# The indexation of debt according to Maurice Allais

## By Sylviane Guillaumont Jeanneney

More than thirty years have gone by since Maurice Allais became an ardent champion of “the indexation of advance commitments” against the general price level. In 1976 he devoted a lengthy analysis to the subject in an article in Economies et Sociétés: “Inflation, Répartition des revenus et Indexation, avec référence à l’économie française 1947-1975” [Inflation, distribution of income and indexation, with reference to the French economy 1947-1975] (1976) and he renewed the demonstration in his famous work L’impôt sur le capital et la réforme monétaire [Capital taxation and monetary reform] (1977). After being awarded the Nobel Prize in Economics, he returned to the charge in a book devoted exclusively to this subject – Pour l’indexation [The case for indexation] (1990). This shows clearly how much importance he attached to the issues both on a theoretical level and for the economic and social future of France.

Admittedly Maurice Allais was not the first to defend the indexation of loans. In the 19th century there were W. Bagehot, Joseph Lowe and William S. Jevons (see Garcia and van Rixtel, 2007) and in the 20th century, as Maurice Allais himself emphasizes in Pour l’indexation, economists as celebrated as Alfred Marshall, John Maynard Keynes and Milton Friedman. At the same time as Maurice Allais, several actively committed French economists (cited by Allais), pleaded the case for the indexation of debt: Étienne Hirsch, former Commissaire Général with Plan and former President of Euratom (Le Monde 8 October 1969), Jean-Marcel Jeanneney, former Minister, professor of economics at the Paris Faculty of Law (Le Monde, 19 February and 22-23 September 1974) and Marcel Boiteux, Managing Director of Électricité de France (Le Figaro, 11 May 1975) then hon. Chairman of the same company’s Board (Le Figaro, 11 May 1975 and 29 October 1990).

That indexation, and especially the indexation of debt, should have found so many champions is explained by the specific situation of France in which the indexation of advance financial commitments was prohibited by the order of 30th December 1958 with the exception of the SMIG (guaranteed minimum wage). But this order was amended by that of 4th February 1959 [1] which authorized indexation against specific indicators in “direct relation to the object of the contract or with the activity of one of the parties” (such as for instance a building index for rents), so that it was essentially the indexation of debt which fell under the prohibition since the minimum wage remained indexed and this indexation de facto carried along with it an indexation of wages more or less close to the minimum. Yet the main argument put forward at the time against indexation of debts to the general price level was that it would prove politically difficult to cancel the indexation of wages if the indexation of financial assets had been accepted, besides the fact that its acceptance would have manifested that the government was not really determined to combat inflation [2].

The distinctive feature of Maurice Allais’s analysis was his call for “compulsory” indexation of “all” financial commitments over a term greater than one year, against a “single price index”. Allais wanted extremely extensive indexation, applying not only to loans and debts but also to wage contracts and to other kinds of income such as land and housing rents, annuities, etc. The suggested reference index was the GNP deflator and the crucial point was that the reference should be the same for all contracts and should really reflect a general price level [3].

The grounds for indexation according to Maurice Allais

Maurice Allais’s case is based on considerations both of ethics and of economic efficiency. For Allais, the economy of markets* is indeed a condition of economic efficiency, but it “can only be really acceptable if it respects a minimum of ethical principles” (Pour l’indexation [The case for Indexation], p. 82). Maurice Allais set out at length (in chapters VI and VII of L’impôt sur le capital et la réforme monétaire [Capital taxation and monetary reform] the iniquity of inflation, of which the main effect is to enable incomes to be distributed in a way that would be wholly impossible under stable prices. Indexation produces an effect equivalent to that produced by money of stable value, “while eliminating the pernicious effects of such stability in terms of possible hoarding of money, since money balances would not be indexed” (Pour l’indexation [The case for Indexation], p. 46). Indexation would essentially reduce uncertainty as to the future and would thus generate efficiency in the functioning of the economy of markets. In particular it would enable the volume of savings to be increased and improve investment quality. It would also reduce the chief causes of inflation which are located in the gains it promises for inflation profiteers. His demonstration is strikingly vigorous with regard to the refusal to index debt. “The refusal of compulsory indexation of loans and debts in real terms,” he wrote, “is tantamount to claiming that it is right to allow a continual transfer of wealth at the expense of savers and to the advantage of borrowers. That is an admission that the functioning of the economy must be based on a permanent swindle, of which lenders are the victims, a position which it would be utterly immoral and ethically inadmissible to try to defend. In plain words, the refusal of indexation can have no other meaning that the institutionalization of theft. By contrast, if deflation prevails, the situation is reversed and debtors are despoiled while creditors are unduly advantaged – a situation which remains quite as unacceptable” (Pour l’indexation [The case for Indexation], p. 64).

