The issuance of paper money establishes the concepts of assets, liabilities, capital, revenue, and expenses, forming the foundation of modern accounting.
The essence of paper money is a debt instrument, in other words, an IOU.
It is necessary to clarify the economic effects of debt. Phenomenally, it is the flow of “money” from the lender to the borrower. When “money” flows from the lender to the borrower, an equal amount of claims and liabilities are generated vertically. At the same time, interest is also generated. In other words, debt creates four functions: cash, claims, liabilities, and interest.
Let’s examine each element in more detail. First, cash. Cash is an asset and a factor in forming assets. Cash is a debt instrument. It can be digitized, but its nature as a debt instrument is not lost. Additionally, the anonymity and settlement finality of cash are important. Second, debt is a liability for the borrower and a claim for the lender. Liabilities are debts that must be repaid and generate interest. Liabilities can be transferred. Liabilities are contracts guaranteed by instruments. Third, debt is a claim for the lender. Claims are assets and can be collateralized. Claims can be transferred. Claims can be divided. Claims generate interest. Claims are contracts guaranteed by instruments. Fourth, the generation of interest. Interest is a financial cost and should not be forgotten. Interest creates time value. Interest is established by contract.
Debt appears as income and expenditure. It exerts its utility through disbursements and receipts.
Borrowed money generates income (assets, cash) and liabilities. From the perspective of the other party, it becomes a loan (claim) and expenditure. The important thing is the movement of “money” and the relationship between claims and liabilities, as well as the time value and the role of interest.
Cash exerts its utility when used, that is, when it is operated. Therefore, the use and destination of cash are important. Uses include investment and expenses. Investment forms assets, including loans. The problem is that accounting investments and expenses do not always match the flow of “money.”
The flow of “money” starts with borrowing and lending. Assets turn into expenses, expenses turn into sales revenue, and the difference between expenses and sales measures profit. Expenditure of expenses realizes distribution.
The function of short-term funds is to raise funds as liabilities, spend them as expenses, and recover them as sales revenue. Recovered funds are reinvested. Long-term funds are formed by initial investments, capital investments, land purchases, loans, etc.
The important thing is that expenses are a means of distribution. From the perspective of production, it may seem that expenses should be minimized, but expenses are the source of income, and the important thing is how to balance production and income.
The role and flow of “money” for production have short-term and long-term functions and flows. Short-term functions form profit and loss, while long-term functions form borrowing and lending.
Economic entities such as companies, households, governments, financial institutions, and individuals exert their functions through income and expenditure, that is, receipts and disbursements. This is the premise of economic activities based on “money.”
Accounting is a system and norm for measuring economic conditions by dividing the long-term and short-term functions of “money.” Long-term functions fall under the framework of borrowing and lending, while short-term functions fall under profit and loss.
Income includes debt-based income and revenue-based income. In accounting, debt-based income is classified as total capital (liabilities, net assets), and revenue-based income is classified as revenue.
It is important to note that liabilities, net assets, and revenue are not directly linked to income; they are functions based on income. For example, accounts payable are essentially borrowed money because they are purchases without disbursement.
Revenue refers to added value. Expenses are the added value minus profit, and added value is the value added by work and effort over a unit period. The base is formed by debt-based income. The origin is in the initial setting by debt-based income, and at that point, capital is established. Capital is an accounting concept, and understanding capitalism requires an understanding of accounting.
This also applies to democracy. Democracy is also an institutional concept.
If revenue, that is, profit and loss, can be attributed to the issue of added value, the key is whether distribution is appropriately allocated based on added value and linked to individual work and life.
Individual lives also differ due to preconditions such as natural and social environments. This point must also be considered. It is a matter of standards, ranges, and variations.
Production volume and unit price, income per capita and productive labor population, consumption expenditure, and living standards. The outstanding balance of government bonds, the Bank of Japan’s holdings, the balance of the Bank of Japan’s current deposits, and the balance of issued banknotes. These are the basic data.
First, it is important to correctly recognize the relationship between people and things.
The essence of the economy lies in constructing and controlling a system of production and distribution that can produce and procure the necessary resources for all people to live, and provide them to those who need them, when they need them, and in the necessary amounts. When this concept is lost, war, famine, poverty, and natural disasters will afflict humanity.
Debt consists of claims and obligations.
In the context of debt, a claim refers to “money.” “Money,” or cash, is an asset. An obligation refers to the duty of repayment. And debt is required to be backed by collateral.
In other words, debt consists of three elements: “money,” a promissory note, and collateral, along with the lender and the borrower. Simply owning land only gives the value of the land itself. By using the land as collateral, you can borrow “money” and obtain cash. Since you are not selling the land, you do not lose ownership of the land. However, you will bear the obligation of debt and the duty to pay interest. The obligation to repay the debt arises the moment the debt is incurred. The lender holds the claim. If repayment becomes impossible, the collateral can be seized. Additionally, claims can be transferred and used as collateral. The borrower can obtain cash in exchange for bearing the obligation. The use of the cash is determined by the borrower. You can buy land and use it as collateral to borrow money. You can also make capital investments. You can build an apartment and rent it out to people. From this, the concept of cost-effectiveness arises.
Debt generates this much economic utility. And currency is based on the utility of such debt. This is also the essence of the modern capitalist economy.
Currency is a means of payment, a debt instrument, and an asset. In other words, currency is an asset that also has the characteristics of a liability.
Simply owning land does not enable investment. Investment becomes possible because one can borrow money using the land as collateral.
No matter how vast the land one owns, if it cannot be converted into economic or monetary value, its economic utility cannot be expected. Not only taxes but also market value are important. Debt, investment, expenses, revenue, principal repayment of loans, and interest payments create the flow and circulation of funds. In agriculture, the flow of “money” only occurs when the products are sold.
If land can only be utilized as land, like in agriculture, capital does not arise. By using land as collateral to borrow money, claims and debts, as well as cash, arise. This cash is then used as funds for investment, establishing capital. In other words, claims, debts, collateral, funds, and investments generate expenses and income. This structure becomes capital.
Capital is treated on the same level as liabilities.
Expenses are the key to distribution, and if one relentlessly cuts costs and compresses expenses, it will ultimately shrink the market.
Stable income has made it possible for salaried workers to borrow money. Therefore, the expansion of irregular employment worsens the economy. In other words, modern capitalism is built on debt. Although it is built on debt and expenses, debt and expenses are being villainized, making it impossible to control the economy.
What drives a company are its income and expenses, in other words, inflows and outflows. Money is used, meaning it decreases when spent. If the decreased amount is not compensated by work, there will be a shortage. This work drives economic entities and circulates money. The balance becomes important. If there is still a shortage despite working, borrowing is necessary. Financial institutions act as intermediaries, transferring funds from entities with surplus to those with shortages.
In market transactions, goods with equivalent value to money flow in the opposite direction of money. Therefore, the economic value of market transactions is always balanced at zero-sum. While goods are consumed, the value of money is preserved.
The ultimate goal of the economic system is to balance production, distribution, and consumption. This also means balancing the relationships between people, goods, and money. Whether it is production, distribution, or consumption, or the relationships between people, goods, and money, what disrupts this balance are quantitative shortages or excesses, structural imbalances, distortions, and unfairness. When balance is lost, people tend to resort to violent means to restore it. This is the primary cause of wars.