Blog/Sovereign Debt Crisis
Posted Jun 7, 2022 by Martin Armstrong
The European Central Bank (ECB) has a major crisis beginning. The free markets always win, and the spreads on the interest rates among the member of the EU are widening for Greece and Italy. Fools are telling Lagarde to use stronger language to signal that divergences among the member states will not be allowed to take place. The borrowing costs of more vulnerable countries such as Italy and Spain cannot be contained.
When they were creating the euro, the Commission attended our 1998 London Conference — the same one when I warned that Russia was about to collapse. It was then when I had a discussion with them, warning that a single currency WOULD NOT produce the same interest rate for all.
All the talk was that a single currency would set a single interest rate. I tried in vain to explain that would never happen. They were comparing it to the US federal government and I made it clear that they were not consolidating all the national debts and this meant that there could be no single interest rate and the difference in the currency would be transferred to the bonds instead. They simply refused to listen because that was one of the selling points to get the euro going.
It did not matter, they just wanted the euro at all costs. Now we see the widening of the spread and one central bank cannot impose a single interest rate any more than the Federal Reserve can control the interest rates all 50 states must pay to borrow money. In the United States, Massachusetts has the highest debt per capita in the country at about $11,130 with a AA rating while Tennesse has the lowest at about $875 and has a AAA rating.
The ECB knows it is facing a nightmare. The ONLY possible solution is to consolidate all the national debts of the member states and that would then become federal. Only then could it possibly be on the same footing with the dollar. Back then, the Bundesbank was against the euro. They were feeding us all the notes of the meetings because they really could not come out and speak. The Bundesbank understood the potential long-term crisis, and they opposed the merger of national debts.
So here we go again. COVID set off the fuse; Ukraine is the time bomb about to explode. As the soothsayer warned: Caesar beware!