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Should we listen to the birds of bad omen?

The increase in the price of energy, raw materials and agricultural products causes a significant transfer to the benefit of producing countries. In a few weeks, the price of a barrel of oil went from 60 to 118 dollars. Taking into account a level of consumption close to 100 million barrels per day, the annual transfer reaches, at the world level, the sum of more than 2,000 billion dollars, that is to say almost the GDP of France.

The interventionism of the public authorities is reinforced from crisis to crisis

Today, the increase in energy is not the only one to affect businesses and households. It is supplemented by that of raw materials, agricultural products and numerous intermediate goods such as microprocessors. In 1973, during the first oil shock, the French public authorities had imposed on companies to bear, in the form of levies and wage increases, a large part of the consequences of the increase in prices. This choice had contributed to a deterioration in the country’s competitiveness and delayed its modernization. Forty years later, it is no longer the companies that are called upon but the State called upon to compensate for the price increases.

In France, the interventionism of the public authorities is reinforced from crisis to crisis. Public spending thus amounted to 59% of GDP in 2021, compared to 46% of GDP in 1980, an amount which had led some to qualify France as a socialist or even collectivist state at the time. Social spending, for its part, rose from 24 to 34% of GDP over the same period. Due to growth that has eroded over the years, the increase in public expenditure has been accompanied by that of the public deficit and the public debt. Since 1973, France has not had a public surplus. At the end of 2021, the debt represented 113% of GDP compared to 21% in 1980. This results in growing financing needs for the State. These should amount to 300 billion euros in 2022. This sum makes it possible to cover the amount of the public deficit, the repayment of the capital of loans taken out in the past and the financing of current cash.

Debt is, in fact, perpetual, but not free

Debt is, in effect, perpetual, with governments borrowing to pay off borrowings. French and foreign savers as well as the Central Bank are having to finance more and more public expenditure which is not financed by compulsory levies, the latter already reaching more than 44% of GDP.

In recent years, zero or even negative interest rates gave the illusion of free debt. Some claimed that the State had every advantage in going into debt because the money was given. Others felt that central bank financing was not a problem due to the absence of inflation. However, in economics, nothing is ever definitive. Everything is movement. With the resurgence of inflation, interest rates are on the rise. Loans taken out yesterday at negative rates will be resubscribed tomorrow at higher rates, as will future deficits, because no one imagines their disappearance in the short or medium term.

Demonstration of “Yellow Vests” in Paris – © Eric Pothier

No one dares to mention the proximity of the wall of financing

The service of the State debt, which was 40 billion euros in 2022 and includes the credits allocated to the payment of loans, has decreased over the past twenty years despite the soaring debt. However, it is expected to rise again in the future. With an increase of 2 points, the bill could almost double after three years. In the event of a lack of growth likely to provide additional public revenue, a risk of runaway public debt is not impossible, unless spending is drastically reduced.

For the moment, no one dares to mention the proximity of the wall of financing, the persistence of low rates is still significant. The public authorities also fear the multiplication of social movements and prefer to put out the fires day by day. This policy of unconditional support, which is growing from crisis to crisis, does not seem to be able to end, having already been at work for fifty years.

The ominous birds who announce that it leads straight to bankruptcy have been contradicted by the facts and have little right to speak even if the situation has changed. Being no longer heard and even less listened to, the threat of a financing crisis takes on all its relief.

  • Philippe Crevel is a specialist in macroeconomic issues. Founder of the company for economic studies and strategies, Lorello Ecodata, he also directs the Cercle de l’Epargne, which is a center for studies and information devoted to savings and retirement in addition to to be our economics specialist.

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