The power that drives a money economy is cash flow.

The power that drives a money economy is cash flow.

The foundations for the activities of economic entities are income and expenditure because the flow of funds controls management. However, it is impossible to analyze the functions of economic entities only by using the flow of funds. Therefore, we use lending and borrowing to measure the long-term function and profit and loss to measure the short-term function. In periodical profit and loss, it is the earning power that keeps management in a normal condition. To develop the functions of economic entities, it is essential to increase earnings. Earnings play a central role in periodical profit and loss. Earnings are supported by adequate expenses. Earnings consist of expenses and profits.

To obtain adequate income, it is important to maintain adequate prices. If arbitrary competition is left unchecked, it is impossible to maintain adequate prices. Stable income is a premise for diseconomy. If this premise should collapse, the economy becomes unstable. It is not good to simply have lower prices. This is because some expenditures do not have a connection with expenses, and, on the contrary, some expenditures are not posted as expenses.

The difference between current income and expenditure and the periodical profit and loss principle is seen in the depreciation cost, the balance of long-term loans and inventory. When these items are manipulated, profits can be adjusted independently of cash flow. By doing so, the nominal and real values would lose touch with each other. Then, setting prices lower than needed becomes possible.

Extreme cost cutting in pursuit of profits goes against the purposes of the economy because there is no point of view toward setting adequate prices while taking expenses into account.

The basis of economic activity is income and outlays, i.e., the difference between receivables and payables. It is time that produces that difference. If there is no cash on hand, payments cannot be made. Without the availability of seed money, a policy of dealing with receivables first and payables later is impossible. In a money economy, money comes first. Nothing begins without money. Basically, seed money is the same as debt because only a currency issuer has cash from the very beginning. To make a money economy workable, money has to be provided to users at first. This is the source of debt. Here, the nature of debt can be seen. This is why debt and capital have equal ranking in accounting terms. The fundamental nature of debt and capital is the same.

Debt comes from a system in which purchases are made in advance and payments are made later. For advance purchasing, it is necessary to circulate funds in advance. This becomes a cause of fund shortage and excessive liquidity. The shortage and excess of money is based on a subtle balance.

The point of origin of a money economy is income. Income is converted into consumption, investments and savings. Furthermore, consumption is converted into profits, investment into assets and savings into debt. In other words, consumption is expenses. Savings are converted into debt. Furthermore, debt is converted into investments by financial institutions. Investments link cash and means of production and they serve to supply cash in the market. Investments and savings form stock, and consumption creates the flow.

No outlay is generated unless there is initial income. In a money economy, incoming money, i.e., income, is the point of origin. Income is the basis of everything. Income means cash procurement. Cash is procured through profits, debt and capital. Without capital goods, profits cannot be yielded. Thus, the initial funding comes from seed money or borrowings. Both are payables. What leads to profits is consumption and expenses. The utility of currency emerges through consumption. Profits are an indicator that measures whether or not earnings matching expenses can be obtained. Profits are not an indicator that measures whether or not expenses match earnings. This is because expenses indicate distribution and because earnings are nominal accounts whereas expenses are real accounts.

People often speak of Japan’s Lost Decade. The existence of bad assets is said to be a cause of deflation. However, what should be noted is that bad assets and the bubble economy are two sides of the same issue - two issues that are in fact two sides of the same one issue. Both are caused by the dissociation of nominal value and real value.
An economic bubble is a phenomenon that features the rise of the real value of assets to the nominal value followed by the subsequent and rapid rise of debt, which is the nominal value. Adversely, bad assets appear as a result of the reduction of the asset value in comparison with the nominal value.
Anyone without an understanding of this mechanism cannot understand the economic bubble and the cause of the economic conditions after the bubble bursts.

A diseconomy is an economy based on borrowings. That is to say, it is an economy preceded by investments. Also, it is a leveraged economy based on the principle of leverage.

A diseconomy encourages the development of the financial system, and the development of the financial system encourages the expansion of the diseconomy.
Deposits and debt are two sides of the same thing. For financial institutions, deposits are borrowings, i.e., debt. The role of financial institutions is to convert deposits, or debt, into investments.

For a diseconomy to occur, regular income has to be secured. If regular income is guaranteed for a certain period, one can make repayment plans and financial plans. Regular income and borrowings are two sides of the same thing. The basis for debt is the value of the security, and the resource lies in assets. The resource for repaying the principal of debt lies in profits. The profits are the balance between earnings and expenses.

Unless a certain turnover of currency is maintained, the economy will not grow and profits will not be secured. What generates profits is the difference between the turnover of income and the turnover of expenses. Time is the source of profits.

The functions of diseconomy are hidden behind emerging economic phenomena.
The keys to the market economy are the balance of the levels of borrowings, earnings, assets and expenses. These levels are relative and have meaning when individual elements are compared to other elements. For example, the relationships between debt and earnings, earnings and expenses, assets and debt, and assets and earnings determine the adequacy of the levels. The results of management appear as the up-and-down movement of debt, earnings, assets and expenses. If this up-and-down movement is repeated at a certain cycle, management becomes stable and the future is foreseeable. If the up-and-down movement of debt, earnings, assets and expenses is irregular and the cycle is not fixed, management becomes upset and unstable. The same can be said about business. The important things are the cycle, width and balance. Accordingly, when considering economic phenomena, it is necessary to start by checking the balance of debt, earnings, assets and expenses.

In a diseconomy, activities are basically the same among economic entities. But, the manner of expression is different. Management entities include the family budget, corporate, government and overseas sectors. The debt of family budgets become assets for other sectors. The assets of the government become debt for other sectors. Accordingly, the mutual balance of debt, earnings, expenses and assets among individual economic entities is important.

The functions and burden of debt contain two factors: repayment of the principal and interest rates.
Repayment of the principal, one factor of the burden of debt, is not on the surface. What does come to the surface is the interest rate accounted as expenses. However, when a financial crisis comes to the surface, repayment of the principal, which lies submerged, is compelled.
This is the largest cause that aggravates a financial crisis or depression.
Capital is free from the repayment of a principal and the burden of an interest payment. But, capital does not bring any profits to capitalists. Originally, capitalists deposited capital with management executives. That is to say, capital is one type of borrowing, and this point should not be overlooked. Capital shoulders some burden as it is a dividend.

While the balance of the current account is an issue among currency blocs, the budget deficit is an issue among economic entities.

Basically the balance of the current account is a zero-sum transaction. To make the balance of the current account of a certain nation go from the red into the black means to make the balance of the current account of another nation go from the black into the red.
The balance of the current account among nations with unified currencies such as the euro is an off-setting account. If it is balanced internally, there is no problem. The issue of the budget deficit is different from the issue of the current account balance in terms of quality. A budget deficit is an issue among economic entities. A budget deficit means a deficit in the government sector. To eliminate the budget deficit, it is necessary to make any of the family budget sector, the private sector or the overseas sector go into the red.
When the financial sector ran about collecting long-term funds while the earning capacity of the private sector was declining, this compressed the debt of the private sector and, as a reaction, the debt of the government sector increased.

The balance of the current account only has to be balanced within a currency bloc.

The important policy to adopt now is to circulate currency in the market to increase the turnover rather than to add public investments or to supply money. For that purpose, the first priority should be improving the earning power of private companies.

For financial improvement, the privatization of public works should be promoted and public investments should be restricted. All that is needed is to replace or transfer the debt of the government sector to the private sector.

For business expansion, the earnings of private companies should be improved by restricting excessive competition and then promoting private investments.

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