* Note the plural in this expression. See HERE.

The arguments presented by Maurice Allais as to the potential impact of indexation on savings remain today as relevant as ever. “It is certain,” he wrote, “that the indexation of claims and obligations would afford considerable encouragement to saving, owing to the security it would offer savers. At the present time there exists no financial investment that offers real protection against the difficulties of old age…. The fact is that all the needs of the elderly are currently underestimated. We live in a society in which the grown-up children of the elderly and of the very old bear increasingly heavy burdens themselves, have little leisure time and have dwellings that are not spacious enough. Taking care of the elderly raises questions to which it is strictly incumbent on us to give a suitable answer…. It is desirable to encourage voluntary savings which adults can build up with a view to their old age. But that requires long-term and even very long-term savings not to be plundered, which brings us back to indexation.” [4].

Allais’s two most controversial demands were for indexation to be compulsory and for it to include wages. This was because the fear of many economists had long been that the right to index debt might spread to wages leading to self-perpetuating inflation via automatic wage rises (or the “sliding wage scale”). Granted wage indexation is only desirable in Allais’s view if “it applies over a limited time period, at the expiry of which each party recovers his freedom and the terms of the wage agreement may be renewed or modified.” This is a crucial point in Allais’s thinking, which contrasts automatic wage indexation, which is indeed a potential source of inflation, with contractual indexation, which allows for the periodic adjustment of real wages depending on the evolution of productivity (Pour l’indexation [The case for indexation], pp. 30-31). But this possibility of periodically modifying the real terms of an employment contract may seem utopian. As Marcel Boiteux (an ardent defender of debt indexation) wrote, after the appearance of Pour l’indexation [The case for indexation], “trades unions will be reluctant to accept an overt reduction in wage rises…. The purely indexed wage agreement runs the risk of leading to difficulties in handling renewals. This means the automatic indexation of wage rises, in the face of which no currency can resist.” [5]. The indexation of debt and the indexation of wages “do not depend on the same reasoning since the former relates to a stock (a debt) the value of which is to be preserved whereas the second relates to a flow, for which it is desirable that a measure of flexibility be safeguarded[6]. Indeed Allais himself recognizes that “economically there is no necessary link between wage indexation and debt indexation. Each may be applied to great advantage and quite independently of the other.” [7].

With regard to the obligation of indexation, it is justified by the importance of what is at stake in the monetary reform being advocated. Hand in hand with this obligation went the use of a single price reference index in all contracts, since recourse to specific references for land and housing rents, annuities, minimum wage, etc. is a source of distortions.

The compulsory character of the proposed indexation was especially contested by the financiers who maintained that the indexation of debt had been rendered unnecessary by financial innovations – variable or adjustable interest rates and futures contracts on debt securities – which, they claimed, would offer contracting parties more flexible protection against the uncertainties of interest rates and future inflation. This is no doubt the point of view which explains why indexed bank loans, unlike bonds, have remained undeveloped. The crucial question is whether “the new financial instruments do or do not offer effective guarantees against variations in the real value of money”, chiefly the practice of variable or adjustable interest rates, indexed to a market rate. This question was raised by Maurice Allais in Pour l’indexation [The case for indexation] (pp. 51-52). “Loans subject to a variable or adjustable rate of interest,” he wrote, “cannot be considered to be acceptable substitutes for loans indexed as to both principal and interest. For experience shows that, notwithstanding a widely-held opinion, the rate of interest does not settle at a level which offsets inflation. Allow me to recall, in this connection, that it was the empirical data that obliged Irving Fisher to revise his initial theory linking the rate of interest with the rate of increase in prices.” Maurice Allais goes on to remark (footnote 28) that the reason put forward “tends to support to the case made by Sylviane Guillaumont Jeanneney (Appendix V to Pour l’indexation) – a case with which I fully associate myself.” Briefly stated, that case is as follows: [8]

