THE EVOLUTION OF THE MONEY SUPPLY IN THE FACE OF INFLATIONARY RISK
Inflation has reached new record highs, with German inflation hitting double digits for the first time in nearly forty years. The European Central Bank (ECB) accelerated the pace of its monetary policy tightening by implementing a cumulative rate hike of 250 basis points since July 2022. Global growth forecasts have once again been revised downward, with the OECD now projecting a further slowdown in 2023.
But beyond the inflation covered by the media, it is the creation of money that determines its value: its depreciation or appreciation makes it a strong or weak currency, capable of determining its constant or current value.
What is its method of creation?
Its functioning and influence through monetary policies make it a means of exchange, a tool, a store of value, and a utility that helps determine its level and therefore its inflationary or deflationary position.
Now more than ever, we recognize the need to understand, through simple questions, how money shapes our economic and political models.
The money supply is a perfect illustration of this, as it regulates monetary policies by increasing, or not, inflationary risk. The regulation of these monetary aggregates sends strong signals regarding the policy to be pursued in terms of liquidity management. It is the perfect correlation between the statistical expression of money evaluated as a stock and the quantification of monetary flows assessed in terms of the level of liquidity perceived by economic agents.
FINANCIAL RISKS AT THE CROSSING OF A BRIDGE!
First and foremost, financial risk is the risk of losing money at a given point in time as a result of a transaction. That is the definition of risk in finance. When a monetary loss materializes, it is no longer a risk, it is a fact. Within this definition, several distinct types of risk can be identified:
A bridge systematically allows one to cross between two peaks, summits, or difficult and complex passages. Risk management, at its level, plays this bridging role between a known situation, the current state, and an unknown situation, the future state. It is through mastery of all aspects of a business and its direct or indirect environment that a company will have the elements needed to manage its evolution while keeping its risks under control.
It is through training, support, sharing, and internal and external collaboration that this risk mastery will be achieved, enabling companies to navigate difficult periods (punctuated by opportunities) and calmer periods (marked by effective diagnosis and new directions).
Fortunately, there are proven ways to guard against these risks as much as possible: diversification, monetary management, monitoring, insurance, hedging…
A sound diversification of your savings is already an excellent first step toward protecting yourself.
A REGULATORY FRAMEWORK IN CONSTANT EVOLUTION TO HELP MANAGE THESE RISKS
Evolution of European regulation:
Knowledge and understanding of all these rules, laws, and regulations can be applied across financial and management activities.
In addition to regulation, a risk analysis framework has gradually developed through credit rating agencies, incorporating new criteria, not only financial, but also non-financial (extra-financial).
These are the Environmental, Social, and Governance (ESG) criteria used in financial transactions. We are only at the beginning of a new era in the materialization of exchanges, and these criteria will be used to assess the behavior of economic actors.
A Brief History to Understand the Stakes of This Evolution
Credit rating agencies emerged at the end of the 19th and beginning of the 20th century. Their original purpose was to provide information on private companies.
The first financial rating agencies were Fitch Ratings, Moody’s, and Standard & Poor’s. They operated on a fee-for-service basis at the request of public authorities and private companies wishing to be evaluated, while maintaining independence from them. Ratings are assigned based on financial criteria, but also on moral, social, and environmental criteria. It was not until the 1970s that financial ratings became established in the United States (following the first major corporate bankruptcy: the Penn Central Transportation Company).
This digression is important in order to understand the shift these agencies would take toward non-financial, qualitative criteria. The purpose of this shift is to treat the data of economic actors differently. These actors will need to be vigilant and, above all, produce new information to reflect their investments and holdings with a carbon footprint or “green” label.
The analysis of this context and the impacts related to financial risk management will be subject to these new constraints through the analyses produced. Risk is no longer purely quantitative; it is also qualitative.
