remember that there is no such thing as a decisionmaker named "Germany". In all such cases you can only have a hope of determining what decisions will be reached (or inflicted) on the various parties by breaking things down into much smaller units. For example, you have to look at Angela Merkle and the equities of her Christian Democratic Union (CDU) , as well as their coalition partners in the Christian Socialists Union (CSU) and the Free Democratic Party (FDP). What does each member of the coalition need, and what are they prepared to give up? If one party is intransigent, could another partner be brought in? Be sure to go to the regional level of politics in Germany, as that's important there. Now, how about the German industrial interests--they support various politicians and will influence public and political thinking on the issue of Germany taking greater responsibility for Eurodebt.

When you've finished all that, do a similar analysis (part-by-part plus interdependencies) for Greece, all other EU countries, and then the EU as a body.

That's why analysis is hard. But to say "Germany" will do this or that invokes a shorthand that obscures the most important things that need to be looked at. Nations don't behave rationally, but at the appropriate level, each sub-component does. How could one possibly have argued that a rational US would deliberately have made the financial decisions "it" made to get us to this high level of debt as well as our present state of economic (and political) dysfunction? But each sub-component has, at each step of the way, made decisions that rationally advanced its own own self interest, and the various political, economic, and social subentities and interest groups have won, lost, modified positions, etc and danced us to our present state. And here we are.

 

[haha]

Kyle Bass practically cracks up when an interviewer asks him about Germany "resolving the problems within Europe."

Bass responds, putting emphasis on each reference to "resolution":

Do you perhaps have a link or reference for this. I think Kyle Bass is very interesting, and I hope he is right about what Germany will or will not do.

It makes me feel good that there might be at least one nation left which is prepared to let the chips fall. Can you imagine a world run by Li'l Ben?

Found it I think: Must See Rare Interview with Kyle Bass on The Euro-Crisis and Japan | ValueWalk.com

Wow, what an ignorant hostile interviewer. If she would just shut up and let Bass talk we might learn something

Ha

 

[samclem]

Can you imagine a world run by Li'l Ben?

I think we're seeing it, for the most part. I guess to fix our present problems we just need more helicopters . . .

 

[JB2033]

Do you perhaps have a link or reference for this. I think Kyle Bass is very interesting, and I hope he is right about what Germany will or will not do.

It makes me feel good that there might be at least one nation left which is prepared to let the chips fall. Can you imagine a world run by Li'l Ben?

Found it I think: Must See Rare Interview with Kyle Bass on The Euro-Crisis and Japan | ValueWalk.com

Wow, what an ignorant hostile interviewer. If she would just shut up and let Bass talk we might learn something

Ha

You found the interview. I too follow what Kyle Bass has to say.

He makes to much sense most of the time.

 

[donheff]

Let me ask you this question: How many of your relatives would you go joint and severally liable with?

Interesting way to think about it. Answer: one - DW. So does Germany see itself as having the equivalent of a plural marriage?

 

[GandK]

Basically you're saying if Germany goes joint and severally liable with the profligate idiots of southern Europe will that quote solve the scenario? ... I don't think that Germany will end up going all in. It would not be to the benefit of Germany to do so in the long run. Let me ask you this question: How many of your relatives would you go joint and severally liable with?

None.

And I agree... it would be a big mistake for Germany to become joint and severally liable at this point, because AFAIK none of the more profligate EU members have really changed their spending habits.

 

[TargaDave]

Didn't think anyone here would be much of a Kyle Bass fan. Other Kyle B interviews without such a terrible interviewer

 

[Midpack]

Kyle Bass certainly is interesting. Just read Boomerang which stemmed from The Big Short based on Kyle Bass benefitting from the mortgage crisis. I still watch/listen to him...

 

[TargaDave]

You do realize that Bass has been very bullish on that pathetic scrap metal and other tangibles for some time.....regardles of what Germany does.

Hmmmm, where's Brew and G4G to remind us this guy is just another tin foil nut job, and to be scoopin up BAC and Italian BTP's with both hands as our masterful central banks continue to engineer this stellar recovery..........

 

[ERD50]

Kyle Bass practically cracks up when an interviewer asks him about Germany "resolving the problems within Europe."

....

