The economist John Law is nowhere near as well known as other representatives of his profession. This is unfair, because hardly any economist has shaped today's economic policy with his ideas more than the highly talented soldier of fortune from Edinburgh, who made an improbable rise to become the first head of the French central bank a good 300 years ago.

The Sun King Louis XIV had brought his state to the brink of bankruptcy. So it was up to regent Philippe II and his good friend Law to bring the state's finances back into balance. The Scotsman had three ideas that will sound familiar to observers of today's government debt policy:

1. John Law introduced paper banknotes, which were only initially backed by gold. After the Second World War, many countries did the same, but since the 1970s at the latest, the stable value of paper money has been nothing more than an illusion. However, it enables countries to issue more and more money, regardless of how much is actually stored in their cellars.
2. The central bank led by Law used the printed money to buy up government bonds. Officially, this is no longer possible today; direct state financing is prohibited. In fact, this has not been the case for a long time. The central banks did not buy their own government bonds, but those of other countries in order to circumvent this regulation. If a country's currency fell too sharply, the other countries saw their export industry at risk and their central banks stabilized the weak currency by buying foreign currency with freshly printed money. Since the 2008 financial crisis, they have also been buying their own nation's bonds, albeit officially via the market as a detour. Direct state financing by the central bank has long been a reality in 2020.
3. Law's third idea was to lure people's money into certain forms of investment - at that time state gold mines in Louisiana. Law then used the money collected to buy government bonds. This detour was intended to dispel the suspicion that new money was constantly being printed to finance debt, which would have undermined confidence in the stability of the value of money in the long term. Today, government bonds - even those from Greece or Italy - are declared by law to be completely fail-safe. Since then, banks and insurance companies have been allowed to buy such bonds without limit and finance them with huge amounts of investors' savings and other bank deposits. They also do this because they can rely on the central banks to buy their government bonds when they need money. This is the only way that government bonds are actually safe.

What can investors learn from this? Well, since politicians and bankers have obviously been using the same tricks for three centuries and investors are falling for them, it is safe to assume that the current government measures will not lead to the collapse of the capital market. As in previous comparable phases (see my post from October), the phase of massive purchases of government bonds will be followed by a boom in real assets and then increased inflation in consumer goods prices. This is because the extremely low interest rates will also increasingly force risk-averse investors into riskier forms of investment such as equities, investment funds, (residential) real estate and gold, which justifies our positive long-term assessment of these asset classes.