Debt indexation (in the strict sense of the term) involves modifying the reimbursement value of the debt in accordance with an index of the general price level and applying the rate of interest specified in the loan contract to the amount of the debt as re-evaluated each year in the same way. This technique is in fact tantamount to direct specification in the loan agreement of the real rate of interest instead of the nominal rate of interest. [9] The use of variable interest rates involves indexing the interest rate of the loan (not the value of the loan itself) against a market interest rate (not the rate of inflation). If the market rate selected as reference evolves depending on the expected rate of inflation, this amounts to indexing the rate of interest against the expected rate of inflation. [10] Variable interest rates are distinguished from adjustable interest rates. In the former case, the interest due is calculated a few days before it falls due, while in the latter case the interest is calculated before it begins to accrue, i.e. a year in advance, the basic principle of the indexation remaining the same.

Although the use of variable or adjustable rates of interest is often compared to debt indexation, the consequences of the two procedures are dissimilar, especially with regard to the debt repayment schedule. With debt indexation properly so-called, the debt burden expressed in real (constant price) terms displays the same temporal profile as under conditions of monetary stability, irrespective of inflation levels. By contrast, with indexation of interest rates (variable or adjustable rate) the debt burden once again expressed in real terms is aggravated in the early years and lightened in the closing years, all the more so as inflation is more pronounced and the market rate of interest serving as reference is therefore higher. [11]. Thus the rise in the rate of interest in the wake of inflation changes the nature of the interest paid: it is no longer merely the income yielded by the money loaned; it becomes in part an anticipated reimbursement of the debt contracted. This sheds light on why businesses are reluctant to use this procedure to finance long-term investment projects in the face of uncertainty over inflation and future interest rates, and that imprudent or ill-informed borrowers may find themselves unable to service their debt. The risks run by small savers and small borrowers (especially households which borrow to buy a home) are so much the greater as the financial products are rendered more complex with mixed systems (fixed and variable interest rates) and derivative products (swaps and market options).

Futures contracts on debt securities, whether traded by mutual agreement or in the financial futures market [12], enable a lender or a borrower to insure themselves against a variation in the rate of interest not expected by the market by hedging, i.e. by carrying out the reverse transaction to that to which they are committed: a lender sells a debt instrument via a forward contract, and a borrower buys it, at a price agreed in advance. In so far as interest rate fluctuations reflect variations in inflation, futures transactions make it possible to protect oneself against the depreciation of debt instruments owing to inflation. [13] However this mechanism is subject to two severe limits. As in the case of variable interest rates, the link between the market interest rates and the rates of inflation is a loose one and the protection afforded is consequently unreliable; as futures transactions generally extend over a year at most they must be periodically renewed. As Maurice Allais stresses, they are complex, expensive and not within the reach of small firms or households.

The fruitfulness of Maurice Allais’s analysis

The reluctance of many economists to embrace wage indexation explains why it remains prohibited in France, unlike other countries such as Belgium. But the prohibition of a sliding scale of wages does not stop wages from evolving over the long term in close correlation with the general price level, even if this correlation is disturbed during wage freeze periods as in 1982 under the stringent policy of Jacques Delors. Although clauses stipulating indexation against a general price index remain forbidden, they do occur in certain collective agreements, particularly in sectors of the chemical and textile industries (Blanchard et Sevestre, 1989).

With regard to the prohibition of indexed debts, although the 1958 order has never been formally abrogated, it has been substantially emptied of its content. Thus 1998 saw the French State itself begin to issue bonds indexed against the national consumer price index. Moreover, by virtue of a derogation from the general provisions of the prohibition, indexation against consumer prices has been authorized for debt and for financial futures (2001), and later on for lending institutions and for the national Caisse des dépôts et consignation (public trustee office) (2004) [14].

