If you always consider negative elements to be destructive, you cannot solve economic problems.
To control the economy, it is necessary to clarify the mechanisms of business
fluctuation. If you fail to do so, economic phenomena such as depressions
and bubbles cannot be prevented, and sound financial operations cannot
If you always consider negative elements to be destructive, you cannot solve economic problems.
Confusion in the positive world is caused by failure to control the negative world. The reasons for failing to control the negative world often lie in the positive world. Structurally, the positive world and the negative world are inextricably linked together. One of the reasons for failing to control the positive world and the negative world is that the negative world is based on the concept of infinity while the positive world is based on the concept of limitations.
Furthermore, while the negative world changes in geometrical progression, the positive world changes, in many cases, in a linear or arithmetical progression due to restrictions of some sort. In the positive world, even changes in a geometrical progression have limitations due to some restrictions.
By the negative world, we mean the monetary or nominal world. The positive world is the real or substantive world. While the nominal value or the value of time changes in a geometrical progression, the real value is subject to physical restrictions and has limitations due to those physical restrictions. This means that the real value is the critical point. That is why the real value is somehow converted to the arithmetic value. And this conversion brings about fluctuations in business conditions. For example, the actual land available for humans to use is limited. If development exceeds these limits, environmental problems are inevitably caused.
The positive world is monistic. In contrast, the negative world is dualistic and based on the zero-sum concept.
Currency exchange is zero-sum and relative. While some currencies appreciate, other currencies depreciate.
One of the factors causing currency exchange to fluctuate is the movement of currency. The movement of currency is what decides the relative value of currency.
The movement of currency is encouraged by the flow of people, things and money.
Put another way, the flow of people, things and money beyond the area of currency area decides the relative value of currency.
What forms the flow of people is work and income first of all, followed by consumption and spending. The things that flow can be divided first of all into tangible things and intangible things. Second of all, they can be divided into movable property and immovable property. Flowing money can be first divided into substantive money and nominal money. Then secondly, money flows as a result of lending and borrowing. And third of all, money flows as a result of selling and buying.
As a general rule, Current Balance agrees with Capital Balance. However, if the government were to intervene in currency exchange, these balances would be reflected into an increase and decrease of foreign exchange reserves.
This means that Current Balance + Capital Balance = Foreign Exchange Reserves
Fiscal Balance＋Capital Balance in Finance = ０
Balance of Payments in the Private Sector ＋ Capital Balance in the Private Sector=０(Note that the Balance of Payments in the Private Sector and Capital Balance in the Private Sector mean the cash balance, i.e., the cash flow, rather than the periodic profit or loss.)
Balance of Payment in Family Budgets ＋Capital Balance in Family Budgets= ０
This means that lending and borrowing among international, public finance and private sector entities, and family budgets form the foundation of the market economy.
The problems of economic entities that lose money are also the problems of those that earn profits.
There are deficit nations and surplus nations. Because both exist, an economic balance is maintained. The problems of deficit nations are also the problems of surplus nations. The financial or economic collapse of deficit nations extends to surplus nations as a matter of course.
The free economy consists of the market economy and monetary systems. The present market economy is based on an accounting system and double-entry bookkeeping.
The premise of the accounting system is cash flow.
As such, individual transactions are conducted on the premise of earnings, income and expenditures, and cash flow. These outcomes are not sorted into the periodical profit or loss from the beginning. They are sorted into the periodical profit or loss when a transaction is entered in the accounting records.
At that time, income is recorded in the debit side and expenditure in the credit side. At the end of the spectrum, the causes of the income and the causes of the expenditure are sorted.
Upon entry in the accounts, an income to be cleared up on a long-term basis is sorted into the gross capital and an income to be cleared up on a short-term basis into the profits. The corresponding causes are also sorted, i.e., the long-term causes are sorted into the gross assets and the short-term causes into the expenses.
This is a premise. And based on this premise, the periodical profit or loss is balanced depending on the profit. Note that profit is an index rather than an objective.
The objective is the continuation of business, the creation of property needed for the benefit of society by continuing to do business and to distribute earnings.
If profit is deemed to be an objective, the inherent function of profit and the inherent functions of management entities such as the creation of property and distribution of earnings would be missed.
The premise is that management entities play a role something like a rectifier. Management entities have a role of equalizing fluctuating income and converting it into fixed expenditures.
For that purpose, management entities convert fluctuating capital into assets, debt, earnings and expenses, and then adjust them with profits and capital. This is the basic principle of capitalism.
In fact, when funds are short, management entities raise funds externally. When excess funds are generated, they manage them externally. The practical operations are performed by banking institutions and guarantee companies. Those who perform banking, guarantee and policy-making services should respond to unexpected occurrences on the premise of short-term cycles and long-term trends.
Generally, income is changeable and inconstant. There are three waves of income: routine waves, non-routine waves and unexpected waves. In any case, income is always inconstant. The problem is that the liquidation of long-term debt is not posted as an expense. Long-term debt is liquidated by reducing assets and debt directly. Also, it is a premise that taxes, directors’ remuneration and dividends to stockholders should be taken from profit appropriation.
Then, the repayment resources for long-term funds are taken from depreciation and profit appropriation. However, in terms of accounting, the repayment of long-term debt is not stated in profit appropriation or expenses. That is, it is not virtually stated in closing information; it is only reported in the cash flow. Even if it is reported in the cash flow, the repayment amount is not reflected in profits.
So, even if you want to liquidate long-term debt, you cannot deduct it directly as an expense from profits.
That is to say, excess profit is appropriated and taxed, resulting in a reduction of assets, in particular highly liquid assets, and invites funding difficulties or bankruptcy in the worst case.
Also, when considering the amount of tax to be paid and the funds, management entities are less motivated to sell off assets to liquidate debt when asset values are soaring.
Therefore, for the purpose of procuring short-term funds, they generally tend to borrow against existing assets rather than selling off their assets. When profits are gained and excess funds are available, many management entities purchase assets to be prepared for fund shortages. Such assets are called hidden assets.
In this way, they tend to accumulate debt.
It is necessary to establish a tax system, accounting standards and economic policies that assume these points.
Considering the characteristics of long-term debt, it is difficult to dispose of it in a lump-sum repayment. First of all, the repayment terms and conditions are stipulated by contract and cannot be changed arbitrarily. The debt conditions have restrictions.
When you have gained profits and attempt to repay a long-term debt, it will not be recorded as an expense and will be deducted directly from assets, and, moreover, it will be taxed. As a result, upon repayment, you would face funding difficulties. Your management state would be imperiled even though you are gaining more profits.
If such a condition were to happen while profits were declining, you would have an even harder time.
Thus, if an attempt were made to liquidate debt all at once during widely fluctuating economic conditions, further decline of the business could be anticipated.
The parties in charge of finance and policies should take measures after fully understanding the functions of funds, assets, debt, earnings and expenses, and their mutual effects.
How did Japan enter this long stagnant period? It happened because the government adopted a policy to force the disposal of bad loans and encourage market competition. Policies should be adopted that aim at restraining the decline of assets and promoting the increase of earnings.
Originally, capitalism was established by dividing the part to be balanced on a short-term basis from the part to be balanced on a long-term basis. For that purpose, rather than persisting in the idea that a surplus is good and a deficit is bad, we should discuss how to balance the positive part and the negative part in terms of time or space. Such discussion will then lead to the essential problem of the mechanism or structure of the economy.
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