What If The Debt Doesn't Matter? Is This Realistic?

I mean, what if the debt wasn't serious? What if the explosion of its amount all over the world since the coronavirus crisis had no harmful consequences? What if we could even get rid of some of it without incurring any damage? This is the little tune we hear from those who want more and more public spending, who believe that only public spending can get us out of the rut, that we have to keep printing money. The Keynesians are fighting back.

A first argument is that public debts will never be repaid anyway because they are in fact "rolled over": as soon as one bond matures, it is repaid by another issued at the same time. The debt is constantly being projected into the future and, as Keynes said - "in the long run we will all be dead" - so why bother.

The other argument is that a part of it, the part held by central banks, could be painlessly removed. Indeed, in the context of their asset purchase programs (QE), central banks hold government debt, so why not simply erase it? Just as it is impossible to cancel the public debt held by economic agents without putting them in serious difficulty (individuals through life insurance, insurers, banks), and expose themselves to retaliatory measures from foreign countries holding them, so removing debt from a central bank's balance sheet would be a simple accounting operation without direct consequences. For example, the Banque de France holds 20% of government debt and then, with the stroke of a pen, this amount disappears, as if by magic.

I mean, there would still be a consequence: the central bank would record a massive loss as a result of this hole in its balance sheet, which would require a recapitalization by its sole shareholder... which is none other than the government. A clean deal after all. But the Keynesians do not stop at this detail ("let's pretend", "the central bank bails itself out with its money printing press"), and let's admit that it works.

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