This U-turn in French policy is due to the fact that the government authorities do not want to remain outside international practices. In the disinflationary context of the 80s, several countries had issued indexed bonds with a view to enhancing the credibility of their commitment in favour of monetary stability and reducing the cost of the public debt (the UK, Australia, Sweden, Italy). France remained a stranger to this trend. Only in the 1990s and the 2000s did most States go on to issue indexed bonds, their goal being diversification of financial assets: Canada (as from 1991), New Zealand (1995), United States (1997), France (1998), Greece and Italy (2003), Germany (2006), while of course the UK and Australia continued their existing issuing programme.

At the present time the American “Treasury Inflation-Indexed Securities” (TIIS) [15] market is the largest market for indexed government bonds in terms of market value and volume of trade, closely followed by the Eurozone market which, since 2003, has exceeded the United Kingdom market and, in terms of bond issue, the US market. The development of indexed bonds has been accompanied by the creation of derivative products: futures, options and swaps markets (Garcia and van Rixtel 2007).

However, it is striking to note that index-linked securities continue to represent a minor, though growing, fraction of the public debt and are concentrated in long-term maturities (ten years and more). Moreover privately issued securities represent a much smaller amount and come chiefly from financial institutions. In the Eurozone in 2009 outstanding debt securities, irrespective of currency of issue, represented 313 billion Euros [16], i.e. less than 3% of long term securities excluding shares and less than 9% of variable rate securities. It should also be noted that the indexation process does not seem to have spread to loans from financial institutions, doubtless because they have given preference to other financial instruments thought to afford protection to their customers or themselves against the uncertainty of inflation expectation, especially variable or adjustable interest rates [17].

While the indexation debate is an old one, it seems to me that the current financial and economic crisis ought to stimulate renewed interest in the subject. The critique which Maurice Allais presented of financial innovations as substitutes for debt indexation predicted the “subprime” crisis and his declaration that the internationalization of the financial markets together with the escalation of speculation made it all the more urgent to reduce uncertainty by indexation of all advance commitments was prophetic. The abuses of the financial system which led to the present crisis are often attributed to the disappearance of minimum ethical standards from the design of financial products, and more generally from the regulation of capitalism. [18] As Maurice Allais wrote in 1990, “this is no longer economics but gambling – in a vast global casino. Speculation, which in a suitable institutional framework would be fundamentally stabilizing and useful, becomes destabilizing and harmful in the context of our present institutions.” After castigating real-time share price quotation of as a source of instability, and futures markets for allowing speculators to sell what they do not own and to buy without paying, he concludes, “if claims and debts were indexed in real terms, the fluctuations of the economy would be far less than they are at present.” [19]. There are grounds for surprise at the fact that the subject of debt indexation goes unmentioned in the abundant literature devoted to the origins and remedies of the recent financial crisis.

It is in my view important to emphasize here that the systematic indexation of debt would have made it possible to avoid the recent financial crisis or at least to diminish its impact (Guillaumont Jeanneney, 2010). The recent financial crisis originated in the “subprime lending” crisis in the US. The expression refers to mortgage loans extended to low solvency borrowers as opposed to traditional loan clients, whose credit rating is classified as “prime” or “A”. This practice began in the 1990s and experienced considerable growth from the beginning of the next decade. Although there is no official evaluation for the subprime market, it is estimated to have multiplied by seven between 2001 and 2007, reaching 20% of mortgage loans (Artus et al. 2008 p. 28). The banks, in common with the mass of institutional investors, were seeking profitable financial investments during a period of low interest rates. Three mechanisms favoured the expansion and then the crisis of the “subprimes”.

