A New Aggregated Conceptual Approach Allowing Operational Transactions and Financial Ones to be Reconciled

M5 assets are distinguished from M5 liabilities as well as from trans-territorial consolidations, which would now yield a consolidated trial balance with foreign subsidiaries. So as to ensure consistency and combat fraud, each balance sheet composition is at historical value. M5 assets will be analysed on a monetary basis. Out of this base, tradable instruments from M5 + Ml and M2 elements will define total liquidity. All the usual financial ratios (i.e., debt to equity) will be available.

When analysing M5' and M6', we evidence the nature of the link and its flexibility between realized operational transactions (commercial exchanges) and the financial world of money. This link is only analysed (if useful) by sector. For instance, for the construction sector because of its contribution to GDP – usually between 60% and 80% – and the duration of the associated financing, with MBS going up to 30 years and burdening the balance sheets or because of securitization, agencies and hedge funds outside the banking system. The global analysis was missing in the USA in 2007. Because of a change in the size of jurisdictions, because of globalization and the overall exchangeability of instruments (see later), such analysis is needed and will be allowed.

The Resulting Breakthrough

Better knowledge. Because the M5, M6 aggregates and their derivatives (M5' and M6') “comprehend and assess” the entire scope of the monetary landscape, this capability resolves both the issue of risk surveillance versus unachievable surveillance and the regulatory requirements to monitor patterns of “shadow monetary movement”. Being inside the perimeter, there is no longer any shadow money per se (see prior definition). Any price-denominated contract is potentially money, if not already monetized. By introducing and using the future M5/M6 monetary aggregate system described here, the entire securitization process that almost destroyed the monetary system in 2007 now becomes hypothetically controllable. The difference between original historical values when underlying instruments were issued and the traded price of the newly structured instrument that was issued in substitution or exchange becomes visible. It is transparent and the price lag can be appraised. Spread risk linked to both the original debtor's quality and slowdown in rotation is measurable.

Enhanced security. By considering that any price-denominated contract is actual money, the door is now open to general regulation that protects the democratic rights of individuals and enterprises. Instruments which are clearly defined from a legal aspect (in terms of their attached guarantees) can be registered with a regulated market (as was originally expected but did not materialize with CDSs). Such next-generation instruments may now also receive a recognizable, attached guarantee either from the marketplace (alongside clearing insurance funds) or, in addition, from government agencies. Besides sanctioning representational fraud, there is no further need to regulate players when they don't operate with individuals. There has been resistance to the views already described in our previous book Virtual Money, but the FSB-supported LEI project[1] demonstrates de facto recognition of the need for a globalized aggregate system.

Additional breakthroughs that would also prove advantageous

■ Measurements of monetary velocity would result from a comparison of production with receivables and vendor balances. Even if not a physical measurement, these would nevertheless provide a necessary indicator of economic health and performance. Thresholds are to be determined as possible versus artificial (e.g., by comparing workforce capacities with revenues, or number of lunches with number of existing people, or oil consumption with number of engines, etc.).

■ The evolution of balance sheet totals by asset classes, compared with revenues and production, would provide several forward indicators of bubble creation or advance signals of upcoming burst activity risk.

■ New indicators will be developed that allow horizontal and points over time to be compared. For instance, we show the difference between M5 and M6 at historical traded values and market values of the same category of M5 financial assets. This will give information to market surveillance authorities. Further, we will see that system stability indicators would be possible (after Chapter 4).

Change of paradigm. The use of the credit multiplier ratio as informative data makes no sense, since many non-bank entities can issue money by granting the authorization to open an account in their books with an open balance authorization. Being tough, the multiplier concept is misleading for students. The multiplier is simply a reduced measurement of velocity of flows in the banking system.

However, the overall paradigm is just the social contract of money acceptance or rejection with a sampling instrument. It has always existed, but there was no data collection system to comprehend it. Explanations were only made when a failure happened (and was treated, or was the cause of a rupture by revolution or war). We will come back to that later. M5 and M6 show the difference between effectively posted prices and values, exerting the effect of speed and masses.

  • [1] FSB press release of June 8, 2012, “A global legal entity identifier for financial markets".
 
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