Sovereign Debt Crisis on Steroids
by Martin Armstrong, Armstrong Economics
QUESTION: Mr. Armstrong; First thank you so much for sharing with us your views of how the world really functions. While there are the typical conspiracy arguments, you are the only one with experience. My nephew works in a major top 10 bank. He told me everyone reads you on the trading desks and that you are correct. They cannot speak publicly. He said only you seem to have a grasp on the depth of the abyss we face. What he explained was that the bank reserves are not mark to market and you are correct that this is a major crisis which we face. Is the entire banking system propped up with sovereign debt that is just going to collapse in a major liquidity crisis?
Thank you once again. There are a lot more people listening to you than you might suspect.
ANSWER: Yes. I will be going over this in more detail at the Solution Conference. Unfortunately, the media does not report the real issues that underlay what we have called BIG BANG. The crux of the problem is always corrupt politicians. I have explained how they have transformed a private banking organization into a tool to support government debt. But the untold story is the quality of the bank reserves. This is why the Euro is collapsing.
Financial institutions must hold for their commitment in government bonds as reserves and there is no mark-to-market requirement because there is a political assumption that overrides real world economics. The securities of sovereign governments are valued as “risk-free”. So in other words, the bank reserves do not reflect actual market conditions. If the government defaults, well there goes the entire banking system.
In the Euro Debt Crisis is the classic example of the cliff we really face. Everything can honestly just vanish in the blink of an eye. Several countries like Greece have suffered greatly as their national debts rose in value when switching to the Euro. Southern Europe has paid a terrible price for the Euro. The credit ratings for corresponding bonds in Southern Europe have declined to virtual junk status in reality. The Basel Committee on Banking Supervision, in the economically important countries has warned there is a problem here.
The immediate rules could lead to total banking chaos. This is also impacted by pension funds and insurance companies. All have “risk free” government bonds on their books. Add to this mess, the fact that politicians will never pay down debt, they constantly add to it year after year with no intention of paying anything back. So why have government bonds at all and how the hell can they be used to support a banking system with zero intention of ever honoring that debt?
This is so entwined, there is nothing else to call this but BIG BANG. Everything is connected. Absolutely everything. Tip one thing over and we have a total cascade failure. People can create AI models and pronounce to the world they will now use AI. The problem, it takes a database beyond what you can buy on the internet and then you have code that takes decades to write and perfect. This not some 3 month school project. We are in real trouble here.