the global bond market lost $12 trillion. The abysmal latent losses of central banks will weigh down government budgets.
Quantitative Easing Morphine
In normal times, states borrow from private banks by issuing “bonds”. That is, slips of paper promising to repay the borrowed money in 1, 2, 5, 10, even 50 years. Plus interest, of course.
In France, these bonds are exchanged for cash at 18 banks. Five American banks (Citigroup, Bank of America, Morgan Stanley, JP Morgan, Goldman Sachs), four French (BNP Paribas, Natixis, Société Générale, Crédit Agricole), three English (Barclays Bank, HSBC, Royal Bank of Scotland), two German (Deutsche Bank, Commerzbank), Swiss (UBS), Canadian (Scotiabank), Japanese (Nomura) and Spanish (Banco Santander).
It follows that near the half interest on French debt is paid to foreigners. According to Agence France Trésor, 30% of French debt is held by investment funds and foreign banks. Foreign central banks hold 18%.
The rest is held by funds, French banks and the ECB. The latter bought for 3,434 billion in debt via QE (Quantitative Easing). Or 42% of the entire stock of debt in the euro zone.
The direct consequence of QE is that 42% of the interest is paid to the ECB. However, the European Central Bank belongs to the States! In other words, governments no longer pay interest on all debt bought up through QE.
The burden of the French public debt (interest) was all the same 38 billion euros in 2021. We were at 46 billion in 2012, when the debt was “only” 1,800 billion, compared to nearly 3,000 billion today.
This shows how much the reduction in rates and QE have relieved the French government’s budget.
And now, weaning?
The fact is that rising interest rates are hurting the value of old debt (at lower rates) held by central banks.
The value of the US bond market drops by more than 12% in 2022 (unheard of), so that the FED will reduce its balance sheet by making losses. Same for the ECB who will discuss reducing its balance sheet today
Where the shoe pinches is that these sales necessarily go “affect the ability of central banks to contribute to government revenue”, note Fitch Ratings.
Worse, “there is a risk that States will be called upon to recapitalize central banks”warns the rating agency.
The FED has already warned that payments to the US Treasury will cease in the event of net losses. Which should not take long since it is currently reducing its balance sheet at the rate of 95 billion dollars per month.
This will be a big shortfall for the government, since these payments represented the tidy sum of 109 billion in 2021. A figure to compare with the 1330 billion dollars of the 2021 government budget of the United States.
The US government will therefore have to cut its spending by almost 10%, or else take on more debt. And as borrowing rates rise higher and higher, debt will resume an exponential trajectory doomed to hyperinflation…
Australian and Swiss central banks
The Reserve Bank of Australia recently reported huge unrealized losses. The value of its stock of debt has fallen by 58 billion Australian dollars.
The Swiss National Bank for its part shows a loss of 140 billion francs on the equivalent of 1000 billion francs in foreign currencies. These reserves represent 130% of GDP!
For Fitch, central banks can function very well despite these losses. After all, central banks have printing presses…
And then, it was probably always planned to resell these debt securities at a loss. This is as much money for the benefit of the private banks which make up the difference. In short, the losses of central banks are the profits of private banks.
Let’s end on a geopolitical note by emphasizing that the price of the joule has become a weapon. Therefore, raising rates will not lower inflation.
The effect produced will be above all an increase in the debt burden, which will force governments to create… more debt. We have already demonstrated this in the UK.
The UN knows this and is already calling on the Fed to stop raising its rates. The Wall Street Journal headlined on Wednesday: “Markets Break When Interest Rates Rise Fast: Here Are the Cracks”.
Central banks will start printing again sooner or later. Or will they be hardliners in launching CBDCs to control inflation through rationing? No matter what, bitcoin is still the best option…
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