The Financial Sense Newshour interviews Kyle Bass
Kyle: When you think about what Reinhart and Rogoff’s
book says, it kind of gets to an answer but it’s not the right way to look at
things; there are many more variables to analyze the situation with. One is, of
course, debt to central government tax revenues—that ratio. Another one is what
percentage of your central government tax revenues do you spend on interest
alone? Those barometers are much more impactful than just using a debt-to-GDP
barometer. And then when you think about Reinhart and Rogoff’s work, if you’ve
read all the white papers that they’ve written prior to writing the book, one
of the other conclusions that they draw is when debt gets to be about 100% GDP
it becomes problematic. Well, what that means is, typically—and, again,
painting the world with a broad brush—central government tax revenues are
roughly 20% of GDP. So what they’re telling you is when debt gets to be 5 times
your revenue, that’s when you start to have a problem. Historically, the
analysis that’s been done empirically by academics has focused on the countries
that have fallen into a restructuring or a default as a result of this ratio
that you and I are discussing. Historically, those have been emerging market
economies that have higher borrowing costs. So, it actually makes complete
sense that that number is too low when you’re talking about a developed market
economy versus an emerging economy because, in theory, a developed economy can
borrow at lower rates than an emerging economy can. That being said, in Japan,
when the debts are 24 times their central government tax revenue, they are
already completely insolvent—it’s just a question of when does it blow up.
