World Bank Economist Warns of Coming Financial Disaster

Oct. 17, 2020 (EIRNS)—World Bank Vice President and Chief Economist Carmen Reinhart said a financial disaster is on the horizon and could take the form of a sovereign default.

Speaking to Bloomberg TV on Oct. 15, Reinhart said after the coronavirus drove the biggest economic slump in nearly a century, bankruptcies have been somewhat staved off by massive government stimulus and central-bank easing. But the path of global quantitative easing “is not a sustainable one,” and many countries could face a debt crisis just as their economic recoveries materialize, Reinhart said.

“This did not start as a financial crisis, but it is morphing into a major economic crisis with very serious financial consequences,” she said.

“The need to look for new revenue sources to support social needs is going to be, I think, a very pressing one moving ahead,” she said, and stating that the risk of a debt crisis cuts “across all regions, in varying degrees, and across all income strata.”

Reinhart is known for the weird theory that a government debt over 90% of GDP is “unsustainable.” She is a student of Robert Mundell, who invented the “optimal currency area” theory to justify the creation of the euro single currency. With these credentials it is obvious that she overlooks the fact that, had the QE gone to investment in the real economy and to really support public credit, there would be no danger of government default.

Instead, QE has gone into supporting the bankrupt financial system and only indirectly to support government debt, to the extent that this was profitable for speculators. A chart published by the Federal Reserve of St. Louis shows that In the last six months, $3.4 trillion have been created, against $14 trillion in the preceding 40 years. M2 includes M1 plus saving deposits, money fund investments.

While the monetary curve goes exponential, the real economy is falling in a deflationary spiral.