Japan Will Lead the Coming Government Bond Ponzi Scheme Collapse



By Charles Biderman


Yesterday Zero Hedge had a link to Kyle Bass’ one hour brilliant dissection of the present disastrous condition of the global financial world that he says within two years will result in a fiscal collapse led by Japan and followed by Europe, including Germany, China and of course the US.


Kyle, who runs the Hayfield Capital Management hedge fund, goes into great detail to explain how the collapse of the government Ponzi bond scheme that I’ve often talked about will result in the coming international fiscal disaster. Some of you may want to reference Wikipedia while watching to understand some of his acronyms and terms.


In the video he references actual numbers delineating the how leverage banks are to ever growing piles of government debt. Kyle also explains in simple terms why Japanese government bonds are likely to be the first to collapse. He points out that German and Chinese banks’ debt leverage are at secular highs, more than wiping out current equity. Kyle also points to today’s zero interest rates amid global monetary printing as the beginning of the end.


I have been delivering the same message as Kyle, but I must add that I also learned a great deal from the global financial data and personal contacts he shares in this video. And the most important takeaway for me is Kyle’s premise that what has allowed the government bond Ponzi scheme to go on this long is the prevalent positive magical psychology dominating the financial markets. In other words: Since it has always worked out well in the past, it will all eventually work out this time as well. Of course what this really means is we can keep kicking the can down the road forever.


That insight alone for me was worth the one hour to watch this video.





6 Responses to Japan Will Lead the Coming Government Bond Ponzi Scheme Collapse

  1. Ed on December 21, 2012 at 4:04 am

    I believe the Wall Street waters get increasingly more polluted each trading day that passes. I don’t think it’s solely Federal Reserve policy that’s holding the markets up. I think there’s also a US Treasury funded HFT entity doing the same. I read somewhere that 90% of the S&P 500 gains this year came from 10 stocks. Is that normal? It’s no wonder the Retail Investor has abandoned this market casino.

    Why is the financial sector up nearly 10% in a week with a Fiscal and Recession Cliff looming?
    Did anyone really believe there would be a deal before the end of the year?
    Will a deal solve anything if we continue having annual trillion dollar deficits?

    I also blame the media for not holding any of our elected “leaders” accountable for their actions.

  2. Gordon on December 21, 2012 at 9:46 pm

    Kyle Bass wrote an artcle 4 weeks ago in Barrons where he said the Japanese financial markets were on the verge of an imminent collapse, since that friday the Nikke proceeded to go up 1400 pts non stop. It reminded me of the last two Crash calls by the not so famouse for now Charles Biderman. The article was written just days before the biggest rally of the year. Just makes you wonder about manipulated markets and short squeezes forever.

  3. Chris on December 22, 2012 at 2:48 pm

    I can assure you Kyle Bass is not investing in Japan. But several investment banks find “value” because they believe that any government intervention leads to short term profits…which is the ONLY thing most banks care about. Charles’s call for collapse have been predicated on simple math, just as Kyle Bass. Neither has given a timeline just pointed at the fact that the math makes it imminent at some point.

    Don’t get caught up with the masses and short term view. I mean UK is in recession but the FTSE is up 10 or so percent. The markets are not the economy, but eventually the markets WILL reflect the economy as reality as always a trailer. S&P 500 up 16% based on what? Earnings are down, profits are down, enployment is stagnant at best, nominal incomes are down, and the things people spend money on the most are inflating (gas, food, education, healthcare). False confidence will take you far….until the reality hits. Yes everything is fine….if you believe the US can grow GDP about 8-10% a yr for the next decade. If not the math is impossible.

    Bass was calling the subprime crises well before the collapse and was ridiculed. His clients were rewarded when he turned the debacle into a 590 million profit. Japan spends 68% of tax revenue on debt servicing and is on track to go to 100% in next 12-18 mths. Then it’s game over. It’s not opinion it’s just math.

  4. Mark on December 27, 2012 at 11:46 am

    Would you say the most likely transmission mechanism between Japan’s JGB problem and the blowup will be import driven inflation?

    i.e. JGB problem leads to currency devaluation (already happening); currency devaluation leads to rise in cost of imports, especially energy; rise in cost of energy a basic input into the economy leads to economy wide inflation; inflation leads to increase in interest rates; increase in interest rates leads to JGB DEFAULT.


  5. TC on January 6, 2013 at 5:13 am

    Bass’ blunt honesty per the likelihood of an imminent sovereign restructuring was most refreshing. Although the principal focus of his presentation was on Japan, by no means should one perceive sovereign restructuring likely will be limited to Japan. Indeed, he seemed quite clear that, restructuring of U.S. Treasury debt, among several other sovereigns, likewise lies on the immediate horizon.

