Think it’s impossible? Bass lays out the domino effect in his investor letter, titled “The Cognitive Dissonance of it All.” Here’s how he sees it going down:
This stage is already complete in Japan. Bass focuses on the gap between the huge amount of debt racked up by Japan over the last 20 years, and the puny tax revenue that is intended to maintain it:
“Japan currently maintains central government debt approaching one quadrillion (one thousand trillion) Yen and central government revenues are roughly 48 trillion. Their ratio of central government debt to revenue is a fatal 20 times," Bass said.
And for all you keeping score, note that United States’ government debt to revenue is currently at a slightly less-alarming 3 times.
- STAGE 2: GET STUCK IN LOW INTEREST RATE TRAP
Japanese monetary policy—like a lot of other Western economies (talking about you, America)—is committed to maintaining abnormally low interest rates in the hopes of stimulating growth.
But the problem, Bass explains, is that this is really a trap having nothing to do with growth. It’s about paying creditors. In order to simply afford paying the interest on its hulking debt, Japan must maintain interest rates near zero. As Bass describes in his letter:
“Japan had to borrow at France’s rates (a AAA?rated member of the U.N. Security Council), the interest burden alone would bankrupt the government.”
Therefore—any increase in interest rates in Japan is terminal. But rates have been below 2 percent for decades. Why would they have any reason to spike now?
- STAGE 3: RUN OUT OF BUYERS FOR YOUR DEBT
Japanese rates, Bass said, are a few years away from spiking once the Japanese stop buying their own debt. Unlike the United States, which has China as a perpetual purchaser of Treasuries , Japan has sold most of its debt to its own population. And that population is aging fast, and saving less.