The answer will show the course of the money flow
If you fail to provide a settlement fund by the designated day, you would go bankrupt. The same applies to the state, private companies and family budgets.
What institutions are involved in the increase or decrease of the money
supply? And, in what way are they involved? These are important questions.
To be able to reply to these questions, what do we need to make clear?
The answer will show the course of the money flow.
It is necessary to know who decides the amount of paper currency issued and how the amount issued is controlled. Paper currency consists of government notes and bank notes.
The credibility of government notes is guaranteed only by the issuing authority. Government notes are not recognized as government debt.
In contrast, bank notes are issued with the financial assets possessed by the issuing bank (the central bank under a central bank system) as security and the amount issued is included in the debt account of the issuing bank.
Bank notes are like open-ended promissory notes issued by a bank.
There are two kinds of paper currency: government notes and bank notes. As their functions and issuing systems differ from each other, the money supply and control can be achieved by constructing issuing and collecting systems and procedures for government notes as well as for bank notes. The way to control the money supply and issuing depends on how the issuing and collecting systems are designed. This refers to the design concept.
The amount of bank notes issued is entrusted to the central bank, but the central bank cannot issue bank notes without any principles. There are systems and procedures for issuing bank notes.
In Japan, one way of issuing bank notes is to supply them when a financial institution withdraws their deposits from accounts with the central bank.
Another way of issuing bank notes is when the central bank purchases national bonds. In the former case, the upper limit of the amount issued is the sum of the fixed deposits. In the latter case, the upper limit is the balance of the national bonds.
In the former case, the bank notes issued are based on the circulating volume of paper currency. In the latter case, the bank notes issued are based on the national bonds outstanding.
In actuality, bank notes are not issued and supplied to the market directly by the government. They are issued by the central bank and supplied to the market in the form of loans using the financial system with the central bank as core.
In that case, the circulating paper currency must be measured not only based on the volume of the bank notes issued in the unit period, but the number of rotations in the market should also be taken into consideration. In other words, it is necessary to know how often paper currency circulated within the unit period rather than how much paper currency was supplied to the market.
Therefore, the circulating volume of currency is analyzed using the volume of the supply and the number of rotations.
Paper currency is supplied to the market by the government in the form of loans using the financial system with the central bank as the core. At that time, the number of rotations required to supply paper currency to the market determines the money supply.
Regarding the money supply system, it is necessary to clarify the relationships between national bonds and currency as tools, and the issuing institutions, government and financial institutions as entities. For money supply control, it is crucial to clarify what security exists for the paper currency supplied to the market and what system is being adopted.
Under economic systems formed by the alliance of multiple government agencies, like the Eurosystem, the positioning of the functions of the issuing bank and other banks is important for constructing those economic systems.
The important question is what institution controls the money supply. At the same time, the scheme for managing national bonds and public bonds is also important. (For example, the central bank issues paper currency with national bonds as security.)
The key to such a scheme is how to guarantee the transparency of the system and procedures.
This is because the financial system is also a credit system.
Money is supplied from the central bank and the government.
To clarify the volume of currency in circulation, it is necessary to grasp the flow from the central bank to the financial institutions.
After we get a grasp of the supply and collection of money, the next thing to clarify is the volume of the currency in circulation. For that purpose, it is necessary to know the balance of the account with the Bank of Japan, loan-deposit ratio and base money.
Under the central bank system, the central bank issues currency when the central government issues national bonds. When the central government issues national bonds, the central bank loans currency to city banks using national bonds as security and supplies paper currency. Under the central bank system, the volume of the currency in circulation is adjusted through buying and selling of national bonds, and through borrowing and lending.
Accordingly, to know the volume of the money supply, it is necessary to look into the national bonds outstanding, the breakdown of the national bond mix (long-term national bonds, short-term national bonds and foreign bonds) and the amount of national bonds issued (excluding refunded bonds).
In particular, the ratio of refunded bonds to the total amount is important.
Furthermore, the foreign reserves should be clarified. This is because short-term national bonds consist of financing bills (FB) for a specific purpose such as exchange intervention and treasury bills (TB) to compensate for the fiscal revenue.
If the total is zero, some of the individual parts are plus and others are minus, excluding cases in which every part is zero. The current balance of every state is neither red nor black. Red and black always co-exist and the total is zero.
Every currency value does not always appreciate. If some currency appreciates, there are always other currencies that are devalued.
The crucial point lies in the relationship that the whole is one and the sum is zero. We can see the basic structure of the economy in the formula constituting this relationship.
In the whole state, the gross income, gross product and gross expenditure coincide with each other.
