Economics exists because of surpluses and shortages. If every country could be self-sufficient in all resources, there would be no interdependence in the global economy. The global economy is built on mutual aid.
Economics is about compensating for the surpluses and shortages of people, goods, and money. When goods are scarce, people are scarce, and money is abundant, it is utilized. When people and money are scarce and goods are abundant, they are taken. What is surplus and what is scarce can change the nature of a country. The United States is one of the few countries with surplus in all aspects. Currently, Japan is lacking in both people and goods. This is something that Japanese people need to be acutely aware of.
It is important to note that both people, goods, and money have quality and quantity. It is not enough to just meet the quantity; without quality, productivity suffers.
The most serious issue is the shortage of goods relative to people.
Economics assumes rotational motion and vibration. Money exerts its utility by circulating. When money flows in one direction, the wealth gap widens to the extreme, society becomes divided, and the flow of money stagnates and eventually stops. Taxes are a means to correct the imbalance of surpluses and shortages. Taxes are responsible for the redistribution of income and wealth. However, redistribution of income and wealth needs to occur not only between individuals but also between sectors and countries.
Chronic capital shortages in certain sectors or countries and capital surpluses in others fix the gap between wealthy and poor countries.
The balance between countries is also a matter of key currencies.
A key currency is a currency used for settlement. When a specific country’s currency is used as a key currency, it means that the key currency country provides foreign exchange reserves to other countries, and its own monetary, financial, and economic policies are constrained. The key currency country must compensate for the surpluses and shortages of funds between countries.
Keynes was concerned about making a specific currency the key currency. As expected, the United States has suffered since then. Currency, especially banknotes, are originally promissory notes. In a peculiar relationship, like accommodation bills, the government issues government bonds to borrow money, and the central bank lends money to the government. So, who does the central bank borrow money from? The people. Depositors in commercial banks, the citizens. In other words, the government and the central bank can issue as much money as they want if they wish.
In Japan, it is clear that if the central bank directly underwrites government bonds, there will be no stopping it, so it is prohibited. Instead, commercial banks are made to buy government bonds, which are then taken over by the central bank, making it practically the same as direct underwriting. This has led to a situation where the loan-to-deposit ratio has fallen below 50%.
Even if inflation progresses, the large issuance of government bonds prevents interest rates from rising. This is the basis for hyperinflation.
Understanding how money flows, its direction, quantity, and speed, and the levels in individual situations can provide a clear picture of the economic reality.
In the current account balance, it is important to know which country holds the key currency. The key currency serves as settlement funds, so there is no need to prepare foreign exchange reserves. This is both an advantage and a disadvantage for the key currency country. The advantage is that there is no need to hold foreign exchange reserves. On the other hand, it becomes necessary to provide foreign exchange reserves to the counterpart country. Since the United States holds the key currency, it tends to have a current account deficit.
There are also issues like the trilemma of international finance. The trilemma of international finance is an important concept in economics, referring to the three policy goals that a country cannot achieve simultaneously. These three goals are:
- Maintaining a fixed exchange rate: Keeping the value of the currency constant against other currencies.
- Free movement of capital: Allowing free inflow and outflow of capital without restrictions.
- Independent monetary policy: Adjusting interest rates and money supply according to domestic economic conditions.
The essence of this trilemma is that it is impossible to achieve all three goals simultaneously. For example, maintaining a fixed exchange rate while allowing free movement of capital makes it difficult to conduct an independent monetary policy. Conversely, maintaining an independent monetary policy while allowing free movement of capital makes it difficult to maintain a fixed exchange rate.
Markets for a country’s currency, like the Eurodollar, can form abroad.
The issue of central bank independence is also involved.
Theories like MMT (Modern Monetary Theory) pose the risk of separating distribution from the cycle of production, distribution, and consumption.
The advent of AI might make planned economies and controlled economies seem possible. However, planned economies and controlled economies bring about different kinds of problems. Control creates vested interests and leads to social stratification and class formation. Social stratification and class formation hinder the flow of money.
It is reasonable to differentiate distribution based on evaluations that are understandable to everyone, like in sports.
No matter how advanced AI becomes, relying entirely on AI creates different obstacles. AI can predict but cannot decide. If AI makes decisions, humans will lose the ability to decide and even lose their thinking ability. This creates new stress between people and also meaningless stress and conflict between AI and humans. AI can provide appropriate information, but the final decision must be made by humans. AI is a support role, and responsibility lies with humans. If this balance is broken, both will collapse because they need each other.
Labor is an activity for living. It is not a punishment or a burden. Living is not a sin. Raising children is not a hardship; it is a learning experience. The reason for the declining birthrate and aging population in developed countries is that people lose the sense of fulfillment in work and hope in raising children.
The fact that it is a zero-sum game means that there is always a force trying to balance. This balancing force is recognized as repulsion and attraction, action and reaction. This force creates vibrations, which are converted into rotational motion. This rotational motion circulates money in the market.
Therefore, the key is to understand what is connected in a zero-sum relationship.
For example, assets and expenses, liabilities and capital, and revenues are in a vertical relationship. Assets and liabilities, capital, revenues and expenses, assets and revenues, liabilities, capital, and expenses are in a parallel relationship. Items in a parallel relationship are also called cross relationships.
Debits and credits are balanced in a zero-sum manner. The trial balance is balanced in a zero-sum manner. When the trial balance is divided into profit and loss and balance sheet, the balance is broken. The profit maintains this balance. Originally, it is appropriate to call profit and loss, but since profit and loss are recorded as revenues and expenses, it is called profit here.
