Mélenchon's Debt Erasure Plan Sparks Concern Over Inflation

French presidential candidate Jean-Luc Mélenchon has proposed an unconventional solution to tackle France's national debt, currently standing at around 117% of the country's GDP. He suggests 'chucking' approximately €636 billion held by the Bank of France into a metaphorical fire.

Mélenchon's plan would essentially write off this portion of the debt, allowing the government to allocate those funds elsewhere. However, critics point out that this approach is simplistic and overlooks the fundamental issue of inflation.

The European Central Bank's own explainer notes that buying bonds 'creates money in the banking system.' In essence, Mélenchon's plan would skip repaying this debt, allowing the central bank to absorb the loss. This would result in more euros circulating within the economy, leading to inflation as there are now more units of currency chasing a constant supply of goods and services.

The implications extend beyond France's borders. The US government has similarly crossed $40 trillion in debt, roughly 123% of GDP. While America gets away with it due to the dollar's status as the world's reserve currency, this advantage is waning. Foreign holdings of Treasuries have declined, and a dysfunctional US government struggles to manage its spending.