Why is the economy not functioning smoothly at present?
Why is the economy not functioning smoothly at present? The reason is that
corporations are becoming less and less profitable now.
As a market principle, competition tends to be accepted as an absolute. However, the functions of the market are not a part of competition. Competition is a part of the market functions.
There are several functions of the market: 1) distribution, 2) setting prices, 3) adjusting prices (to balance price fluctuations), 4) adjusting supply and demand, 5) procuring, keeping, distributing and controlling resources (labor, goods and money), 6) assuring the quality of properties, labor and means of production (including safety and maintenance), 7) protecting the environment, 8) adjusting production volume, 9) protecting consumers, 10) creating and preserving jobs and establishing regular income, 11) promoting and adjusting investments, 12) establishing credit systems, 13) establishing regulations for transactions and preserving discipline, 14) preserving trust in and circulation of money, 15) protecting and developing industries, 16) selecting inefficient industries and businesses, and 17) adjusting disparities between domestic and foreign prices and exchange fluctuations.
The first of these functions, distribution, promotes property distribution through exchanges of property and money. The second function, price setting, decides the current monetary value of properties through market transactions. The fourth function, adjusting supply and demand, controls production and consumption by adjusting demand and supply. Competition is a function of the price setting function.
The role of competition, that is, the purpose of competition, is to decide reasonable prices. On the other hand, if competition impedes reasonable prices, competition actually causes harmful effects.
The most important function of the market is distribution. This function distributes property through market transactions.
To achieve reasonable distribution in the market, it is necessary that money is distributed evenly among market participants.
Money represents the right to exchange it for property in the market.
Market competition works properly when it forms reasonable prices.
We should not forget that fair competition exists only when fair regulations exist. An arbitrary dispute is not competition but a conflict or a fight that might ultimately lead to bloodshed. Even a war has rules.
Rules and regulations mean restrictions. Even if restrictions are eased, fair competition is not guaranteed. Arbitrary deregulation just exacerbates conflicts and does not guarantee fair competition.
In fact, markets in which regulations have been eased have arbitrarily deteriorated, and in the end encouraged oligopoly and monopoly.
Getting an investment of 300 million yen means acquiring an asset worth 300 million yen. But at the same time, it also means getting a loan from somewhere. This point should be noted. Procuring funds of 300 million yen means assuming a repayment obligation or debt. This is the same in the case of capital. Basically, repayment should be made from income. What is important is that the repayment has to be made not from income, not from profits. The problem is that debt would increase or cash management would deteriorate when debt cannot be repaid from income. Whether profits after the repayment of the long-term debt can be obtained or not governs the trend of gross capital. Furthermore, if repayment of the principal of long-term debt is encouraged while profits are weak, the economy would cease to function any more.
The amount of long-term debt repaid does not officially come to the surface in terms of accounting. Therefore, after-tax profits are the resources used for repayment. Deduction from after-tax profits means that the resources available to repay debt decrease by the amount of tax paid.
Also, repayment of long-term debt is basically not recognized. Defaulted credit has defaulted debt on the opposite side. If defaulted credit is disposed of in response to a decline in profits, assets are disposed of but defaulted debt remains. As a result, debt accumulates. We should keep in mind that the basic problem is a decline in profits.
Another risk is that excessive money gets into circulation if credit is cleared up and only debt remains.
Excessive money in circulation causes excess liability. This could be a cause of inflation in the future.
The tax system should be designed with a proper understanding of this point.
At present, the Japanese economy is experiencing a strange balance between inflationary pressure caused by excess liability and deflationary pressure caused by the strong yen.
The problem lies in income and expenditure.
In the concept of periodic profit and loss, revenue is based on profit. Profit consists of a balance between earnings and expenses. After all, earnings and expenses exist to correct the imbalance between revenue and expenditure over a certain period. The principle of periodic profit and loss aims to maintain the balance of excess and deficiency of periodic profit and loss by making use of long-term funds.
For periodic profit and loss, the key point for the period is earnings and expenses. Under the principle of periodic profit and loss, the economy would not function if the balance between earnings and expenses could not be maintained.
