If only one or two out of 100 companies went bankrupt, bankruptcy would only be problem for the companies involved. But if some 20% of all companies went bankrupt, it would be reasonable to think that we would be wrong to assume such a narrow effect.
If one-third of all companies went bankrupt, the problem would lie in the structure. If the majority of companies went bankrupt, without a doubt, the system would have a defect.
The reason why the cause of the current ongoing economic crisis cannot be remedied lies in wrong recognition of the problem. First of all, the present market economy is a system that is based on a long-term balance, but remedial measures are being taken based on a short-term balance. Second, while the problem of bad assets is caused by the divergence of the nominal value from the substantial value ?- the divergence of the liabilities from the debt -- this is incorrectly recognized as a problem of substantial value alone.
In the first place, companies that are based on continuation should not be assessed only by their short-term performance. For this reason a profit and loss standard exists.
The profit and loss standard does not assume that a company will always operate in the black. It assumes a balance of the company’s profit and loss.
The problem is the cause and the nature of the loss. In the light of industry objectives and the long-term outlook, it is important to determine what the causes of deficits are, and whether or not the situation is temporary.
While the monetary value of assets that work to bear out the nominal liabilities goes up and down dramatically, the nominal liabilities remain at par value.
Even after bad debts are disposed of, the borrowing -- the nominal liabilities -- will not decrease. Nominal liabilities are first eliminated when the debt is repaid. Resources that enable repayment of debts must come from earnings. While funds can be borrowed anew to repay existing debts, the outstanding amount of the debt keeps accumulating.
The distortion of the economy is, in fact, a distortion of the accounting system. The distortion of the accounting system is reflected upon the economy. The distortion of the accounting system is visible in financial statements.