Message to François Hollande : How to save over €50 billion in taxpayers money per year

Following the catastrophic results for the governing socialist party in last weekend's French municiple elections, François Hollande (the French president) has nominated someone from the  right-wing of his party as Prime Minisiter - Manuel Valls.

Valls is keen on balancing the budget using austerity - he said so clearly when he was a presidential candidate in the primaries in 2011 - so I think that we can look forward to €50 billion in cuts to the French goverment's budget in the next couple of years.

So, where could those cuts be made? Education? Research? Health? Transport? Housing? Energy?

I have a better suggestion. How about not paying the interest on public sector debt? That amounted to €52.2 billion in 2012. And the total from 1995-2012 came to €825.9 billlion. The numbers for 2013 will be coming out in the next couple of weeks, so I will be able to update the numbers again.

What I already know is that total government debt increased by a further 4.5% in the year to the end of 2013, to reach a total of €1925.3 billion. That's now 93.5% of French GDP - up from 90.6% at the end of 2012.

Even though the markets are being "kind" to the French government by only asking for interest at 2.25% on long-term loans, the fact is that any payment to the banking system is a total rip off. When Banks buy government bonds they create the "money" used to buy those bonds out of thin air. And, as I showed last week, they don't even have to have any capital to back them up, because according to the Basel regulations, lending to AAA or AA rated governments is zero rated for risk. It doesn't count.

This raises an interesting option. Suppose there was a friendly bank that was prepared to make loans to the French government at 0% interest over 100 years. Couldn't the French government then use those loans to pay off its debt - thus avoiding over €50 billion a year in pointless payments?

If a bank has bought French government debt with non-existant money, it follows that if the French goverment were to pay off that debt with equally non-existant money, the bank would be forced to write-off the debt. As you hopefully realize - money can be created when banks make loans, but it can also be destroyed when those loans are paid off.

But there's a problem. The fact is that most government debt is not held by banks. As soon as a bank buys government bonds (using money that it didn't have), it then sells those bonds onto things like pension funds, insurance companies, and overseas investors.

In fact, it's not easy to find out exactly who holds all that debt. But, in 2011, Reuters published a list of the 50 main holders of French debt, although it should be noted that this list doesn't include institutions such as Central Banks, which are not required to reveal their holdings. You can see that most of the players are indeed insurance companies, pension funds and other non banks.

So, the problem is that if a friendly bank provided 0% loans to the French government who then bought back the €1925.3 billion of debt, this would flood the markets with new money, and that could be very destabilising.

But it seems to me that there is a way out. Commercial Banks could be forced to buy back those bonds with existing money (not by creating yet more new credit). After that, the  French Government could buy back those bonds on condition that those Banks agree to write off the debt completely.

The net result of that would be to decrease the assets of the commercial banks - by transfering those assets to a non-profit making "friendly" bank who would charge 0% interest.  This would, at a stroke, reduce the need for tax-payers to foot the bill for interest payments, saving the government over €50 billion a year.

It's not as if French Banks are short of assets. Have a look at this list of the 50 largest banks in the world. BNP Parisbas had $2.474 trillion in assets at the end of 2013 - putting it at number 3. Another French bank - Crédit Agricole - comes in at number 4 with €2.431 trillion. Société Générale has $1.651 trillion. I don't think it would be a bad thing if those asset levels were reduced a bit. Especially since those banks don't have enough capital reserves to justify those assets.

Of course, the insurance companies and pension funds will scream that we have just cut off their easy zero risk income stream. Tough. They might have to start using their money to make real investments in the economy, instead of creaming off 3% of GDP every year for doing nothing. 

I think that this might work. Comments, please?