However, it is difficult for individual industries and businesses to maintain constant earnings. That is why the function of politics is important.
The market is an artificial system. It was not created naturally. As the market is a system, various safety devices are required for the market to operate properly.
The current market economy is premised on regular employment and regular income. It is based on a credit system that works when regular income and regular employment are established. Therefore, if the regular employment system were to collapse, the current market economy would soon fall apart in no time at all.
For example, if you want to buy a house and get a mortgage, the premise is that you have regular employment and regular income. If you became unemployed and no longer had a regular income, this structure would break down in no time at all. If you fell behind in your repayments, you would be required to repay the loan in full or dispose of the collateral.
The problem is income, steady income. Even if you were to cut back on your living expenses and dip into your savings, the problem would not go away without obtaining income.
Corporate management and finance have the same structure. The problem would not go away unless earnings were recovered.
In a money economy, it is cash flow that drives the economy. To know the function of cash, it is important to know the route of the cash flow.
The function of cash depends on the volume, direction, speed and scope of the cash flow. Viewed from a different angle, speed means rotation.
Money is supplied to the market through the following process. The issuing institution lends money to public or financial institutions. Then, money is supplied to the market through investments made by these financial or public institutions. These investments are converted to assets, and the assets are converted to expenses. Funds paid as expenses become revenue and income. Revenue and income are distributed to consumption, savings, repayment of debt and taxes.
Savings and taxes are reinvested and flow back into the market. Repayment of debt is cleared. After that, consumption and reinvestments are returned to earnings and redistributed as expenses. This repeating cycle maintains the market system.
No matter whether it is savings or repayment of debt, there is no difference in the money recovered by financial institutions. The consumed money is returned to the market.
The market system is sustained by the return flow of cash. If the cash flow were to stop, the market mechanism would break down.
The foundation for the market economy is purchasing power. Purchasing power is based on income. If employment were to become unstable, the economy would also inevitably become unstable.
The economy is driven by cash flow. The foundation for the volume of cash flowing in the market is revenue and income.
The important factors of revenue and income are volume and rotation.
Taxes are used for public investments and redistribution of income. The important factor in the redistribution of income is the ratio of taxes to gross domestic income. If this ratio is high, the ratio of the contribution to the redistribution of income is also high. The per-capita income required for redistribution and the ratio of workers contributing to the gross national product to the total population are important. If the ratio of taxes to income becomes higher, it inevitably becomes necessary to sustain a high level of per-capita income.
An important role of the market is sustaining added value through price adjustments.
Investing means raising funds at first and then acquiring assets. Fund-raising means assuming liability irrespective of its form, such as debt or capital. Given the nature of investments, the asymmetry of debt and credit becomes conspicuous when investments are made.
The problem is the depreciation of assets. Except for some assets such as land, asset depreciation starts when ownership is acquired. The depreciation of assets is a problem because assets are used as collateral to secure debt. If repayment of debt is guaranteed by revenue, this problem of asset depreciation does not surface. Once earnings decline, however, the problem comes to light as defaulted credit.
What is interest on money? To clarify the meaning of interest on money, it is necessary to know the functions of interest on money.
The functions of interest on money are: 1) forming the value of time, 2) forming expenses, 3) providing a source of earnings for financial institutions, 4) forming added value, 5) influencing commodity prices, 6) forming exchange rates, and 7) influencing the money supply, rotation and stocks.
Interest on money forms the value of time. This means that interest on money is a time function. When determining the function of interest on money, it is necessary to calculate the current value based on the cash flow.
Also, it is necessary to take into account the effects of time differences upon interest.
What should be considered is the fact that debt repayment plans are not always linked to earnings.
Debt consists of principal and interest. In the structure of debt, the portion of the interest forms the time structure.
Whether borrowed funds constitute debt or not depends on the time period required to repay the procured funds. That is to say, when repaying procured funds, the portion exceeding the unit time period is classified as borrowing or debt. On the other hand, the portion to be repaid within the time period is classified as an expense. However, the repayment amount for the portion corresponding to the principal of the debt is not considered an expense.
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