Wednesday today and a short blog. I also have to travel a lot today. But some brief comments on an interesting article from French commentator Michel Lepetit – Nourrir le débat sur une annulation partielle (370 mds€) de la dette publique (April 15, 2019) – which means more or less “Promoting the debate on a partial cancellation (€370 billion) of public debt”. The article proposes that the Banque de France cancels its holding of French government debt (the €370 billion), which could also lead other national central banks in the Eurosystem following suit with respect to their own government debt holdings. He argues that the cancellation (write off) would have no negative social impacts and could help Eurozone governments fund the transition to a low-carbon future. Above all, it reflects an understanding of Modern Monetary Theory (MMT). Michel Lepetit argues that the QE implemented by central banks, especially since the GFC demonstrates the patent failure of the foundations of monetarist dogma (“l’échec patent des fondements du dogme monétariste”).
Central banks could easily write off all Eurozone debt
Michel Lepetit is the President of Global Warning (a group pushing for the transition to a low-carbon economy) and a researcher at the Interdisciplinary Laboratory of Future Energy (LIED).
He notes that:
1. The ECB’S QE program (the PSPP) works through the national central banks, so that the Banque de France has purchased around €370 billion worth of French government debt.
2. These assets are the property of the Banque de France (“intégralement la propriété de la Banque de France”).
3. The French government pays interest to the Banque de France on this debt.
4. In return, the Banque de France pays a proportion of this income back to the State as dividends and corporation tax.
5. From the left pocket the right pocket receives! The Banque de France is 100 per cent owned by the Government.
6. Why not just cancel the debt? That is, someone in the Banque de France just sets the number in the balance sheet to zero rather than €370 billion. One keystroke is all it would take.
He examines the likely consequences of a cancellation, noting that they will never be put back on the market by they Banque de France.
Within the Eurosystem, the debt purchased by the individual national central banks is wholly owned by that bank.
There is “no risk-sharing on government securities acquired by NCBs [National Central Banks]”.
The estimated impacts are as follows:
1. He acknowledges the impact on Government would be to reduce it earnings but also the amount it pays serving the debt – essentially only a “visual effect” (“La mesure est évidemment sans effet autre que visuel”).
2. He doesn’t examine the impact on the balance sheet of the Banque de France, but the reality is that while the assets would decline, that decline in functional terms is meaningless. The central bank is not like any other corporation where insolvency is a threat.
3. No impact on the government bond market – the debt was not going to be resold to the market.
4. It would reduce the public debt ratio in France by 15 per cent at the end of 2018.
5. It would increase the rating agencies scores for French government debt.
6. Negligible impact on GDP growth.
8. He acknowledges it would be a “delicate” issue in terms of the broader implications for European monetary policy. It would completly blow the cover on the ECB’s claims that it is not funding fiscal deficits (albeit indirectly via the secondary bond markets).
It would open up the prospect that other central banks might follow suit – thus reducing some of the pressure that Brussels has to maintain its austerity bias.
9. It also raises the possibility that the national central banks could invest more strongly in the European Investment Bank (and cancel any EIB debt it holds which would then mean that:
Annuler cette dette, alors qu’une part significative des prêts de la BEI pourraient être « fléchés » vers la transition énergétique et climatique, serait un signal mondial fort.
In other words, channel more central bank funds into areas that will quicken the transition to renewables and fight climate change. That would send a strong global signal.
In an earlier paper (September 20, 2017) – Estimation de l’impact du Quantative easing de la Banque centrale européenne
sur le financement de la lutte contre le changement climatique par la Banque européenne d’investissement – he notes the political resistance to such a strategy.
He quotes Bundesbank head, Jens Weidmann:
Ladies and gentlemen, to foster the necessary transition to a low-carbon economy some observers are actually calling for monetary policy to take climate risks into account. However, neutrality is an important principle of the Eurosystem’s operational framework. In a monetary union with 19 national financial systems, which differ in various ways, it is important not to favour certain financial instruments over other forms of financing. Any type of privileged treatment would increase national differences
in the transmission of our single monetary policy.
So don’t hold your breath!
In general, central banks cannot go broke and within the Eurozone, debt ratios are used as indicators by Brussels to punish Member States.
I discuss that issue in these blog posts (among others):
1. The ECB cannot go broke – get over it (May 11, 2012).
2. The consolidated government – treasury and central bank (August 20, 2010).
3. The US Federal Reserve is on the brink of insolvency (not!) (November 18, 2010).
4. Better off studying the mating habits of frogs (September 14, 2011).
And the capacity to write of debt with no negative consequences brings me to the next issue.
Democrat hopefuls I would rule out …
There are many (that I would rule out).
But a CNBC report (April 22, 2019) – Elizabeth Warren wants to use her wealth tax to wipe out Americans’ college debt and pay for tuition – is evidence for ruling out the former lawyer.
I would only support candidates in this day and age who show, at least, a glimpse of understanding about macroeconomics.
Ms Warren seems to be basing her progressive credentials as an aspiring Democratic presidential nominee on introducing a wealth tax so that the US government has enough money to wipe “out student debt and tuition at public colleges”.
She wants to:
Spend $1.25 trillion over 10 years to eliminate up to $50,000 in student debt for those with household incomes under $100,000
Allow states to make public colleges tuition-free
Spend $100 billion on expanded Pell grants to defray more non-tuition expanses
And she claims a “2% annual tax … on … wealth exceeding $50 million” plus some, would be required to pay for it.
She even advanced a justification for this policy:
… higher education financing has long been crimped by tax cuts for wealthy Americans and corporations.
This ‘tax the rich’ strategy – which is music to the progressives who are ignorant of monetary matters – is supplemented by other populist tax targetting strategies (a “Real Corporate Tax” and higher “estate taxes”).
Some of these other tax hikes are “intended to raise $400 billion for expanding access to affordable housing”.
So we get the drift.
I have not problem reducing the wealth of the super rich or making corporations pay higher taxes if that is a strategy designed to reduce their influence and power in society.
It might not be the best way of doing that and analysis would be required.
But the idea that these tax initiatives are required to raise funds to allow the government to spend on progressive things – for example, cancelling student debt, making colleges cheaper to attend, providing low-income housing – is a purely neoliberal construction and just privileges the dominant sound finance mentality that undermines generalised well-being.
No Democrat presidential hopeful should be elected if they perpetuate this sort of myth.
They are just framing the neoliberal narrative – that the rich are important and their past endeavours will help government pay for services to the poor (sounds like something Ayn Rand would derive from Atlas Shrugged).
Tax the rich by all means (to reduce their social and political power) but never tie it to the capacity of the government to supply services to the poor, the environment or anything else.
I would not elect Ms Warren.
She should be advocating that the US government just write off all student debt – with a keystroke. Perhaps at the same time, as a demonstration of international solidarity, that the Banque de France writes of its holdings of French government debt.
That would be a nice thing.
Music to work by …
It was released in May 1979 and has some really beautiful guitar playing on it.
He was supported by another great guitar player Snowy White who plays rhythm guitar on this particular track (Track 9 on the album).
Apostle was written by Peter Green as were all the tracks on the album (with some collaborations on some of them).
He recorded this album after several years out due to his mental health issues.
Martin Celmins biography of Peter Green (Castle books, 1995) is a must read for Peter Green fans – it is a very sympathetic and detailed account of a trouble genius.
My favourite guitar player (with Jimi Hendrix).
That is enough for today!
(c) Copyright 2019 William Mitchell. All Rights Reserved.