Banque de France should write off its holdings of State debt

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 …

This song – Apostle – is taken off the second solo album by In the Skies – after he quit Fleetwood Mac.

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.

This Post Has 20 Comments

  1. Re taxing the rich, how about this option? I recall wealthy people write that they want their tax dollars to not be just sunk into general fund, but would like it to go somewhere they want. So give them this option. Raise their tax to the pre Reagan levels and tell them to choose where their tax dollars are spent. Print a list of acceptable options. Collect their taxes and spend them according to their choices.
    It’s of course not strictly a tax any more but a spend. We would just continue to call it a tax. It could even be just sent to the various states which do need tax revenue.
    The super wealthy would have one less reason to not pay tax and they might even embrace the idea. We would in part be giving them what they want.

  2. Hi John Doyle

    But tax dollars are not spent by a dollar issuing government, they are extinguished. Bill says ‘Tax the rich by all means (to reduce their social and political power)’. One way they exercise their power now is by using their wealth to influence government spending. It undermines democracy. Granting them a role in spending decision-making ahead of the common man and his/her representatives, makes this political power through wealth even starker.

    Why wouldn’t governments want to reduce their public debt ratios at a stroke? I guess they are like public school boys who liked a good flogging but now have a chance to pass the pain on to other people.

  3. ‘In general, central banks cannot go broke and within the Eurozone’

    I fully understand why this is true of currency issuers but it doesn’t seem so clear in relation to the Eurozone as in this case the ECB is the currency issuer. I would have thought that the individual central banks in the Eurozone would have to buy the bonds with existing financial assets rather than ‘fresh keystrokes’. I suspect I’m missing something important here.

  4. Maybe Ms. Warren is not the best option, but she is definitely better than the other two frontrunners: the architect of student debt himself Biden or the format-sans-content McKinsey-technocrat Buttigieg.

    [Bill edited out link – no interest in promoting Elizabeth Warren]

    Most of her proposals are steps in the right direction (though maybe reformist at best), even if Ms. Warren thinks she has to tax enough in order to finance them. Also, one has to at least commend Ms. Warren’s willingness to go into such detail in regards of policy proposals at such an early stage of the campaign. The other two frontrunners basically have reduced their cases to “It’s me, uncle Joe!” and “I’m Pete and I’m smart”.

    I would much prefer a Bernie Sanders presidency (is S. Kelton still a campaign’s economic advisor?), but the world could do a lot worse than Warren. However, I do concede that this might be an historical oportunity to drive a stake in the heart of the neoliberal vampire once and for all and that Ms. Warren doesn’t strike me as the Dr. van Helsing type.

    Most of the candidates will flame out of the race sooner rather than later, so one shouldn’t invest too much time with them anyway. Right now it feels like the Democratic Congressional Campaign Committee is still sorting out which establishment candidate they’ll support against Sanders in the primaries and I’d feel less dread if it ends up being Warren (though I’d still hope she’d lose).


  5. To be fair to John Doyle he does say it isn’t really a tax anymore. It could be a compulsory contribution that has to be made by people with more than a certain net worth to a number of funds held by the Treasury in commercial banks. That money would then be used to carry out charitable works such as feeding the homeless, disaster relief, etc. It isn’t a bad idea in the present context, but much better that the government understands its own currency issuing capabilities and just does those things as a matter of policy.

  6. Let’s hope Tulsi Gabbard gets her head around MMT and the Federal Job Guarantee, so the world can see an economically intelligent US administration on an anti-war platform.

  7. This MMT understanding is correct, of course. Unfortunately, the voting population is not yet there. In the US polls show clearly that voters want to tax the rich in order to reduce income inequality and the political power of the wealthy elite class. A legitimate purpose of taxation. But to require that everyone first understand the distinction that raising taxes does not pay for government spending is an intellectual ‘bridge too far’ right now. You have effectively ruled out every presidential candidate in the US, including Bernie Sanders. I hope at least one candidate would adhere to the complete MMT narrative, but I don’t believe that is going to happen in this political cycle. MMT will first win the power corridor, and then win the academic corridor too, in my opinion.

  8. Just to put in a bit more explanation of my thoughts, still at an early stage. The fact is that a pre Reagan Tax level will destroy a lot of ‘earned’ wealth. So in lieu of more deficit spending to match the tax the money can be put to use as Nigel says for good works. There would be no harm in naming the persons responsible for the money injection. Since the fed has to give grants to the states which do use tax it gets away from the deficit spend the Fed carries out. I see it as a genuine trickle down effect. It would make the rich become involved more in the society and less like parasites. It would give MMT a big leg up if it caught on, I think. If the tax was high enough one could put to bed the inheritance tax option, also being discussed.

