Interview by Marion Leblanc-Wohrer, Guy Marchal and Philippe Mudry
Agefi Hebdo: The thesis at the heart of your book ** is that monetary creation escapes central banks …
Jean-François Serval: Central banks work on the basis of concepts that are out of date in the evolution of the economy (Bretton Woods) where there is no respect for them (non-intervention on the foreign exchange markets). They base their control on aggregates that have lost their relevance. In fact, the current definition of money is no longer adapted to the new context of disintermediation and globalization of the economy.
The development of financial markets, particularly over-the-counter markets, that is to say without the banking intermediary, gives economic agents the possibility of financing from sources other than the credit monitored by the central banks. . This phenomenon of disintermediation allows companies to no longer go through traditional banking channels to finance or transit their payments, to lend to each other, to find equity, bonds or shares subscribed by private investors without the investment bank, and even create new forms of exchange with the consumer like points and miles which respect the three classic criteria of the definition of the currency: unit of account, intermediate of the exchanges and reserve of purchasing power! However, this disintermediation does not appear clearly in the balance sheets statistically apprehended by the supervisory system of central banks, whose institutional purpose is first and foremost to guarantee the proper functioning of the banking system. The relevance of monetary control is reduced. In addition, the value of contractual instruments (securities of any kind, derivatives, shares, bonds, units of debt funds, credit default swaps…) created by financial innovation to serve as a monetary standard for trade is set by markets, some of which are regulated and others not. It was estimated in October 2008 the total of these contractual instruments to 400 trillion dollars, 500 times the reserves of gold from central banks or 30 times the US GDP …
Thus, because of the deregulation of the economy, it is no longer possible to distinguish clearly and justifiably the currency of the central power from other exchange values. This is what we call virtual money.
Securitization also leads to monetary characterization …
The characteristic of a currency is to be accepted in an exchange, such is at least our definition. Securitization makes it possible to distribute tradable finance, in considerable volume, by offering the ability to transform any asset into a financial product: it thus makes it possible to transform a portfolio of receivables into a financial instrument to the extent that it becomes tradable, and so to subject it to changes in value without being linked to multiple factors such as the value of the underlying pledge (a building for example for a mortgage loan). It becomes with its derivatives, in volume as in value, independent of the underlying economy without the economic agents who exchange it directly as a monetary value have on the contrary to worry about it,
How do accounting standards have a multiplier effect?
Fair value plays a key role in money creation: by making it possible to remeasure a company’s assets through the application of fair value, accountants allow it to increase its debt, that is to say create money. If we estimate that the value of an asset can go from 100 to 200 without being exchanged by a simple reassessment on which all the actors are remunerated, we created money, virtual money not related to its macroeconomic situation or even microeconomic. This revaluation is refinanceable simply because of the balance sheet image it creates and serves as a basis for the ratios used by the rating agencies.
What can we do ?
We need to revise the idea of money supply and circulation with different approaches. These are all instruments of exchange that must be apprehended. To do this, it is necessary to ensure the totalization of private balance sheets, to separate the items of receivables and debts that is to say those with a counterpart trade and risk and compare these aggregates with the balance sheet of central banks.
The launch of a new world economic order is more than ever on the agenda. The creation of the G20 is a political first step, even if it has only been effective for the time being during the acute phase of the crisis. On the other hand, although we must be aware that we can not apply the same rules on different fields, we must move towards convergence and speed up negotiations, as has just been done on bank accounting for accounting compensation between assets and debt on instruments treated differently in the United States and Europe. If Europe and the United States can not agree, an agreement on the control of accumulated monetary imbalances and the current trade with Asian countries will never happen,
* Accounting and auditing firm
** “The virtual currency that makes us live”, Jean-François Serval and Jean-Pascal Tranié, Editions Eyrolles