Finance is a system.
Finance is a system.
Generally speaking, in order to explain business conditions, attention is focused solely on money incoming into and going out of individual economic entities. But, in fact, the circulation of money is what determines business trends.
It is the flow of money that makes economic systems work. Money supply means money transfer from the public sector to the private sector. No matter whether individual economic entities are in the red or in the black, the amount of money in circulation is constant.
If money circulation is not smooth, economic entities are unable to function. Depression is caused by nonfunctioning economic entities. Depression is a state of the economy.
Worsened finance is caused by an imbalance between money collection and money supply.
Money transfer is accompanied by ownership transfer.
Monetary value is one thing, and money is another.
Money exerts its effectiveness when it flows. If money stops flowing, it cannot exert its effectiveness. Both assets and debt have monetary value when money flows. But, neither assets nor debt alone has effectiveness. Economic entities do not accumulate much money.
The principle of monetary value lies in borrowing and lending money.
The operations to transfer monetary value involve buying and selling, and borrowing and lending. Buying and selling means ownership transfer. Borrowing and lending means exchange of receivables and debt.
Such money operations have a ripple effect. This means that money transfer generates a wave of assets and a wave of debt. These two waves counteract each other to keep an overall balance. These two waves are the motive power for economic activities in a money economy.
Finance is a system. Many people confuse finance with a nation’s income and outlay. But, finance is a system that circulates money. In this sense, whether a system to circulate funds has been established or not is the key in sustaining the health of finance.
If a chronic budget deficit cannot be resolved, there would be some fault in the financial system.
If finance does not function as a system that circulates money, there is a basic financial problem caused by interpreting finance only from the aspect of cash income and outlay.
Why do people seek to understand finance from the aspect of cash income and outlay? The problem lies in the beginning of establishment of finance.
There are a tax system and a monetary system at the root of the problem. Disconnection of the tax system and the monetary system is the largest problem.
When real money was first produced, it was released and supplied to the market continuously and in a one-way fashion without the prospect of collection.
In a financial system without the prospect of collection, finance falls into bankruptcy when the raw material for money, such as gold or silver, is exhausted, and then money cannot be supplied.
In such a condition, money flows into the market without control.
In the days when a monetary system in the modern sense was not yet established, it was necessary for money to have real value in order to keep its inherent function as an exchange value.
For this reason, substances with an expensive value, such as gold, silver or copper, were selected as the material for real money.
However, in the beginning, money was not connected to taxes. It was considered as part of the means of payment.
Taxes were paid mainly in goods or by working.
If an uncontrolled flow of gold, silver or copper coins continues, the ownership of gold, silver or copper is transferred from public organizations to private organizations.
When gold or silver is exhausted, goods procured by means of money are disrupted. Then, public organizations borrow money from private organizations or collect money as taxes.
Private organizations have established a fund circulation system by corresponding earnings and expenses to periodical profit and loss. That is to say, they have established a system with the prospect of payback.
Taxes have no counter-performance. Therefore, taxes cannot be controlled in connection with earnings and expenses. The principle of periodical profit and loss is not established.
Accordingly, finance is not yet established as a system.
Goods do not have a negative value. Even if a borrowing and lending relationship is created, people cannot help but rely on memory or records. Since special techniques were required for record keeping, asymmetric information was caused by necessity.
The negative value comes into existence when money goes into circulation. Here, the monetary value means the negative value. If you do not understand this point, you cannot understand the function of money.
In light of periodical profit and loss, we cannot always say that being in the black is good and being in the red is bad. This should be judged in connection with the equalization of earnings and expenses.
One of the factors that made the monetary system come into existence is the issue of redundant products and labor force.
When farming productivity improves, redundant products are generated. Viewing from the other side, redundant productivity means an excess labor force.
It becomes necessary to eliminate the redundant products and labor force.
A major part of business that absorbs the redundant labor force is occupied by the military and religion. The secret of the economic role played by the military and religion is hidden there.
This implies the essential part of finance.
The market does not function unless money is circulating through the overall market like blood circulating through the whole body. All blood must go through the heart. Similarly, a heart is necessary for the financial system and all money must flow back to the heart.
The important point is whether funds flow toward consumption or toward investment.
There are several kinds of investment that include investment in inventories, in facilities, in construction, in finance and in the military. Investment in inventories feeds funds back to the manufacturing industry, investment in facilities to the machine industry, investment in construction to the construction industry and investment in the military to the military industry.
We should note that the military industry is a self-contained and closed industry without expanded reproduction.
Earnings consist of cost and added value.
Economic value is formed by the added value.
The added value contains personnel expenses, depreciation expenses, interest, rent and profit margin. The added value consists of expenses and profits.
The personnel expense forms the income. The interest, rent and profit form the time value.
Investment in assets feeds funds in the direction toward earnings and income of other economic entities. Assets contain depreciable assets (buildings and facilities) and non-depreciable assets (land). Depreciable assets are amortizable assets. They are the assets to be converted to expenses in the future and, at the same time, they are the resource for debt repayment.
Investment forms assets, and at the same time, causes debt. Once debt is formed, a repayment obligation is caused.
The portion of the funds for the principal (debt) repayment contains depreciation expenses (expense) and after-tax profits (capital). This portion is the principal (debt) repayment and the interest (expense) and flows back to financial organizations.
The repayment funds for non-depreciable assets are not amortized and become a new borrowing factor. This portion remains for a long time and affects the amount of money in circulation.
The U.S. market and accounting system are strict with the nation’s own businesses, in particular the manufacturing sector.
Unless the U.S. market and accounting system are drastically reviewed, it is most certain that U.S. industry will head into decline. The most critical problem is that both the market and accounting system are based on unrealistic premises. There is a problem in the fundamental ideas.
In the U.S., the rate of profit of U.S. corporations in the manufacturing sector is less than 30%. On the contrary, the rate of profit of financial businesses is more than 30%.
It is incorrect that manufacturing cannot no longer be done in the U.S. It is correct that the U.S. itself has built a system in which manufacturing does not generate profits.
Originally, the objective of accounting was to adjust the functions of long-term funds and short-term funds. However, accounting has turned into a system for pursuing only short-term profits, and now it exclusively aims to run funds in the short term. Consequently, funds do not flow to business and people become bent on obtaining apparent profits in the financial market.
Only industries that are protected by patents or copyrights are prosperous. We must never forget what that means: a market without restrictions is a lawless area.
While some countries have a current-account surplus, other countries have a current account deficit. While some countries experience appreciation of their currency, other countries experience depreciation of their currency. While some countries have a trade deficit, other countries have a trade surplus. That’s zero-sum.
It is like the win-loss standings in professional baseball. Individual teams might have winning percentages and scores. But, when all is summed up, the wins and losses are balanced and reach zero.
Gambling on the assumption of wins and losses like these cannot be done by one person or one pair. It cannot be done by two persons or two pairs either. Or, if the participants were limitless, nothing could be settled as a whole.
Both the whole and parts are balanced only after the appropriate number of teams participate.
Excess is produced because there is deficiency. It is not bad to have excess and deficiency. Funds circulate because there is excess and deficiency. The balance of the excess and deficiency is what is important.
The role of banking or finance is to pass on extra funds to people who do not have enough funds.
If a country with extra funds were to invest its funds in a country that was short of funds, the funds would circulate. But, this is not easy. Funds tend to gather in countries with extra funds and do not flow easily to countries that are short of funds.
That’s why the economy collapses.
In Europe, one approach is that an international agency is now raising funds from countries with extra funds and providing some social investment to Greece which is short of funds. However, due to an entanglement of national interests, things cannot go so smoothly.
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