The sum of the monetary value of the entire market is zero.
The important point is that the sum of the monetary value of the entire market is zero.
The fact that the sum of the monetary value is a zero sum is not related to whether or not there is definitely a deficit. The point is which sectors comprise the deficit entities and which have surpluses.
In order to clarify the balance of accounts by sector, it is necessary to grasp the overall balance of income and expenditure.
Basically, the following equations are valid.
Investments + consumption + savings + repayment of debt = expenditure
Sale of assets + income + borrowing + reversal of past accumulation = income
Income and expenditure are always consistent. The sum of income and expenditure
is translated as a zero sum.
On the other hand, the national account statement is calculated as the profit and loss within the unit period with income as the core.
That is, the profit and loss within the unit period is calculated as: income = consumption + accumulation.
The sum of profit and loss is also zero.
Accumulation refers to savings and capital transfer.
What is accumulated is assets and liabilities, as well as capital.
Surplus funds are accumulated in debt through lending and borrowing.
Lending and borrowing overall will comprise a zero sum, so if the subject of the lending and borrowing is not replaced, debt will accumulate unilaterally and will continue to increase.
This increases the stock of assets, liabilities, capital.
Assets, liabilities, and capital are the denominators of leasing, rent, interest, profit and amortization expenses. As assets, liabilities, and capital increase, the leasing, rent, interest, profit and amortization expenses, which are their numerators, will be compressed. If revenue does not grow or begins declining, interest and profits will be compressed.
Income is the sum of consumption and accumulation. Accumulation comprises investments and savings.
Assets and liabilities, as well as capital are formed through investments and savings.
And debt and capital are classified into financial accounts and capital accounts.
Disposable income is obtained by deducting the public expenditure and financial expenditure from income.
But the problem here is that accounting does not recognize financial expenditure.
That is to say, the repayment of the principal of debt is not entered anywhere in accounting.
In corporate accounting, there is a time lag between when the actual financial planning occurs and the funds for repayment of debt are secured in the form of amortization expenses.
In principle, the principal of debt should be repaid within the scope of income.
Income is one form of acquiring revenue. The second is the withdrawal of savings. The third is selling assets. And fourth is borrowing money.
Generally, the principal of the debt and the interest on the debt should be repaid within the scope of income.
The higher the amount of repayment, the more the available money through revenue, that is, the disposable income, will decrease. The repayment of the principal of debt is basically a fixed expenditure.
If the repayment becomes impossible within the scope of revenue, the repayment must be covered by past accumulation, new debt or income. If that is still not enough, then assets will be disposed of.
The livelihood of people suffers when their repayment of debt increases and their disposable income decreases.
In particular, when their income is flat or decreasing, they might fall into the so-called payday loan hell. The fearful thing about payday loan hell is that it can progress while people are unaware, and when they do take notice of their predicament, it has reached a state where the situation is out of control. This is the same with the nation.
The surplus and deficit of the unit periods of each sector are determined as follows: for the government it is revenue − expenditure; for finance it is interest income − payment rate, and free cash flow; for household budgets it is income − consumption expenditure; and for the overseas sector it is exports − imports.
The surplus and deficit of the total of each sector are determined by the increase or decrease of the total expenditure (investment + consumption + savings + repayment of debt = expenditure) and the total revenue (sale of assets + income + borrowing + reversal of past accumulation = income).
Investment relates to the increase or decrease of fixed assets and capital formation.
And it is politics that arbitrates how to adjust the surplus/deficit conversion of each sector.
The actual expenditure comprises the repayment for consumption + savings + borrowing. And the portion where the sum of the variance of consumption, savings, and borrowing exceeds the income becomes new borrowing and working capital. The relationship between consumption, savings, repayment of borrowing, and income determines the actual economy.
The important point is that new borrowing will be impossible if the repayment amount including the interest on the debt is beyond certain limits within the income. This is also the same for society as a whole.
An important key to establishing economic policy is the level to which the balance of receivables and debt is rising relative to the level of income.
If the amount of financial expenditure within the income is not accurately grasped, it may put the brakes on the whole economy.
In the worst case, the economy will collapse.
The problem lies in being convinced that by all means deficits are bad or that a surplus must be had.
If the whole is a zero sum, when there is a surplus, a deficit will automatically be derived. The problem is one of degree, and whether it is a transient or constant issue.
If you try to maintain a surplus by force, or if everyone tries to make a surplus, it will inevitably create tension and jeopardize the entire mechanisms of the economy.
Whether a surplus or a deficit exists is but a part of the problem, and the surplus/deficit issue is one that must be viewed from the perspective of the economy as a whole.
On the surface, income is thought to be allocated to consumption and savings.
However, actual expenditure comprises the repayment for consumption + savings + borrowing. And, if the sum of the consumption, savings, and repayment of borrowing exceeds the income, the portion in excess becomes new borrowing, that is, working capital. And the relationship between consumption, savings, repayment of borrowing, and income determines the actual economy.
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