By THOMAS PIKETTY*
It was by resorting to exceptional taxes on the richest that the large public debts of the post-war period were extinguished, and that the social and productive pact of the following decades was rebuilt.
How will states face the accumulation of debts generated by the Covid-19 crisis? Many already hear the answer: the central banks will assume an increasing share of the debts on their balance sheets, and everything will be resolved. In fact, things are more complex. Money is part of the solution, but it will not be enough. Sooner or later, the richest must make their contribution.
Let's recap. Money creation took on unprecedented proportions in 2020. Federal Reserve jumped from 4,159 trillion dollars on February 24 to 7,056 trillion on September 28, close to 3 trillion dollars of monetary injection in seven months, which has never been seen before. The balance of the Eurosystem (the network of central banks managed by the European Central Bank, ECB) rose from 4,692 trillion euros on February 28 to 6,705 trillion on October 2, an increase of 2 trillion.
In relation to the euro zone's GDP, the Eurosystem's balance, which had already gone from 10% to 40% of GDP between 2008 and 2018, jumped to close to 60% between February and October 2020.
What's all this money for? In normal times, central banks are content to grant short-term loans in order to guarantee the liquidity of the system. Since the inflows and outflows of money in the different private banks are never exactly balanced each day, the central banks lend sums for a few days that the establishments later repay.
After the 2008 crisis, central banks started lending money with increasingly longer terms (a few weeks, then a few months, or even several years) in order to reassure financial actors, paralyzed by the idea of their gambling partners going bankrupt. And there was a lot to do, because, in the absence of adequate regulation, the financial game has become a gigantic planetary casino over the last few decades.
Everyone started lending and borrowing on an unprecedented scale, even though the total private financial assets and liabilities held by banks, companies and households now exceed 1.000% of GDP in rich countries (including not including derivatives), versus 200% in the 1970s. Real wealth (that is, the net value of properties and companies) also increased, going from 300% to 500% of GDP, but much less intensely, which illustrates the financialization of the economy. In a way, central bank balance sheets only followed (belatedly) the explosion of private balance sheets, in order to preserve their ability to act on the markets.
The new activism of central banks has also allowed them to buy back an increasing share of government bonds, while reducing interest rates to zero. The ECB already owned 20% of the eurozone's public debt at the start of 2020, and could own close to 30% by the end of the year. A similar evolution takes place in the United States.
As it is unlikely that the ECB or the Fed will one day decide to send these bonds to the markets or demand their reimbursement, we could, from now on, decide not to count them in the total public debts. If we wish to inscribe this guarantee on legal marble, which would be preferable, then this risks taking a little more time and debate.
The most important question is the following: should we continue on this path, and can we consider that central banks will hold 50% and then 100% of public debt in the future, further easing the financial burden on states? From a technical point of view, this would not pose any problem. The difficulty is that, by solving the question of public debts with one hand, this policy creates other difficulties, especially in terms of the growth of wealth inequalities. In fact, the orgy of money creation and security buying leads to rising stock and real estate prices, which contributes to enriching the rich. For small savers, zero or negative interest rates are not necessarily good news. But for those who have the means to borrow at low rates and who have the financial, legal and fiscal competence to find the right investments, it is possible to obtain excellent returns. According to the magazine challenges, the 500 largest French fortunes increased from 210 to 730 billion euros between 2010 and 2020 (from 10% to 30% of GDP). Such a development is socially and politically unsustainable.
It would be different if monetary creation, instead of feeding the financial bubble, were mobilized to finance a true social and ecological impulse, that is, assuming a strong job creation and wage increases in hospitals, schools, thermal renovation, services locations. This would make it possible to relieve the debt while reducing inequalities, investing in sectors that are useful for the future and shifting inflation from asset prices to wages and goods and services.
Therefore, it would not be a case of a miracle solution. As soon as inflation returned to substantial levels (3% to 4% per year), it would be necessary to reduce monetary creation and return to the fiscal weapon. The whole history of public debts shows that money alone cannot offer a peaceful solution to a problem of this magnitude, since, in one way or another, it involves uncontrolled distributive consequences. It was by resorting to exceptional taxes on the richest that the large public debts of the post-war period were extinguished, and that the social and productive pact of the following decades was rebuilt. Let's bet the same will happen in the future.
*Thomas Piketty is director of research at the École des Hautes Études en Sciences Sociales and professor at the Paris School of Economics. Author, among other books, of Capital in the XNUMXst century(Intrinsic).
Translation: Fernando Neves de Lima
*Originally published in the newspaper Le Monde.
