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AB 2000 studies

Alain Boublil Blog


The public debt and inflation

The interest rate on 10-years bonds issued by France came, at the end of February, very slightly in positive territory (+0.03%) when it was fluctuating for several months between -0.30 and 0.20%. It fell back to -0.06% at the beginning of March but it was not needed more to re-launch worries about the too high level of the French public debt and about the risks that a rate increase provoked by a comeback of inflation would weight on the debt charge in the future. The trial made to public authorities by these who condemn a policy which consists in bequeathing to our children the financial charge of our mistakes has been re-opened. These comments are not only expressing the poor knowledge about financial markets. They have a strong ideological basis. The issue is to condemn the State intervention whatever it is in the name of an assumed economic and financial liberalism. But it is far from being convincing.

The interest rate rebound has first a symbolic character since it concerns only tenth or hundredth of percents. Whatever it is said about, they remain at an extremely low level. It is also general. This increase is not affecting France more than other countries. So it is not the sign of a distrust regarding the country situation. So the rise, these last weeks, has been in the country as in the euro-zone, much lower than in the United States for instance or than in China.

It is the consequences of the accomplished progress in the U.S. in the approval of the rebound plan proposed by the Biden administration. It has just been approved by the House of Representatives where Democrats have a large majority and it would also been  by the Senate in the coming weeks. We notice that the country is much more efficient than the European Union. The European Plan approved by the heads of governments in autumn is still waiting for its put in practice since its adoption by the European Parliament after a long procedure. It must be now ratified by the Members-States. The financial markets analysis is that the American rebound plan is going to generate the comeback of inflation. Investors then will ask for a higher return of their investments. American rates rebounded by more than 50 basis points in one week. Europe has followed with an increase of about 30 basis points which has been reduced after.

But the prices increase is still far from the 2% level set by the central banks to put an end to their accommodative policy which has been a determining factor of the interest rate fall. It comes after a long period of stagnation and even of diminution of interest rates. But it was not needed more to agitate markets. They have taken into their account the reasoning according to which a stimulation of the demand generates tensions on production capacities and on the job market with foreseeable wages increases.

It is occurring in a strained context on the commodities markets. The energy transition policies with the development of electric vehicles generate a strong demand for metals and rare earths, indispensables for the production of batteries; Fossil energies are not excluded of this phenomenon. Cold weather waves in the U.S. as the restarting of the Chinese economy are at the origin of a strong rebound of oil and natural gas prices which had slumped a year ago. They are bringing their contribution to the exit of a deflationary period that developed countries were engaged for several years.

So the debate on public debt has been restarted in France where economists and politicians are showing a lot of imagination. Must we cancel it or would it be better to isolate the deficits accumulated during the pandemic and finance them with a new tax? Must we issue eternal bonds? But one thing is sure: the timid rebound of inflation and the increase quite also timid of the interest rates are worrying. Despite that and to the contrary of what we are hearing, it is not such a bad news as we could believe.

First point, the inflation rebound has been everywhere higher than the interest rates increase. So, the real rate, i.e. the nominal rate less the inflation rate has fallen. Borrowing in this new context costs even less than in the past. The only exception regards the bonds indexed on inflation which will have a higher cost when they come at maturity. Happily, they represent in France less than 10% of the public debt. But it can be rightly asked why the State is persisting in issuing this kind of bonds. The interest rate difference with classical bonds is negligible.

Second point, unlike the forecasts inscribed in the previous finance bills, the charge of the public debt continues, years after years, to go down because the refinancing at the current conditions of past bonds coming at maturity we must reimburse is always done with interest rates much lower when they are not negative. The strategy which consists in increasing the duration of issued ones is a double success. It meets the adhesion of investors. In February, the State has issued 11 billion euro with durations coming from 10 to 30 years when investors demand was over passing 25 billion. And it guarantees for a long period a reduction of the charge of the debt. The fall of the paid interest thanks to the low rates compensates and will again compensate in the future the increase of the size of the debt.

At last, in Europe, that debt is now largely carried by the European Central Bank, which belongs to the States. The States, in some sense, are lending to themselves. It is why it is absurd to ask for its cancellation or even for reimbursement delays. If it was decided, that would worry financial markets and would make future issuances more difficult. Regarding the idea that excessive debt would weight on our children, it is quite also unfounded. In France, the household financial saving rate is very high and by large superior to past deficits. Future generations will surely inherit the debt but also the money to reimburse it. The criteria, included in European Treaties, which compares the public debt, which is a stock, to the GDP, which is a flux,  was, from the beginning, biased. It is today even more irrelevant. We must compare what is comparable, i.e. the net public debt and household financial assets, after having removed their indebtedness. Then, we would notice that, in France, this ratio was rather stable these last years and that the rise of the public deficits generated by the sanitary crisis has been, at least, partly compensated by the accumulation of saving by household.

The only way, for a State, to avoid to reimburse its debt without creating a crisis, is inflation. It is what had happened during the Seventies. The victims were the savers. The financial reforms of the Eighties in France and the globalization which has intensified competition have put an end to that practice; it is not the current episode with a modest prices increase which will put in question this essential aspect of the today and of the tomorrow world. It doesn’t anymore constitute a threat for public finances, as some, due to their ignorance or their ideology, are trying to make us believe.                        


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