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“Inflation and cryptocurrencies, first challenges for central banks” – Jean-François Serval’s column

Can inflation be a response to the debt challenge as some suggest, while the war in Ukraine is seriously aggravating the inflationary risk? At the rate of 7% per year, the rate observed in December in the United States, the level of global public debt over 10 years, halved, would return to the zone deemed acceptable of 60% of GDP. This reality of figures is however particularly pernicious insofar as it seriously misunderstands the economic mechanisms that govern exchanges.

The market economy can only function on the basis of the immutable data of competition and selection which generate the economies of scale which allow the increase in production and exchanges. For this virtuous mechanism to operate, the price evaluation system must remain a stable point of reference for the economic agent who determines production. While in recent years price inflation has been below the 2% rate, an inflationary reversal would be disastrous in the face of the rise in rates it would cause.

The challenge we face is first of all a production issue, the only one capable of bringing a concrete answer to the question of the debt through the creation of new wealth. For this, the currency must remain as neutral as possible so as not to disturb the game of supply and demand. This objective depends primarily on the action of the central banks. The latter must regain their role as safeguards for the monetary system, while throughout the last decades the development of the financial economy, driven by massive securitization transforming assets into financial instruments, has created money outside of any limit.

Today there are 6,000 crypto-currencies in circulation representing a value of 2000 billion dollars, of which a little more than 40% would be bitcoins

Bitcoins. Central bank policy fundamentals are challenged more than ever by the recent cryptocurrency boom. Today there are 6,000 crypto-currencies in circulation representing a value of 2000 billion dollars, of which a little more than 40% would be bitcoins. The creation of specific cryptocurrencies adapted to the multiple uses that can be envisaged and which constitute immense progress in payment systems is inevitable but must be strictly supervised by a sovereign authority. This is already the path taken by the People’s Bank of China by limiting its issues to certain uses, and above all to certain identified users.

In a liberal economy, nothing prohibits an economic agent from creating an asset and trading it; however, the proliferation of financial instruments that contribute to monetary creation must lead central banks to define the nature and purpose of these instruments and their classification by category in order to find the key role that should be theirs in the management of Monetary Policy. This definition of financial instruments should allow central banks to regain their power to regulate monetary volumes and their rates, and to exclude from this framework any asset that is not money, which must be freely valued by the play of the markets.

Jean-François Serval, Chairman of Audit Serval Group.

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