Global Deficits Will Create $4.5 Trillion in New Debt: Hedge Fund Manager

How much additional soverign debt does the world have to issue this year, just to make up the massive, growing budget deficits?

"You have to think about the world and its totality. There is a finite amount of capital, so just to plug fiscal deficits the world has to issue $4.5 trillion worth of new debt—that assumes the existing debt stock rolls," Kyle Bass, managing partner of Hayman Capital, told CNBC's The Strategy Sessionon Tuesday, adding, "but where does this $4.5 trillion worth of new debt come from?"

"U.S. banks' securities portfolios have increased 26 percent year over year, all they are doing is buying Treasury Bonds. The Fed doesn't want that to happen—they want the yield curve to flatten and the banks to go lend," Bass said.

With the Q2 GDP (Gross Domestic Product) set to be finalized on August 27, Bass believes it will likely be revised to 1 percent or lower (the advanced estimate is currently 2.4 percent).

Bass said countries trap themselves by heading to a zero interest rate policy (ZIRP), due to avoidance of painful restructuring in the private and public sector, running double fiscal deficits, and piling on debt.

"The only way out of that trap is painful restructuring down the road or stay in the trap the way Japan has for twenty years until demographics change, which is happening with them right now," Bass said.

For that reason, he believes Japan will likely face debt crisis within two years.

"Countries typically default if sovereign debt is 70 percent of their GDP," Bass said. The current public debt to GDP ratios are as follows:

  • Japan 190 percent
  • 113 percent
  • United States 53 percent

"If 50 percent of the our debt rolls ever year a move in the short-term rate immediately effects the income statement for the U.S.," he said.

The solution, according to Bass, is for the U.S. to cut its spending and slash its budget to avoid deflation. Down the road "the U.S. will have to restructure," Bass concluded.

"The Strategy Session," hosted by David Faber and Gary Kaminsky, airs weekdays at Noon ET on CNBC.

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