18 Apr 2013

French Public Sector Debt and Interest Payments - The Full Story

I had seen graphs showing how France's public sector debt would have looked if the Government hadn't had to pay interest  - see for example the graph from Bernard Leitaer's book "Money and Sustainability". But, frustratingly, the graphs always started in 1978, and I was told that it was difficult or impossible to get the figures from before then.

However, after a long series of exchanges with people at the INSEE, I have been able to put together the full story for the period from 1970 to the present day. Intially, I was told that the INSEE didn't have the numbers, but after a bit of pressuring from my part, the complete set of numbers can now be revealed to the world! Here they are.
You can see that Public Sector Debt has increased from €25 billion in 1970 to €1833 billion at the end of 2012. This corresponds to an increase as a percentage of GDP from around 20% in 1970 to over 90% at the end of 2012. Interestingly, this percentage actually dropped down to about 11-12% from 1973 to 1977, essentially because the economy was still expanding (as shown by the increase in GDP).

But then, the cost of the interest payments starts to really kick in. In 1973, when Pompidou and Giscard passed their famous law that prevented the Government borrowing from the Banque de France, interest payments on public sector debt were a mere 0.57% of GDP. But then, those interest payments cost more and more each year, reaching a peak of 3.73% of GDP in 1996. Since that time, that percentage has dropped off a bit - totalling 2.72% of GDP at the end of 2011 (I'm waiting for the official figures for 2012, which is why the figure in red is just an estimate).

The graph below shows the increase in Public Sector debt for the period 1970 to 2012 as a percentage of GDP (see the red curve). But I thought it might be amusing to look at two other possible scenarios. The purple curve shows how  debt level would have changed if the government has not paid the interest payments every year. As you can see, although the level would have increased a bit recently to about 30% (essentially because of the financial crisis in 2008-9 and the cost of bailing out banks), for nearly all the forty year period, the level of public sector debt would have stayed well below 20%, dropping to lows of 11% in 2001 and around 13% in 2006-7.

But there's another curve - the one in blue. This is what would have happened if, instead of paying interest payments to the banking sector, the same amount of money had been used to pay off the public debt. As you can see, if the government had done that, the entire public debt would have been written off in 1987. And since that time, the government would have been running a surplus. It could have cut taxes, increased investment in energy, transport, housing or whatever.

For me, these curves demonstrate the complete folly of a system in which goverments are forced to borrow money from the commercial banks and then pay interest. And, don't forget, the commercial banks that lend the government don't actually have the money they lend. They just create it out of thin air. It is complete madness.

I think you can compare what we have been doing over the last forty years with a young couple who start their married life together in 1970. Let's suppose that between the two of them they have been earning around €100,000 a year. If they had been sensible, they might have bought a house and regurlarly paid off the debt so that after 25 years, the house was theirs. The would have kept their accounts in order, they would have never let their credit card bills accumulate,  and at the end of forty years, they would be able to look forward to a happy retirement.

The system that we have been running is the equivalent of saying to the couple - go out and buy a house using a credit card. But don't bother paying of the loan. Just keep allowing the level of debt to accumulate. As long as you don't let your level of personal debt exceed 60% of your annual income (i.e. €60,000) everything is fine.

Well, yes, it is fine. It's fine for the bankers who lend the couple the money to pay for the house that they never actually own. They will continue paying more and more to the banks. It is a fantastic scheme for the lenders. But it is a total disaster for the young couple. And it is also a complete disaster for our elected governments.

Surely, the time has come for a change in system. Governments should simply not be allowed to get in debt to commercial banks. And only the central banks should have the ability to create new money.


  1. Simon, impressive data crunching, as usual. The numbers tell their own story.

    I think this has been commented on before, but at least in Britain, the government currently borrows mainly from non-bank financial institutions like pension funds, by selling gilts.

    Richard Werner has suggested (for a long time, evidently), that instead of issuing bonds, governments should actually borrow directly from commercial banks, as short-term loan contracts, not as bonds/gilts. (Note: he means in the present, unreformed money system). In the present recession, this would have the benefit of increasing the money supply in a way that would get it to the real economy, via public spending. It would boost bank lending and balance sheets, and generally kick-start the economy.