Within the management entity, there is a force trying to maintain vertical and horizontal balance, and this force drives the management entity.
The balance sheet represents long-term capital movements, and the profit and loss statement represents short-term (unit period) capital movements.
Considering this, profits are always compressed. To continuously generate profits, it is necessary to break the balance by adding time value. Interest adds this time value. Therefore, zero interest rates work to compress profits. However, interest has a double-edged effect, and when economic growth stagnates, it works to compress profits. The economic system based solely on growth has its limits, and generally, the mature state is considered to be longer.
Therefore, the key to economic policy is how to adjust long-term and short-term balance. Considering this, liabilities and expenses, which have been considered negative factors, actually hold the key. In a sense, it is the negative utility. How to borrow money safely and secure appropriate expenses. Profits are built on top of this. Profits are just an indicator. It is not a matter of good or bad, but there are healthy deficits and unhealthy surpluses. Unhealthy surpluses can have worse effects.
The basic relationships are vertical and parallel relationships as mentioned earlier. The trial balance is the basis of accounting. Before it is converted into the adjusted trial balance. The process of converting the trial balance into the adjusted trial balance, and the process of dividing the adjusted trial balance into profit and loss and balance sheet, and the closing procedures hide the mechanisms of accounting and capitalism. Therefore, it is important to understand the third-grade bookkeeping.
Understanding the mechanisms of accounting reveals the mechanisms of capitalism. This is the key. Capitalism is based on bookkeeping principles, and the meaning of capital cannot be understood without understanding accounting and bookkeeping. However, most economists do not understand bookkeeping. Only practitioners understand bookkeeping, but they cannot theorize it.
Bookkeeping is related to machine learning.
This also applies to national economic accounting. It is not about making a surplus at all costs or that deficits are bad, but about logically examining why there is a surplus or deficit, and identifying any unhealthy or abnormal factors. This includes the pros and cons of making a specific currency the key currency.
How to resolve fiscal deficits, how to align long-term and short-term balance, and how to incorporate time value. How to resolve fiscal deficits. The government should also earn money. This would realize the principle of beneficiary pays. Not relying solely on tax increases. The strange value that profit-making businesses are evil makes it impossible to move. The government is a bundle of vested interests. In the past, they earned money by selling trade rights or monopolizing salt in China.
It is possible to make a profit without privatization, and it can be turned into a fund. It is essentially bureaucratic work. If separated from bureaucratic work, it can make as much profit as it wants. Even without privatization. At least, if the accounting is aligned with private sector standards. Public projects are too far removed from the market economy from the planning stage. The accounting is different.
It is strange, but the communist system is nestled in the middle of the capitalist system.
The mechanism is designed to make profit and loss unbalanced. Otherwise, it is impossible to draw a structure where all companies make a profit. If based on income and expenditure, if there are profitable companies, there will inevitably be companies with deficits. Also, it becomes impossible to evaluate short-term business activities over a period.
The total economic value does not exceed the total income. Total revenue does not exceed total expenditure. Economic fluctuations appear as the difference between the beginning and the end of the period.
Labor costs include expenses, rewards, living expenses, and distribution. These functions connect production, distribution, and consumption through labor costs.
When the balance of payments is zero-sum, the economy does not fluctuate. When balanced, no profit is generated, and no added value is created. Consequently, “money” does not circulate. The circulation of “money” is driven by surpluses and deficits, and added value. In other words, it is driven by distortions and imbalances.
These distortions and imbalances are created by debt. Modern economies are built on debt.
Banknotes, or paper money, can be considered as debt from the nation’s citizens. Paper money, government bonds, and taxes are inseparably related. Similarly, deposits and debts are also inseparably related.
The circulation of “money” is driven by market distortions, i.e., surpluses and deficits. These surpluses and deficits create debt. Debt means lending “money” from places where there is a surplus of “money”. Lending “money” is called finance.
Loans and profits and losses are two sides of the same coin. Behind profits and losses, loan relationships are formed.
However, total revenue, total income, and total expenditure are consistent, and the total sum is zero. This would stop the movement of “money”, so the long-term and short-term utilities of “money” were separated. The short-term utility arising from sales and purchases was classified as profit and loss, and the long-term utility was classified as loans. Furthermore, the long-term utility was divided and amortized as expenses. At the same time, liabilities were also classified into short-term and long-term utilities. By incorporating the time value, the difference between the beginning and the end of the period was created.
In other words, by separating long-term and short-term utilities and dividing long-term utilities, profits were generated. Loans were incorporated into long-term utilities, and sales and purchases were incorporated into short-term utilities. The problem that arises later is that the repayment and amortization of debt do not match in terms of price and period. This means that sales and purchases, and loans are balanced.
This relationship can be understood by looking at the relationship between total assets and total capital, and operating cash flow. The difference between current assets and current liabilities, and the core part of operating cash flow is working capital.
Cash flow means the flow of “money”. The economy is driven by the flow of “money”. So, what functions does the flow of “money” have?
Debt itself is not bad, but it is bad when debt becomes uncontrollable.
National finances are based on the principle of annual balance. An annual balanced budget forces long-term utilities into short-term utilities, causing imbalance.
In other words, fiscal collapse is an inevitability created by annual balanced budgets, based on standards different from modern market principles. Without awareness of this point, appropriate economic policies cannot be adopted.
Especially in the overall economy, public investment and social security belong to long-term utilities and must be based on long-term balance. If these are forcibly treated as short-term utilities, the balance of payments will not match. Economic theories lacking this perspective do not hold.
This is because they ignore market principles.