Thanks for posting this, very interesting. It's hard to think that this guy could be very wrong. Seems really bright and down to earth.

Wow, what an ignorant hostile interviewer. If she would just shut up and let Bass talk we might learn something

Ha

She sure was hostile. I was impressed by how cool Bass was, but I got the impression it was a little like an elephant being bothered by a mosquito - not worth getting too upset about.

Didn't think anyone here would be much of a Kyle Bass fan. Other Kyle B interviews without such a terrible interviewer

Thanks for those also (have not watched the second yet). In the first, he had some (IMO) great insights into our global competition situation (right ~ 51 Min in). Essentially said that we can't expect to import cheap labor without importing a lower standard of living, and he sees wealth moving from one group to the other. He said we are not competitive - they work harder ( but we are better entrepreneurs).

At 54 Min mark, he talks about the pubic pension issues.

-ERD50

 

[brewer12345]

You do realize that Bass has been very bullish on that pathetic scrap metal and other tangibles for some time.....regardles of what Germany does.

Hmmmm, where's Brew and G4G to remind us this guy is just another tin foil nut job, and to be scoopin up BAC and Italian BTP's with both hands as our masterful central banks continue to engineer this stellar recovery..........

How classy of you!

For the record, I think the Germans will eventually get out of the way of what needs to be done. No telling how long that will take.

We now return you to your gloom festival...

 

[JB2033]

How classy of you!

For the record, I think the Germans will eventually get out of the way of what needs to be done. No telling how long that will take.

We now return you to your gloom festival...

Tell us what your statement here about the Germans means: "The Germans eventually need to get out of the way of what needs to be done" What is it they need to do in your opinion??

The late great Milton Friedman predicted that the first true monetary crisis would spell the end of the EU.

So assume Germany does not go all in, and even then they do not have the resources to bail out Southern Europe; what happens next? The U.S. bails out Europe?

Assuming that none of this happens how long can the Italians maintain yields at 7% before default or need of a bailout?

If this happens what are the consequences? In your opinion what is the solution to the problem?

 

[traineeinvestor]

If history is any guide, there are only four end games for countries which consistently spend more than they take in for long periods of time:

1. austerity - i.e. living within one's means through higher taxes and/or less spending

2. currency debasement - i.e. keep printing more of the stuff

3. default - whether Argentina 1980s style or Russia 1917 style

4. ask someone with deep pockets to bail you out - which is kind of hard to imagine for Europe as a whole

It's largely a case of picking your poison(s) before the market does it for you.

I'm inclined to agree with Kyle Bass for the reasons he gives. Germany as enough of its own problems to contend with and lacks the fiscal strength to backstop the lifestyles of the Southern Europe even if it wanted to.

As an aside, its worth remembering that the difficulties of Eurozone members failing to manage their finances in a manner consistent with the nature of the Euro were well debated at the time the Euro was first adopted. It's disappointing to realise that nearly 20 years after the Euro was adopted they still haven't figured that one out.

 

[MichaelB]

The EU as a whole has a moderate public deficit (4% or so) and a very small trade deficit (less than 1%). It is a very wealthy region and has the resources to resolve its financial problems. Things can end badly, but they don't have to.

 

[samclem]

If history is any guide, there are only four end games for countries which consistently spend more than they take in for long periods of time:

There's a fifth one you overlooked. Between 1933 and 1939, the German government took in about 62 billion marks in taxes but spent over 100 billion marks (mostly on armaments and troop pay). While many in Europe and the US were concerned, others believed the growth in German military power would be self limiting as clearly Berlin couldn't afford to keep arming at this pace. These folks didn't realize the German leaders intended to seize the assets of their neighbors, and the neighbors of their neighbors, to repay their debts.

Of course there's nothing on the horizon like that today. But it's always important to avoid mirror imaging when deciding what a country/group/person might do next.

 

[Running_Man]

The EU as a whole has a moderate public deficit (4% or so) and a very small trade deficit (less than 1%). It is a very wealthy region and has the resources to resolve its financial problems. Things can end badly, but they don't have to.

