France Proposes Canceling 18% of Public Debt! Global Trend Toward 'Erasing Debt Out of Thin Air' Could Worsen Inflation

As global long-term government bond yields continue to rise, high debt burdens are fueling radical calls for 'debt cancellation.' Simon White, a renowned macro strategist and co-founder of Variant Perception, warns that such ideas could spread from France to other countries. The global debt cycle may be entering a phase of 'erasing debt out of thin air' through monetary financing, potentially exacerbating inflation and eroding the value of financial assets.

White points out that scenes reminiscent of the global financial crisis are re-emerging. French left-wing populist politician Jean-Luc Mélenchon recently called for canceling 18% of the country’s public debt, even suggesting bonds could be burned directly. Similar proposals are not new—such discussions emerged in Europe and the U.S. during the 2009 European debt crisis.

The issue is that debt cancellation is essentially another form of monetary financing, which could trigger severe inflation and further strengthen the investment logic favoring real assets over financial assets.

The U.S. has also considered similar ideas. In 2011, there was debate about the U.S. Treasury minting a $1 trillion platinum coin, which the Federal Reserve would exchange for $1 trillion in government bonds, after which the Treasury would cancel the bonds to bypass the approaching debt ceiling.

Now, the U.S. is just $1.1 trillion away from hitting its debt ceiling again, with its debt-to-GDP ratio 25 percentage points higher than 15 years ago. Interest payments have already exceeded $1 trillion. White believes it would not be surprising if calls to cancel or reduce portions of U.S. public debt emerge in American politics.

U.S. 'Twin Deficits' Most Concerning

White emphasizes that the U.S. debt situation remains the most worrying globally. In terms of GDP share, the combined 'twin deficits'—current account and budget deficits—of the U.S. exceed those of all major emerging and developed economies except Brazil.

This massive deficit is inconsistent with the current stage of the U.S. economic cycle. Part of the reason is the surge in interest payments, but even excluding interest burdens, the U.S. still runs the largest deficit globally, both in GDP share and dollar terms.

In recent years, Western politics have increasingly lost the will to withdraw fiscal stimulus, and political forces have moved away from the center toward unconventional policies. As a result, radical measures like debt cancellation are becoming imaginable on the political agenda. Even if never implemented, these low-probability, high-impact tail events are already altering the market’s risk distribution.

Traditional Debt Reduction Options Are Becoming Harder

White argues that governments can reduce debt through fiscal consolidation, economic growth or inflation, financial repression, selling government assets, debt default or restructuring, and debt cancellation or other forms of monetary financing.

However, fiscal consolidation may carry heavy electoral costs; economic growth is hampered by massive deficits, and inflation is further fueled by rising interest payments; financial repression, even if it eventually occurs, may come too late; selling government assets like gold is a one-off measure with limited impact. In contrast, directly canceling debt is relatively easy to implement, making it increasingly attractive to policymakers.

'Erasing Debt Out of Thin Air' Could Trigger Inflation

For example, the U.S. Treasury could write down government bonds held by the Federal Reserve—say, by 10%—or even cancel them outright, with the Fed offsetting by reducing its equity to negative. Other variations include minting a platinum coin or opening overdraft facilities at the central bank, but the essence remains the same.

White notes that the reserves created by the Fed through quantitative easing (QE) should have been gradually canceled as the Treasury repaid maturing debt. Once debt is directly canceled, the timing for reserve withdrawal is lost, effectively creating permanent monetary expansion.

Whether it’s QE accompanying fiscal expansion, yield curve control, or central banks providing de facto unlimited financing to treasuries, all such measures could ultimately push up inflation. As long as countries continue to postpone painful but effective fiscal reforms and resort to expedient measures like debt cancellation, the tail risk of the global debt cycle entering an era of 'erasing debt out of thin air' will continue to rise.