Jean-François Serval - Financial Innovations and Monetary Reform: How to Get Out of the Debt Trap

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It certainly takes a great deal of intellectual audacity to tackle the issue of international debt with the firm intention of finding a solution to this challenge that is mortgaging the worlds economic future, after decades of fiscal laxity. And Jean-Franois Serval and Jean-Pascal Trani are not lacking in audacity with the publication of this new book, which puts forward concrete proposals to meet the challenges of debt.

In their first book LaMonnaie virtuellequi nous fait vivre, the authors had already demonstrated their particularly detailed knowledge of the mechanisms of the monetary economy. This 2010 text, with its premonitory title, analyzes the financial crisis that marked the end of the 2000s, known as the subprime crisis, with regard to the mutations in financial innovation that have allowed for the almost unlimited creation of monetarized financial instruments, sources of virtual money, since there is no counterpart in the creation of real wealth. This observation of a new monetary space, outside the radar of central banks, led the authors to formulate one of the key ideas of their book, an idea that we shared at the time: the definition of new tools for analyzing monetary flows, called M5 and M6, which encompass the entire space in which economic agents operate and thus make it possible to grasp, in the most complete way possible, the reality of the financial assets that are used for exchanges and the values that underlie them.

In a second book, published in English, The Monetary System: Analysis and New Approaches to Regulation, Jean-Franois Serval and Jean-Pascal Trani set out the framework for regulation that is better adapted to the stability needs of the financial world, thanks to the statistical possibilities offered by the data captured by the expanded monetary space represented by M5 and M6. A better perceived reality and a better controlled reality.

This third volume aims to build a new stage in this edifice: the outline of a global reform of the international monetary systema reform that proposes the establishment of a renovated monetary universe based on the current institutions that organize international financial life and advocates the creation of a new standard, in a world where monetary issuance has been freed from all restrictive constraints since the abandonment of the gold standard in 1971. But more than that, this book puts forward a resolutely innovative approach, the central idea of which consists in transforming sterile financial masses that no longer have any economic reality because they no longer bear interest into wealth creation. To facilitate the return to the real economy, they propose that a significant part of public debt be converted into equity capital in the world of business and goods production, with the aim of finding new profitable investment projects. The idea is audacious, as we have said, and the authors endeavor to demonstrate its technical feasibility. The demonstration is convincing and appears relevant to getting out of the debt trap, while accompanying, through the mass of investments mobilized, the great technological transformation underway in the world economy.

The challenge we face is first and foremost one of production, which is the only way to provide a concrete response to the question of debt through the creation of new wealth. In this approach, money must remain as neutral as possible with respect to exchanges and therefore not interfere with the supply and demand mechanism, which must play its full role. This objective depends first and foremost on the actions of central banks, the authors emphasize. The latter must regain their role as guardians of the monetary system, whereas over the last few decades the evolution of the financial economy has created money beyond all limits.

Finally, we are convinced that this investment and production approach accompanies a movement that is already well underway, that of setting up vast national and international investment programs in major infrastructure and research projects in innovative sectors. China was the first to set an example with its new Silk Roads projects, the basis for a Chinese network of the world economy. Now, the United States and Europe are also embarking on major projects involving trillions of dollars or euros, although market forces will have to provide adequate returns on the savings available! The developed world is becoming aware that only the creation of wealththe increase in production, thereforecan overcome the crushing obstacle of debt.