Martin Armstrong: The Entire Global Monetary System Needs to be Revised

Let’s talk about maybe one of the reasons why QE2 failed. In your view, will they announce another QE3 or QE4 as some on Wall Street anticipate if the economy weakens?

Well, unfortunately, they feel they have to do something. But in all honestly, as I think they do realize, they can’t stop it because we are in a global economy. I mean, you take the QE2 idea, then okay, you are going to buy 30-year bonds and you are going to take them in, and therefore, in theory there’ll be a shortage of long-term debt, so therefore they’ll lend more back to the mortgage market. Again, that shows the problem of this myopic view of the world. China said, well gee thank you very much, and they shortened their maturity by selling those 30-year bonds and moving down to two year notes or less.

So the problem we have is that there is no way to stimulate the economy because if they pump in cash, there is no guarantee it stays here. They export it overnight. We do not know who owns what. The only thing we do know is that 40% of the interest that is on our national debt goes out to foreigners. So, the old economic theories where you have a fixed exchange rate system and all these things after World War II, it just does not exist anymore. And we really have to sit down and revise the entire world monetary system because nobody knows what they are doing.

What are your views on Europe and how things will play out there?

What we are seeing in Europe and what the Europeans did not do properly is that they thought they were creating a single currency. What they didn’t do was they didn’t create a unified debt market. So, they left the national debts in each of the members. By doing that you are creating essentially a derivative where okay, fine the Deutsch Mark does not exist anymore, or the Greek Drachma; but if I short the Greek bond, it is effectively the same thing as if it were the currency. I can isolate just Greece and sell that.

Now what happens is that pressure has been pulling Europe apart. And they are not prepared to consolidate the debt to stop it, and they keep putting band-aids on to try and prevent it. But it’s not going to happen. I mean Europe is collapsing under this monetary idea that they had, and the way I can explain it in American terms is if you can imagine what chaos we would have if all 50 states were allowed to issue federal government debt. It would be an absolute free for all. And unfortunately in Europe, there is no single European bond. Every country issues its own, and then the banks use those independent states, they take their debt and they use that for their reserves to say that the banking system is secure. Now, when you start taking Greece down and people start attacking the bonds of Spain and Italy and so on, what happens is, now you are attacking the actual reserves of the bank. Now we have a banking crisis develop. So, I mean, Europe is just … the politicians won’t do the right thing, and therefore it is just turning into a real basket case. (more)