1. Borrowers misjudged the financial burden imposed by their loan, which for the most part stipulated a variable rate of interest (indexed to the FED funds rate) or a complex system of mixed rates (fixed and variable). Sometimes repayment charges were considerably lightened in the opening period in order to entice the borrower. “From 2001 to 2006 a sharp increase is observed in the fraction of variable rate loans, with a corresponding decline in fixed rate loans: the former rose from 1 to 13% while the latter fell from 41% to 26%. The remainder were made up of hybrid loans (using fixed rates in the initial years, before passing on to variable rates) and “balloon loans” which call for the reimbursement of a substantial part of the capital in the final stage. These last enjoyed special popularity in 2006, when they accounted for 15% of subprime loans (as against less than 3% in 2005)” (Artus et al. 2008, p. 28). At the moment of accepting the loan, the corresponding debt-servicing might appear minimal. “In some cases, when the euphoria was at its strongest, financial institutions (chiefly non-bank) made use of highly aggressive commercial practices, sometimes at the very limit of legality.” (Ibid. p. 48)
2. The credit extended was of the revolving kind in the sense that an increase in the value of the mortgaged property entitled the borrower to “top up” his debt within the limits of the rise, for an object different from the initial loan. Since the sheer quantity of mortgage loans sent up the price of real estate, the credit expansion was self-perpetuating.
3. The securitization process, by which the banks shared the risk of such debts with other institutions, dulled their awareness of this risk. [20] The fall in interest rates and in loan yield led to the inclusion in the securitization pool of obligations that were increasingly risky, and hence less liquid and more profitable. Thus two thirds of US subprime loans came to be “securitized”, via a process which often included several stages of credit-pooling. At the end of the process, investors (mutual funds, insurance companies) bought these structured products by way of diversification or yield improvement, all the more readily as they were awarded favourable scores by the rating agencies. (Banque de France, 2009). [21]

If mortgage indexation had been compulsory as Maurice Allais advocated, the situation would have been entirely different. On the one hand American households would have had a clear appreciation of the commitments they were taking on, with a simple system in which annual repayments remained constant in real terms, instead of the practice of variable of hybrid rates by which debt-servicing forecasts were rendered opaque. And on the other hand the increase in debt-servicing costs due to the rise in the Fed Funds Rate, which proved intolerable for more precarious households, would have been avoided. [22] It is also arguable that the rise in property prices, far in excess of the rise in consumer goods prices, would not normally have led to a greater capacity for mortgage-borrowing in an environment in which loans were indexed to a general price index as Maurice Allais advocated, rather than to the value of the mortgaged asset. Debt indexation certainly would not have ruled out the securitization of these loans, but the risks run by the security-owners would have been considerably lessened.

Neither would compulsory debt indexation have prevented the real estate bubble, of course, because this was linked to the acceptance of high risk premiums in a time of excessive liquidity and a fall in the real rate of interest. But by imposing greater transparency in real loan conditions it would undoubtedly have helped reduce its scale.

Twenty years ago Maurice Allais wrote [23]: “It is certain that an economy can only be fully efficient if uncertainties concerning the future are reduced as far as possible, and to reduce these uncertainties as far as possible, the first prerequisite is to use a single stable value reference for all economic calculations bearing on the future. In the present scenario no one on earth can foresee today what will happen to rates of interest, currency values and share prices in the coming months. We are living in an uncertain and changeable world. In this world, indexation would be a powerful factor in reducing uncertainty.” At the threshold of the year 2014, when we are wondering about the chances of a sustainable recovery of growth, this text unquestionably remains as fresh as ever.

Références

Allais, M. (1976) “Inflation, Répartition des revenus et Indexation, avec référence à l’économie française 1947-1975” [Inflation, income distribution and indexation, with reference to the French economy 1947-1975] Tome X, n° 4, pp. 677-713.

Allais, M. (1977) L’impôt sur le capital et la réforme monétaire [Capital taxation and monetary reform] Hermann, Paris, pp. 210-226.

Allais, M. (1990) Pour l’indexation [The case for indexation], Clément Juglar, Paris.

Artus P., Betbèze, J-P., de Boissieu, C., Capelle-Blancard, G. (2008) La crise des subprimes [The subprime crisis], Conseil d’Analyse Economique, La documentation française, n° 78, Paris.

Bagehot, W (1875) “A new standard of valueThe Economist (20 November), reproduced in Economic Journal (1892), vol. 2, n° 7, pp. 472-477.

Banque de France (2009) “La crise financière” Documents et débats, n° 2, February.

Bauman, Z. (2009) “Nous sommes devenus les gestionnaires de nos propres jouissances. Le capitalisme n’exige plus de se serrer la ceinture, mais de vivre à crédit” [“The dawn of the era of self-regulated enjoyment – Capitalism no longer asks us to tighten our belts but to live on credit” ] Le Monde, 28 February.