  9. “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.”

    I’d be interested in seeing what that would be. I’m sure somebody could cook up something, but might the social effects depend on what the write-down was balanced against?
    I’d been under the impression that the Banque de France is a client bank of the ECB, not a full Central Bank.

  10. Says Bundesbank head, Jens Weidmann: “(T)o 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.” Is the utter insanity of such thinking not patently obvious? Is “neutrality” to be considered a higher value than survival? Using the MMT lens, we must demand an eco-economic policy across the board, as called for in “Reclaiming the State.” Economists and environmentalists must come together in a universal vision of the ends to be pursued (the sustainable health of people and planet) and the means to achieve those ends (fiat money spent according to MMT principles). The proponents of MMT should relentlessly stress that it–and only it–reveals the ample (though not unlimited) scope of human agency that allows us to preserve our threatened ecosystem and thus ourselves.

  11. Only Bernie and Tulsi for me. Others will get bullied out of the building. Thats not to say Bernie and Tulsi get macroeconomics though. Bernie has a movement behind him and that movement would support Tulsi. Only movement can change things.

    As for the bank of France, it really is a right pocket left pocket situation. I thought about the interest payment that will be lost if debt is canceled. However, the interest payment is also right pocket left pocket: Its still the government paying and receiving.

  12. Hi John D
    Yes your thoughts are still at an early stage in the MMT enlightenment journey. Keep reading Bill’s blog and it will start to make sense.
    Re-read Patrick’s reply. Tax is the un-creation of Fiat currency. Gov. spending is the creation of new currency at the head of the stream. Political policy determines where this is distributed not kudos to the rich elite. You are still thinking in mainstream economic ideological terms. If your ‘trickle down’ belief (a purely monetarist myth) was worth a light, then where would my tax be allocated & would I get a mention as a benefactor?

  13. Bill wrote, “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.”

    While I agree with that position, it’s far from being generally accepted.

    (1) Only two members of the Democrats’ Progressive Caucus in the House of Representatives endorsed any MMT-like perspective when they were discussing their program earlier this year.

    (2) At the Minsky Conference last week, L. Randall Wray had one slide in his deck which was taken from Bernie Sanders’ website in which he advocated a tax on high incomes “so that” programs like the Green New Deal could be financed. His position on this issue may, of course, evolve, particularly if Stephanie Kelton’s message gets heard.

    We in the United States have a tremendous amount of educational work to do, both among the political classes and among the electorate at large, before we can make acceptance of MMT a litmus test for choices in the voting booth.

  14. John Doyle

    I would caution against calling your idea a tax. It isn’t within the MMT framework. Money collected by local authorities is called a tax – Council Tax in the UK, State Tax (I think) in Australia. I preferred it when it was called a Community Charge. It is money deducted from people with more than a certain net worth, deposited in a community bank account and used to provide local services. A proper tax removes money from circulation forever.

  15. Hey everyone calm down. I know Tax is “uncreation of currency” But it is not so for all but monetary sovereign governments. Taxes are revenue for users of currency. The idea is a hybrid, a mixing of taxes. The idea is to make the wealthy think they are paying tax to approved[by them] causes. A carrot approach, instead of a stick. Put their names to it. I think Nigel your definition is too narrow. There are lots of taxes as well as fees and charges and levies and duties and tolls. Right now the Federal government makes grants to states to help them with expenses. This super wealth tax can be done the same way, as grants from deficit spend. That way the tax can be destroyed but the grant can be named to reflect the contribution made by the parasites. It will look like a trickle down, at least to them. Just fancy book keeping entries.

  16. I would think, and certainly hope, that Bernie “gets it”. With Stephanie Kelton having advised him, how could he not “get it”?
    The problem is whether he will openly espouse it, and of that, I’m afraid I have my doubts. I think I read a quote by him saying something like “I’ve always been a sound finance man” (or “balanced budget man” or something like that). I imagine he feels this gives him respect among traditional voters, and perhaps he feels he’s too old to change his image.

  17. Nice reminder for Peter Green,closer to home Jackie orszaczky and esp his posthumous album with Hamish Stuart and Dave Symes, ready to listen, is worth a listen

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