GNP (Distribution) = Consumption + Savings
GNP (Expenditure) = Consumption + Investment + Current Balance
Therefore, Saving - Investment = Current Balance
Balance between Savings and Investment in Private Sector + Balance between Savings and Investment in Government Sector = Balance between Savings and Investment in Foreign Sector
(Borrowing and Lending in Family Budget - Investment in Family Budget) + (Borrowing and Lending by Private Companies - Investment by Private Companies) + Fiscal Revenue and Expenditure + Capital Balance + Change in Foreign Reserve = 0
Fiscal Revenue and Expenditure = (Tax Revenue + Nontax Revenue) - Budget Expenditure
The balance between Savings and Investment in the Government Sector is nothing more than Fiscal Revenue and Expenditure.
When a budget deficit is caused, it is thought that the government sector has run out of money. However, we should not forget that the government sector is a fund supply source. When the market expands, the money supply has to be increased by necessity.
On the contrary, when the market shrinks, the money supply has to be decreased. Does a change in the money supply invite market expansion or shrinkage? Or, does market expansion or shrinkage invite a surplus or shortage of funds? The problem is not which is right or wrong. Both are possible. However, we should take note of cases in which the market scale does not conform to the money supply.
The single-year equal budget principle means:
(Tax Revenues + Nontax Revenues) - Budget Expenditure should be always be zero.
While the tax revenues and the nontax revenues are undetermined, the budget expenditure is predetermined as a budget through legal procedures.
Thus, once finance goes into the red, it is technically difficult to make it move into the black.
The fiscal revenue and expenditure give meaning to national bonds.
To have finance fulfill its original function, the following measures should be taken. First, suspend the single-year equal budget principle. Second, change the cash basis to the periodical profit and loss principle, or use the periodical profit and loss principle together with it. Third, increase nontax revenues. Fourth, capitalize a portion of the national bonds. By capitalizing a portion of the national bonds, the upper limit for issuing paper currency is fixed.
Also, when the balance between savings and investment is seen as a great issue, the reference should be capital investment, which represents cash flow, rather than the current balance.
The relationships among the current balance, capital balance and foreign reserve are as follows.
Current Balance + Capital Balance + Change in Foreign Reserve = 0
Current Balance = Trade Balance + Service Balance + Income Balance + Current-Account Transfers
The important premise is that the sum of the current balance is zero throughout the entire world. First of all, we should assume that the whole of the current balance is one and the sum is zero.
The relational expression of
Family Budget Sector + Company Sector + Finance Sector + Foreign Sector = 0
If we link a relational expression like this to the relational expression that shows the current balance is a zero-sum in the world market, we can clearly see a picture of the world economy.
If we attempt to balance the individual parts independently, money will not go into circulation and the economy will be devitalized. This is because the circulation of money is caused by the differences.
The problem is whether the relationship is permanent or temporary. If the relationship between one state having a current-account deficit and another state having a current-account surplus is permanent, both the red and the black sides would accumulate unevenly.
The same applies to the relationships among the family budget, government, company and foreign sectors.
We should analyze the geographical conditions, resources and economic environment of a state and construct an industrial structure appropriate to the state.
In a state with poor resources, income generated from resources is small. Therefore, such states should be based on service industries. For such states, it is necessary to construct a state based on a small government and energetic private companies.
For states with poor resources, there are specific styles of state foundation: the Switzerland-style, Monaco-style, Hawaii-style, Singapore-style, an academic city-style and so forth.
In an economic sense, a government that grows too large is not favorable to a state with poor resources. The tasks performed by the government are less marketable and inefficient. If circumstances allow, it is better to downsize the government to vitalize the market. States poor in resources are vulnerable to overseas fluctuations. To respond to environmental changes flexibly, it is effective to minimize the rigid portion.
If finance falls into a permanent shortage of funds, business conditions become rigid. This is a problem. The cause lies in the single-year equal budget principle of finance. Under a liberal system, public institutions, too, should pursue profits.
Since finance is permanently in the red, finance cannot exercise its power effectively in response to business fluctuations. In addition, since the budget principle prevents finance from coping with the situation flexibly, the chance to take effective measures is lost.
It is impossible to put all of the Family Budget Sector, Company Sector, Finance Sector and Overseas Sector in the black or in the red. This is a premise. And, another premise is that the sum of these sectors is zero in the entire market. Thus, the question to decide is which we will put in the black and which we will put in the red.
Under a common currency system like the Eurosystem, the current balance does not tend to emerge. Instead, the capital balance becomes apparent. Greece has the following two options. One is to transfer the deficit of the government sector to the private sector through privatization and then achieve a surplus in the current balance. The other option is to attract capital from the eurozone to achieve a surplus in the capital balance.
Anyway, it is better to hold down the cost of administration. For that purpose, a small government should be realized. Since the transfer of income does not increase the gross product but tends to rigidify finance, expanded reproduction can be expected. In particular, funds should be appropriated to enhance public investment and social capital.
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