Summary of Key Points
Rising global long-term bond yields have increased the pressure on governments to repay their debts. French left-wing politician Jean-Luc Mélenchon has called for the cancellation of 18% of the country's public debt, suggesting the "burning" of these bonds. Experts warn that this idea of debt cancellation could spread to other countries, especially the United States, which faces severe debt problems. In essence, debt cancellation is a form of "monetary financing" under a different guise—central banks directly printing money for the government to spend, which could lead to rampant inflation and ultimately result in the devaluation of financial assets while physical assets retain their value. At the same time, the United States is approaching its debt ceiling and facing high levels of dual deficits, with increased risks of extreme policies due to political polarization. Other options to reduce debt, such as fiscal austerity or selling assets, are either difficult to implement or have limited effectiveness. Debt cancellation may seem appealing, but it hides deadly pitfalls.
I. The French Call for "Burning Bonds": An Extreme Proposal under Debt Pressure
Recently, French left-wing populist Jean-Luc Mélenchon proposed a radical idea: to cancel 18% of France's public debt, which he described as "taking the bonds and burning them directly." Why now? Because global long-term bond yields have been rising, meaning the interest rates on government loans have increased. For example, what used to cost 2% per year to borrow 100 units of money may now cost 4%. The pressure to repay debt is growing, and Mélenchon's proposal essentially suggests that the government could default on a portion of the debt, immediately relieving the pressure. However, this is no small matter, and experts say this idea could spread like a virus to other countries with high debt levels.
II. The Essence of Debt Cancellation: "Money Printing" in Disguise
Many might think that canceling debt is a clever solution, but it is actually a form of "monetary financing"—where the central bank directly prints money for the government to use without the government having to repay it. Normally, government loans must be repaid (e.g., through the issuance of bonds with interest). If debt is canceled, the money printed by the central bank becomes a free gift for the government.
Why would this lead to inflation? Imagine a market with 100 apples for 100 dollars, each costing 1 dollar. If the central bank prints an additional 100 dollars, there are still 100 apples, but each one now costs 2 dollars. Debt cancellation means the central bank prints money without taking it back, increasing the money supply and driving up prices. The United States has tried a similar scheme with "trillion-dollar platinum coins" (the Treasury creating trillion-dollar coins for the Federal Reserve to buy, allowing the government to use that money), which is essentially the same as "burning bonds"—unrestrained money printing.
III. The Debt Challenges in the United States: Dual Deficits and an Approaching Debt Ceiling
The United States' debt situation is more concerning than France's:
1. Debt Ceiling Approaching: There is only 1.1 trillion dollars left before hitting the debt ceiling, and the deadline is fast approaching.
2. High Dual Deficits: The combination of a current account deficit (more imports than exports) and a budget deficit (the government spends more than it earns) accounts for a higher percentage of GDP than any other major economy, except Brazil.
3. Soaring Interest Expenses: The annual interest payments are approaching 1 trillion dollars.
Experts say it would not be surprising if someone in the United States called for the cancellation of government bonds, given the increasing political polarization, which makes extreme policies more likely to be considered.
IV. Why Debt Cancellation Seems Attractive but Is Dangerous?
There are only six ways for governments to reduce debt, but most are unfeasible:
- Fiscal Consolidation: Spending less and raising taxes, but this is unpopular during elections and can lead to electoral losses.
- Economic Growth/Inflation: Growth can increase tax revenue, but high deficits hinder growth, and inflation can reduce the debt burden, though it is already a problem.
- Financial Repression: Keeping interest rates below inflation (e.g., 2% on savings while inflation is 3%), but this is a slow process and has already begun (e.g., the Treasury's repurchase of long-term bonds).
- Selling Assets: Such as selling gold reserves, but this is only a temporary solution.
- Debt Default/Restructuring: Not repaying debt or delaying payments, which can damage a country's credit and make it harder to borrow in the future.
- Debt Cancellation: Seems the easiest (just cancel the debt), but it has the most severe consequences—triggering inflation and devaluing financial assets.
Debt cancellation is like drinking poison to quench thirst; it provides temporary relief but leads to long-term harm.
V. The Impact on Ordinary People
If debt cancellation were to happen, how would it affect ordinary people's assets?
- Financial Assets (stocks, bonds) would depreciate: Inflation reduces the value of money, and the actual value of stocks and bonds would decrease.
- Physical Assets (homes, gold, commodities) would retain more value: For example, gold prices rise during inflation, helping to preserve wealth, as do housing prices.
Experts warn that if governments continue to avoid effective but painful measures (such as fiscal austerity) and resort to extreme tactics, the risks of these low-probability, high-impact events will increase. Ordinary people should prepare in advance to protect their assets from inflation.
In summary, debt cancellation is not a solution to the problem; it merely shifts the burden to everyone through inflation. With global debt pressures at their peak, such extreme ideas deserve attention. Ordinary people should pay more attention to their asset allocation to avoid falling into financial pitfalls.