Blanchard, P. and P. Sevestre (1989) “L’indexation des salaires: quelle rupture en 1982?” [Wage indexation: how wide a discrepancy in 1982?] Economie et prévision, vol. 87, n° 1, pp. 67-74.

Boiteux, M. (1975) “L’indispensable indexation des emprunts à long terme” [“The indispensable indexation of long-term loans”] Le Figaro, 11 May.

Boiteux, M. (1990) “Maurice Allais et l’indexation” Le Figaro, 29 October.

Fitoussi, J-P. (2009) « La crise économique et l’éthique du capitalisme » [“The economic crisis and the ethics of capitalism”] Le Monde, 3 March.

Garcia, J.A. and van Rixtel, A. (2007) “Inflation-Linked Bonds from a Central Bank Perspective” European Central Bank Occasional Papers Series n° 62, June 2007.

Guillaumont Jeanneney, S. (1975) “Les conséquences de l’indexation des créances pour la politique économique” [“The consequences of debt indexation for economic policy”] Revue d’économie politique, 1975, n°5, September-October, p. 693-720.

Guillaumont Jeanneney, S. (1982) Pour la politique monétaire. Défense d’une mal aimée, [The case for monetary policy – Defence of an unpopular view] PUF, Paris.

Guillaumont Jeanneney, S. (1998) Monnaie et finances, Thémis, PUF, Paris, 1998.

Guillaumont Jeanneney, S. (2010) “L’indexation des créances selon Maurice Allais” [“The indexation of debt according to Maurice Allais”] in A. Diemer, J. Lallement and B. Munier : Maurice Allais et la science économique [Maurice Allais and Economics], Clément Juglar, pp. 297-308.

Hirsch, E., (1969) “Pour des emprunts indexés” [“The case for indexed loans”] Le Monde, 8 October.

Jeanneney, J-M., (1974) “Plaidoyer pour une monnaie de compte française” [A plea for a French accounting currency], Le Monde, 19 February.

Jeanneney, J-M., (1974) “L’indexation de l’épargne, serait casser l’expansion? [“Would savings indexation slash expansion?”] Le Monde, 22-23 September.

Shiller, R.J., (2003), “The Invention of Inflation-indexed Bonds in Early America”, National Bureau of Economic Research, Working Paper Series, n° 10183.

[1] Repeated in article L. 112-2 of the French Monetary and Financial Code.

[2] During the 70s, France issued bonds indexed to references other than the general price level: the price of the gold ingot and the ecu (the Giscard loan) or the ecu alone (the Barre loan).

[3] Maurice Allais stated that “the nominal GNP deflator takes about a year to be known exactly; but it is quite possible to obtain close estimates for it which could be published at the end of each month”. (Pour l’indexation, Note 17) At the present time the reference index is generally a consumer price index. It was, for example, the Eurozone’s Harmonized Index of Consumer Prices which was recommended by the European Central Bank (Opinion of the European Central Bank of 3rd June 2004, requested by the French Ministry of Economic Affairs, Finance and Industry on a draft legislative provision authorising inflation-indexed loans from credit institutions [CON/2004/20]). Garcia and van Rixtel (2007) express the same view and point out that the only government to issue bonds indexed to the GNP deflator was Italy, in 1983, and that it was not a success.

[4] Pour l’indexation [The case for indexation] pp. 43-44.

[5] “Maurice Allais et l’indexation” [“Maurice Allais and Indexation”] Le Figaro, 29 October 1990.

[6] My intervention during a debate with Maurice Allais at the Association française de Science économique 9th November 1989, reproduced in M. Allais, Pour l’indexation [The case for indexation], p.155.

[7] Pour l’indexation [The case for indexation], p.87.

[8] Appendix V reproduces various extracts from the debates on indexation at the Conference of the French Economic Science Association, 9th November 1989, on “The monetary conditions of the economy of markets” held in honour of Maurice Allais. The line of argument to which Maurice Allais refers was developed in the article in the Revue d’économie politique and in my book Pour la politique monétaire [The case for monetary policy], already cited and summarized in Monnaie et finances (1998) pp. 99-101.

