An Inadvertent Admission

To the surprise of the socialist enarques ruling France these days, it has turned out that the country is not exempt from the laws of economics. Imagine that!

First labor minister Michel Sapin let it slip that France is 'totally bankrupt', which probably isn't news for readers of this blog. France is of course not the only nation that finds itself in this predicament. Nearly all the welfare/warfare states of the industrialized West are bankrupt if we properly consider their balance sheets. Sapin's inadvertent admission has been extensively discussed elsewhere already, so we at first didn't write about it, but we decided that it deserves at least a brief mention.

Naturally the minister of finance, Pierre Moscovici judged the remark 'inappropriate'. High ranking politicians are not supposed to blurt out the truth. According to Moscovici:

“France is a really solvent country. France is a really credible country, France is a country that is starting to recover.”

Right-o. And in other news, Pater Tenebrarum has been appointed emperor of China.


“Going Galt”

Then it became known, via data published by the Bank of France, that so-called capital flight from France has accelerated markedly in recent months (this is reflected in a sharply growing TARGET-2 liability). This is what happens when punitive tax rates are instituted and the government practically denounces anyone protesting its wealth grab as a 'traitor'. According to the Telegraph:

“Fresh data from the Banque de France show a sudden rise in outflows in October and November, registered in the so-called Target2 payments system of the European Central Bank.

Simon Ward from Henderson Global Investors said the net loss of funds was €53bn (£43.8bn) over the two months, roughly the period when Mr Holland unveiled a string of tax rises and suffered a collapse in relations with French business.

A key gauge of the French money supply — six-month real M1 — has been contracting at an accelerating rate ever since Mr Holland's election in May. It has fallen to levels last seen in the depths of the crisis in 2008. France's money data is now flashing more serious warnings than numbers in Italy or Spain. "Taken together, it is clear that there has been a major loss of confidence and funds have been pulling money out of the country," said Mr Ward.

While France is at no serious risk of a debt crisis, it has been bumping along at slump levels for two years with the youth jobless rate rising to a record 27pc.”


(emphasis added)

France may not be at a 'serious risk of a debt crisis' right now, but by now it should be obvious how utterly meaningless such assertions are. After all, credit default swap spreads on Greece's sovereign debt traded at 35 basis points in 2007. It sure wasn't judged to be at 'serious risk of default' by the markets at the time.  In the meantime it has actually defaulted twice in a row, and a third default is all but assured. Prior to the first debt restructuring, its CDS spreads went out at 26,800 basis points.



10 year yield-France

France's 10 year government bond yield remains very low. As of yet, it does not signal much worry on the part of investors. That may however change at some point – click for better resolution.




5 year CDS on the government debt of Ireland, Japan, Belgium and France (the orange line). At 85.3 basis points, CDS on France are still way below their highs seen at the height of the euro debt crisis panic. However, for an industrialized 'core' country of the euro area, this is quite an elevated level actually – click for better resolution.



The Telegraph reports further that  businessmen are now increasingly 'going Galt' in France in protest over the socialists' anti-free market campaign:

Mr Hollande's `soak-the-rich' campaign and a 75pc millionaire tax has erupted into controversy since comedian Gérard Depardieu renounced French citizenship and decamped to Russia in protest, egged on Brigitte Bardot.

Yet the bitter stand-off between France's Socialist leader and French business is a greater concern. An alliance of private sector groups issued a "State of Emergency" alert in October. The employers group MEDEF said business was "in revolt across the country", warning that bankruptcies were accelerating and firms were slashing investment.

"Large foreign investors are shunning France altogether," it said.

Mr Hollande has sought to rein in his industry minister Arnaud Montebourg, who first lashed out at the Peugeot family and then threatened to nationalize ArcelorMittal's steel operations in Lorraine, describing Lakshmi Mittal as "unwelcome" in France.”


(emphasis added)


A Revaluation of Capital

As we have pointed out recently, France is the only major country in Europe in which the free-fall in PMI data has merrily continued to accelerate. Mr. Hollande needs to absorb the lesson that capital moves to wherever it is treated best. Entrepreneurs are not likely to wait around to be robbed of the fruits of their efforts. Instead they will decamp and continue their efforts elsewhere. We should however add here that 'capital flight' is really a bit of a misnomer; it is more accurate to speak of a large scale revaluation of capital

Ludwig von Mises describes the process in Human Action:

The mobility of the investor manifests itself in the phenomenon called capital flight. Individual investors can go away from investments which they consider unsafe provided that they are ready to take the loss already discounted by the market. Thus they can protect themselves against anticipated further losses and shift them to people who are less realistic in their appraisal of the future prices of the goods concerned. Capital flight does not withdraw inconvertible capital goods from the lines of their investment. It consists merely in a change of ownership.

It makes no difference in this regard whether the capitalist "flees" into another domestic investment or into a foreign investment. One of the main objectives of foreign exchange control is to prevent capital flight into foreign countries. However, foreign exchange control only succeeds in preventing the owners of domestic investments from restricting their losses by exchanging in time a domestic investment they consider unsafe for a foreign investment they consider safer.

If all or certain classes of domestic investment are threatened by partial or total expropriation, the market discounts the unfavorable consequences of this policy by an adequate change in their prices. When this happens, it is too late to resort to flight in order to avoid being victimized. Only those investors can come off with a small loss who are keen enough to forecast the disaster at a time when the majority is still unaware of its approach and its significance.

Whatever the various capitalists and entrepreneurs may do, they can never make mobile and transferable inconvertible capital goods. While this, at least, is admitted by and large with regard to fixed capital, it is denied with regard to circulating capital. It is asserted that a businessman can export products and fail to re-import the proceeds. People do not see that an enterprise cannot continue its operations when deprived of its circulating capital. If a businessman exports his own funds employed for the current purchase of raw materials, labor, and other essential requirements, he must replace them by funds borrowed. The grain of truth in the fable of the mobility of circulating capital is the fact that it is possible for an investor to avoid losses menacing his circulating capital independently of the avoidance of such losses menacing his fixed capital. However, the process of capital flight is in both instances the same. It is a change in the person of the investor. The investment itself is not affected; the capital concerned does not emigrate.”


(emphasis added)

In short, what is happening in France is a 'flight of deposit money' on the one hand, and a downward revision in the value of its capital stock on the other. Given that entrepreneurs are threatened both by expropriation (as the Arcelor-Mittal case as well as the Peugeot case showed) and the fact that a large portion of their profits will be confiscated, the value of capital in France obviously declines so as to reflect these threats.

The sellers are removing the proceeds from the government's reach by sending them abroad. The buyers are hoping that the socialist ideologues will eventually change their stripes and that the purchase prices already discount the dangers adequately. That may be a miscalculation, but of course we don't know the future; after all, Mitterand's most disastrous socialist policy measures were eventually also reversed.




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