    At the same time, though, one might fathom Bass is being entirely sanguine about the impact–the reach–of a sovereign restructuring affecting national treasuries at the very core of the global banking system. I center this conclusion on his positive outlook per non-agency RMBS. How one could ignore the role played by a securities-based global financial system evolving since the end of the Bretton Woods system of fixed exchange rates in 1971 in perpetuating the parabolic increase of indebtedness across both private and public spectrums, and assume derivative securities will somehow remain unscathed in crisis necessitating sovereign restructuring is more than moderately mystifying.

    Entirely missing from Bass’ analysis is commentary on debt fundamentals wherein prerequisite to any debt’s issuance is certainty that debt will be extinguished. Such fundamentals having been relegated to the dustbin in the age of Greenspan, this by way of sophistic monetarist machinations regarding risk mitigation–accomplished through financial infrastructure at the core of the securities-based (i.e. OTC derivatives-founded) banking system Greenspan principally fostered and oversaw. Yet it is this crucial matter of certainty that a debt in fact will be extinguished, which all too likely will enter into the political discourse at the hour of sovereign debt restructuring. Were one to ponder this very likelihood, Bass’ analysis thus appears lacking to a degree that ought not be overlooked, particularly as it was he who early in his presentation announced an outlook anticipating the likelihood of war over the period immediately ahead. I think it foolhardy, if I might be blunt, to suppose war will not be fought on financial fronts, particularly at the divide separating the private and public sectors, and all the more so considering how a tragic lack of due diligence was exercised by a private sector that otherwise persistently proclaimed its regulation was unnecessary, which practical reality might easily be laid hold of in the body politic and cited as the very cause for the need of sovereign restructuring in the first place.

    If I might summarize my sense of the matter, I think it disingenuous to blame the present day’s crisis on the expansion of sovereign balance sheets, as the driver behind this has been a shadow banking system operating with a theoretical infinite multiplier over several decades whose effect essentially was to hijack traditional central bank functioning and provide private finance a means to effectively print money in a derivatives-fueled process that likewise demanded the safest of securities (sovereign debt) to engage dynamic hedging. This process of private sector “money printing” (a dynamic Doug Noland has been very much in front of in his “Credit Bubble Bulletin” published weekly for about the past 15 years) whose consequence led to the parabolic increase in indebtedness over recent decades, and this ultimately without regard for the fundamental consideration of whether debt being added would be satisfactorily extinguished, is at the root–the very core–of our contemporary dilemma. Nurtured by this derivatives-fueled, private sector money printing was a bond bull market over the entire duration. Agency and Treasury debt played instrumental roles in this process’ perpetuation, and in a self-feeding dynamic both brought lowered borrowing costs, as well as rationalized increased public spending (much of which went toward destructive, non-productive wars).

    To blame out-of-control public spending on “unsustainable” entitlements as cause of the present day’s necessity for extraordinary central bank intervention is not only disingenuous, it is downright seditious. Greenspan is to blame for today’s predicament. Likewise to blame are those enterprises he animated–the likes of which, as I said and as everyone knows, positively threw due diligence to the wind despite persistently claiming regulation was unnecessary. We can throw the Bernanke Fed into this latter group to be sure.

    Let me conclude by saying there positively is no need to cut federal spending on entitlements, education, national defense, and so forth. No need whatsoever. Rather required is a Glass-Steagall reorganization of the banking system, this that the fundamental prerequisite guiding debt issuance be restored–namely, that certainty of a debt’s extinguishing be effectively assured to a degree far more indisputable than is the case presently. Does this mean there is likely to be a chaotic financial upset? Absolutely. Glass-Steagall or not, financial calamity is a virtual certainty, and on this point Bass’ analysis is both useful and conclusive. So, if we simply cannot avoid chaos, then we had better come to terms with solutions that will prevent our ever soon again becoming so very vulnerable as we are right now, which, indeed, is to a degree as finds us imminently risking a most unnecessary and calamitous global war. My most urgent advice is get to know Alexander Hamilton, and let the fact that, the Financial Times of London(!) shockingly is as well calling for Glass-Steagall deeply sink into your skull. This incredible development, indeed, even more starkly than has Kyle Bass, tells the world under no uncertain terms that, we are at the doorstep of doom should the current arrangement not be immediately reformed.

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Charles BidermanCharles Biderman is the Chairman of TrimTabs Investment Research and Portfolio Manager of the TrimTabs Float Shrink ETF (TTFS)

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