[9] By using $A$ to denote the amount of a loan indexed over a year, $r$ for the rate of interest stipulated in the contract and $B$ for the total debt-servicing (interest plus reimbursement), while taking $i$ for the nominal rate of interest, EQU which is the definition of the real interest rate.

[10] Which comes down to considering that EQU, which is close to the preceding definition of $r$ (per Note 9), but not equivalent.

[11] A simplified example enables the difference between the two kinds of indexation to be illustrated. Let us assume constant inflation of 10% per year. An agent contracts a loan of 100 Euros for a ten-year period, indexed to the general price level, at a 2% rate of interest. He pays interest of 2.2% in year 1, 2.24% in year 2 and so on – 10% more each year, so that after 10 years he has repaid 259.37 Euros, i.e., in real terms, the interest cost remains equal to 2 Euros per year and the reimbursement is equal to 100 Euros, so that his situation is exactly identical to what it would have been if the value of money had remained stable. Now let us suppose that an agent borrows the same amount, but at a rate of interest indexed to EONIA plus 2% and let us suppose that EONIA is equal to the rate of inflation; the interest cost will now be 12 Euros per year and he repays 100 Euros in year 10. Computing the debt service in real terms, it comes to 10.9 Euros in year 1 (as against 2 Euros in the first example), 9.9 in year 2 and diminishes each year. The repayment after 10 years comes to just 39 Euros.

[12] The first financial futures exchange was established in Chicago in 1975 while the Paris MATIF first saw the light in 1986.

[13] The following example illustrates the mechanism involved. An agent owns a debt instrument yielding interest at a fixed rate of 10% on account of an expected inflation rate of 10%. But he fears that inflation may be higher than expected and that its acceleration will lead to a rise in interest rates and a corresponding fall in the market price of his bond. He therefore decides to forward sell an asset equivalent to the one he owns, so that if, when the delivery date of his futures contract arrives, its cash price is lower than the forward price, he will pocket the difference. If he then reinvests this gain, the real value of his portfolio will remain unchanged. Of course if inflation turns out to be lower than expected, and the rate of interest falls, he will incur a loss, which will be offset by the (now excessive) interest he has received. The opposite logic applies from the borrower’s point of view.

[14] Article L112-3 of the French Monetary and Financial Code.

[15] Also called “Treasury Inflation–Protected Securities” (TIPS).

[16] My thanks are due to the Banque de France (source Bloomberg) for kindly providing me with this figure. The statistics published by the ECB in its monthly bulletin relative to outstanding debt or to debt security issuance distinguish between fixed and variable rate securities but provide no information concerning indexed securities.

[17] There is no trace of indexed loans to be found in the monthly bulletin of the European Central Bank. No data are available.

[18] Jean–Paul Fitoussi, Le Monde, 3rd March 2009. See too Zygmunt Bauman, Le Monde, 28th February 2009

[19] Pour l’indexation [The case for Indexation] pp. 68-69.

[20] Securitization consists in pooling, by a financial institution, of a portfolio comprising bank debt and/or various financial instruments, using an ad hoc structure called a Special Purpose Vehicle or SPV to issue the securities and own the underlying assets.

[21] In mainland Europe, unlike the UK, the mortgage market is different and there is no real equivalent to the “subprime” loan. In France the volume of property mortgages has risen, but there has been little variation in loan allocation as a function of borrower income. There was however a sharp increase in the proportion of variable rate loans since the beginning of the decade, rising from 4% in 2002 to 20% in 2005; thereafter it has fallen and by 2008 was only at 2% (Artus et al. 2008, p. 33). Should this be attributed to the influence of Maurice Allais?

[22] The Fed funds rate gradually gained 4.25 % points from 2004 to 2007, from 1% to 5.25%: meaning that the interest cost for a variable rate loan of \$100 rose by \$4.25 over that period. During the same period the consumer price index rose by some 10%; supposing a real interest rate of 3% to be stipulated in the contract, the interest due would only have increased by \$0.3 in 2007 as compared with 2004.

[23] Pour l’indexation [The case for Indexation] p. 68.