by Tyler Durden
Monday, Mar 06, 2023 – 05:20 AM
By Eric Peters, CIO of One River Asset Management
“That is money that cannot be spent elsewhere,” said German finance minister Christian Linder.
You see, annual interest on Germany’s government debt has risen 10x in the past two years, from 4bln to 40bln euros. That’s not a particularly big number, roughly 1% of GDP. But that’s not the only consequence of recent rate rises. In the race to exit Europe’s negative interest rate oxymoron, a multitude of changes are taking place.
Central bank balance sheets, bloated by a decade of monetary manipulation, now yield less than overnight interest rates. That gap is producing staggering losses for the very same central bankers responsible for creating it.
The German Bundesbank is thus expected to generate a 193bln euro loss over the coming decade. That’s a big number for the delicate German psyche. It’s the kind of number that will require a government bailout – indirectly with the passage of time and inflation. And if we’ve learned one thing from our long litany of financial crises, it’s that institutions requiring government assistance lose their independence, if not explicitly, then implicitly.
It’s not that central banks have ever been truly independent; they haven’t. It’s that the illusion of their independence from the politicians to whom they are accountable has ebbed and flowed over the decades.
Before this cycle is over, central banks across the developed world will turn to their politicians to beg for bailout forgiveness, even as they raise interest rates, which in turn lift interest payments that these same politicians must pay on government debts.
Any illusion of independence will fade. Calls for wholesale change will naturally come from the fringe, as it is the establishment that led us here.
“Inflation and the future depreciation losses that will arise from the ECB’s monetary policy – adopted in violation of its mandate – will be the nail in the coffin of Europe’s prosperity and the end of the euro,” declared Alice Weidel, co-leader of Germany’s rightwing AfD party.
“And no one will be able to say they weren’t warned.”