I see current EU deficit as of the end of 2009 at 6.3% which is double the allowed amount of the EU agreements, and this was with interest rates at historic lows which they no longer are. Of course a deficit of 6.3 percent sounds manageable until you realize tax revenues in Europe are already withdrawing nearly 40 % of GDP meaning you would need over 10% of all the remaining money outside government control in the EU to balance the EU government budget. And cutting government spending could lead to a large slowdown in Europe as the government is so much of the employer in Europe.

Ireland tops EU deficit table again - RT News

One of the major issues is the longer interest rates are allowed to stay at these historic lows, the cost of the relatively minor interest on large budget deficits is not felt in the process of propping up economies. It is only when interest rates rise that it is apparent the money cannot be paid back. This is the current issue in Italy, which needs below market rates in order to maintain it's economy. So they need Germany's economy to secure below market financing. However the escape from the historic low interest rates is not addressed.

It has been interesting to follow how 3 banks in Iceland have led to the European nation to need to voluntary go into receivership of Germany, despite the fact that Germany has some of the world's worst capitalized banks.

 

[MichaelB]

I see current EU deficit as of the end of 2009 at 6.3% which is double the allowed amount of the EU agreements, and this was with interest rates at historic lows which they no longer are.

The Economist Magazine shows the EU deficit at -4% in 2011. See here Trade, exchange rates, budget balances and interest rates | The Economist

 

[Running_Man]

Well that is the budget, not the actual. I believe Greece is budgeted to be at 9% and Italy at 4%, don't see the actuals equaling the budget.

 

[haha]

When you listen to what Bass says you have to be impressed that he thinks, not hopes, and does not fall back on the fixed idea of "keep a diversified portfolio....). The guy has a penetrating mind. Here we talk about 3% inflation, or say things like "I'm not afraid of inflation". This simply means that we don't understand reality.

IMO we are up a creek. I took out Bernanke's book "Essays on the Great Depression". He had better have a very good PR guy, or he had better get out of town before things fall apart because no one thinks he is the maestro. No matter what he and other self absorbed economists say, you can't cure too much debt with more debt. Good thing for them that many of them are on the public payroll because if they had to survive on their investment results they would be dead.

I have been investing for very many years, and to me markets do not seem to be correctly valuing all the risk that is out there. Which of us would loan a meaningful amount of money for a fixed term of 10 years at today's rate of 2.01%, or for 30 years at 2.99% ?

There used to be a guy on here who often said, Firecalc went through the great depression with a 4% WR, how could it be worse? Well my friend, all kinds of ways. The commonest cognitive error is to cast your net too narrowly.

Ha

 

[ratto]

No matter what he and other self absorbed economists say, you can't cure too much debt with more debt. Good thing for them that many of them are on the public payroll because if they had to survive on their investment results they would be dead.

That's the beauty to fulfill someone's theories or ambition with OPM (other people's money).

There used to be a guy on here who often said, Firecalc went through the great depression with a 4% WR, how could it be worse?

This kind of reminds me of this quote from Italian movie "Pasqualino Settebellezze (Seven Beauties)": "Death can't be any worse than this!".

 

[TargaDave]

Kyle's most recent letter to investors

Hayman_Nov2011

Here are 3 more references that I think are worth reading:

Currency Wars, The Making of the Next Global Crisis by James Rickards

Money Mischief, Episodes on Monetary History by Milton Friedman

Fiat Paper Money, The History and Evolution of our Currency by Ralph T Foster

 

[Midpack]

Kyle's most recent letter to investors

Hayman_Nov2011

May be just me, but when I opened it (ScribD?), it looked like it was arabic. Maybe a members only issue?

 

[deserat]

To answer OP - I believe no - I live here in Germany.....I don't see them allowing themselves to bankroll the profligacy without some serious loss of financial autonomy by the PIIGS. The Germans love to visit those sunny places, however, they really love their country and the way it is organized (read as the RULES - which in one of my touristy visits I realized stemmed historically from Charlemagne setting out the rules for the way certain enterprises would work and then basically doing no-notice inspection visits all around his huge realm ensuring the rules were adhered to)......their minds just function that way from birth on - it's very easy to live here as long as you know and follow the rules.....

 

[HFWR]

May be just me, but when I opened it (ScribD?), it looked like it was arabic. Maybe a members only issue?

No Script was apparently blocking it in my system; by "allowing all on the page", it magically turned to English...