    Ralph commented in his blog about Werner's letter to the FT about this, and I commented on Ralph's comment. Of course the system should really be changed so that the government doesn't have to borrow money from anyone, but until that can happen, Richard Werner's idea seems a pretty good one.

    One might ask what the pension funds are then supposed to do, supposing the government no longer conveniently provided an endless stream of gilts for them to invest in.


    1. It's not the job of government to go into debt specifically to benefit private pension funds, especially when the taxpayer is footing the bill.

    2. Pension funds et al could find more productive ways of investing their money, such as the bonds of good quality commercial companies. Of course they would have to do the due diligence required, but it's about time they worked for their commission, instead of just taking the easy gilt option.

    On another tack, by "And only the central banks should have the ability to create new money" I take it you mean something like Positive Money's "Money Creation Committee", which would have BoE input, but would not (theoretically) be dominated by the BoE, as I understand it.

    I'm getting more and more sceptical of central banks actually. I liked this paper by Norbert Häring:


    "The veil of deception over money: how central bankers and textbooks distort the nature of banking and central banking"

    Talking of the Money Creation Committee, I've been looking at www.monetative.org who are the German equivalent of Positive Money. Their idea is that the money creation entity is a 4th branch of government. We already have

    1. Executive

    2. Legislative

    3. Judicative

    and so the new money-creating arm would be

    4. Monetative

    What I am not sure about is the relationship (if any) between the new "Monetative" entity and the central bank.

    Thanks to www.monetative.de I've been looking at the work of Bernd Senf (and to a lesser extent Magrit Kennedy). Both of them are strong on the idea that interest is one of the greatest ills of our present monetary system. Their arguments seem convincing to me, but I think it would be a very hard sell to the public at large, let alone the financial community.

    I'm persuaded by the idea that interest is a large contributor to inflation (I already believed this, but there seems to be some objective evidence), even though raised interest rates have been used to (supposedly) suppress inflation. Maybe what raising interest rates does is to control the symptoms (in a rather imprecise and often painful way), whereas if we could remove interest, that might tackle the problem at source.

    And perhaps we could get to stable 0% inflation without risk of deflation, and generally lower costs for producers and consumers. People would be able to save more out of their income, and with no inflation, they wouldn't need interest to preserve the value of their savings, and they wouldn't need fancy pension schemes which depend on the likes of government debt bonds....

  2. Thanks for the detailed feedback.

    I'm planning to post something about the role of pension funds soon. But basically, I think that they are largely just a front for the banks. Pension funds have $31.3 trillion in assets - but 56% of that is held by US pension funds. I suppose that it is just conceivable that that is all the hard earned savings of working Americans. But what's to stop banks investing in Pension funds too? That way they can argue that any attempt to block their interest payments will be an attack on the poor old age pensioners....

    I read Richard Werner's pieces - and they make reasonable sense in a system where Central Banks are unable to absorb public sector debt and use alternative methods (like my FTT) to cancel the debt. But, as I have argued, there are at least two ways for the BoE to take up all UK government debt - either by buying on the secondary markets, or by going via a "publicly-owned credit institution" - like RBS for example. Once the debt is in the Bank of England, that's £49 billion a year of taxpayers money that gets saved. This is a better system that borrowing from banks - even if the banks are offering rates below inflation.

    On the question of whether to trust Central Banks - I agree that while Mario Draghi is the head of the ECB and Mark Carney the head of the BoE, it is difficult to be confident - they could easily be more interested in defending the interests of Goldman Sachs that the interests of the general public.

    Nevertheless, like Positive Money, I think the idea of using the Central Banks to control the money supply gets round the standard complaint that it would be irresponsible to let politicians get their hands on the printing presses. Indeed, there are two groups who I think cannot be trusted with controlling the money supply - politicians and commercial bankers.

    But, in the end, I would be happy to see a very tight link between the money creation part of the central bank and the elected government. And if all money creation is done by opening a line of credit for the government (as Positive Money propose) then that's pretty close to allowing them to do what they want.

    Remember that my proposition is that the Central Bank can pump newly created money into the economy (until unemployment is effectively eliminated and real wealth creation maximised) but at the same time mopping up the excess money via an instantaneously modifiable FTT on all electronic transactions denominated in the Central Banks currency. By playing with those two levers, it should be relatively straightforward to (a) get the economy working properly, and (b) transfer the current money from the 1% to the 99%.