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. 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.

What is your reaction to the protests on Wall Street and elsewhere in the U.S.?

Well, you see a lot of people saying we are the 99%. But, really, what they don’t understand is if you confiscate all the assets of the top 1% what are you going to accomplish? Will it do anything? It will not even balance the budget. I mean, that is not our real problem and you can keep raising the taxes all you want, but we have deficits far beyond that. And we are not going to solve the problem that way. We really have to do a serious, serious reform. And if you take, for example, what the tea party has been saying. It sounds nice: balanced budget, okay, but we have debt that is continuing to increase. And so what will happen is, is that the cost of interest to keep carrying this debt that we never pay off is going to continue to escalate. Eventually that would reach 100% of total expenditure. So you can have a balanced budget and the debt crowds out everything else from Medicare, you know, all the way to unemployment benefits. There will not be any of that left. So, a balanced budget, we are beyond that too. We really have to do a serious monetary and economic reform here. And the government has been doing this since World War II. They borrow year after year after year. And there is just never any intention of paying anything back.

If you go to a bookstore, alright, you can go look for basically the World Almanac, little paperback type thing. And in the beginning, look there and they have tables, all the data on the national debt, and year after year they’ll list how much you paid in interest. If you add up the interest expenditure between 1986 and 2006, you’ll see that 80% of the increase in the national debt was all interest. So, we are not getting anything for this. Forty percent of that money is going out of the country. So, it’s just astonishing to me that you can cut every program you want, but the national debt is off the table. You cannot negotiate it. You cannot – I mean, we have to create a new monetary system. We just have to do so. The debt is going to take over absolutely everything to the point we won’t have any kind of expenditures for anything. I had called the doctor for my mother, and they said they are no longer taking Medicare patients because they are anticipating cuts coming through in January. So, you can have these nice programs, but they keep chopping away at them because of the rise in the national debt cost. They can say, oh we are going to tax the rich. Okay, fine go ahead. Take everything they have. It will not stop the continual growth in the national debt. I mean it is like the pink bunny that is on the Energizer commercial. It is just going to keep on going. So, unless we sit down and start really seriously saying, look we have to revise everything and let’s look at this, there is not much that we really have to look forward to, other than shear economic chaos.

Is it going to take a crisis as we saw take place in the 30s? Right now, you are hearing we’ll be okay if we just tax the rich, that they need to pay their fair share. But as you point out, you could tax the rich, take away all their money, and you are still going to have a budget deficit and we are still sending interest overseas.

Sure, I mean, it’s incredible that people always want to blame corporations and say, oh they ship jobs overseas and that is why we are losing jobs. If you look at the amount of interest that we are paying that is leaving this country, it is far more than what we are losing in trade. And it is a shame because we just have a lot of rhetoric all the time rather than just looking at the simple truth. And it seems to be a lot of dogma, I think, that prevents people from even looking at things, or they just do not want to. I’m not sure. But politicians are … I mean, I’ve worked with a lot and it is very frustrating because you can tell them, listen, you know the trains coming down the street and it is going to—if you do not step out of the way—you are going to get killed. And their mindset is: well, I don’t see anything right now.

They just will not act until there is a crisis. Yet to them it is kind of like, a guy comes up to you and says, listen I just saved your life. And you look at him and you say, yeah, what’d you do? Well, you see that car at the top of the hill, somebody did not put the break on, it started rolling down, it would have hit you, so I jumped in the car and put the break on. So I saved your life. The guy does not see it, so he goes yeah, how do I know you are not just lying? And that is the way the politicians look at it that they can’t win an election by saying, vote for me because I stopped you from losing your house. And they would much rather that you are under the gun of losing your house and then say, vote for me and I will prevent it, but they won’t act in advance. So, unfortunately that is I think what is wrong with our political system. And the two words, political economy should have been divorced the first moment they met, but unfortunately that is what we have to live with. And so they will not act until the crisis happens. And then they want to have their big hearings. And then they want to investigate. And then they always want to criminally charge somebody but they have tried investigations to every stock market crash since 1907, they have never found this mythical short player that pushed everything down. But it’s great grandstanding. All of the yelling and screaming that they did over derivatives but they still did not—they still did not regulate them. They still did not stop the CDSs from being issued. They did nothing. They regulated other things, and added more agencies and more government jobs, but they actually did not do anything to prevent what was happening. And to tell you the truth, the reason they will not do so is because the banks that they were looking at are primary dealers. A Primary dealer is the one that settles the government debt for them. So, they are never going to charge criminally any of those banks because they have become kind of like the financial crack dealer. They are not going to give them up. If they really wanted to help the economy, they should have shaved 25% off of the mortgages and basically funded it that way. That would have prevented all these massive foreclosures and the problem with the foreclosure is all that property now comes out onto the market. By that coming onto the market, even if you have a house and you are current on your mortgage payment, now your property has declined in value because of everything else that is being sold. It’s all interconnected. The worst recession ever is always a real estate recession, because people will spend money as long as they feel they have equity in their home. If they feel that they no longer have that equity in their home, for retirement or whatever, they don’t spend money. So, a real estate recession is the worst of all, and that is what we have.

Final question: as you look forward over the next twelve months, what are your models telling you about the economy in the markets?

Well, basically I think we are headed into—going into the end of 2015—another big, I think, economic crisis. That is probably when the sovereign debt crisis comes to a head. But between now and then, unfortunately it just looks like more and more like a bull market in volatility. I think that initially we can still see gold consolidate a little bit. I would not expect it to take off dramatically yet. Largely a lot of people are still confused trying to figure out what is going to happen in Europe. There are people that want to be optimistic about it. But the old story of the difference between an optimist and a pessimist is that the two are on the top of the Sears Tower and they get blown over. And the pessimist immediately starts praying, oh my God, I’m going to die. And the optimist as he’s passing the fourth floor says, well, so far so good.

So, I think that pretty much sums up our problem. There are people that just do not want to admit that there are economic problems and unfortunately refusing to address them early on is kind of like cancer. I mean, you can cure it if you deal with it, but if you do not deal with it, and you wait until the very last end, it’s too late. So I think we are in a bull market of volatility. And that is what we are looking at, particularly over the next two years.

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