Conclusion (The Structure of the Bubble)
In conclusion, I would like to consider what is actually happening in the Japanese economy.
It is a waste of time to conduct analyses that do not lead to decisions. Analyses are conducted to aid in some form of decision-making. I do not want analyses that confuse people with indecisiveness. In that sense, we do not need critics. Analyses are conducted because there is uncertainty, and analyses that only increase uncertainty are counterproductive. However, it is also problematic if there is only one conclusion and one’s thoughts or judgments cannot be reflected. Therefore, information is sought to provide the necessary requirements and information for making decisions.
For this purpose, it is essential to clarify what decisions need to be made and how. Without this clarity, there is no point in conducting analyses.
Without forecasts or plans, one can only rely on intuition and experience. However, that is not sufficient to lead an organization. Predictions based on reliable information, budgets, and plans based on those predictions, and comparing them with actual results to devise and implement countermeasures are necessary. Each situation requires its own decision-making. The final stage of analysis is managing the forecast and actual results. Identifying problems, devising countermeasures, implementing them, and correcting the deviations from the initial intentions is the essence of analysis. In other words, the key is how to correct approximations and errors.
The primary purposes of economic analysis are prediction and explanation. Predicting future economic changes and explaining what is currently happening are the demands of economic analysis. This is because economic analysis is meaningless unless it leads to some form of countermeasure, economic policy, or management decision. Explanation involves explaining causes, situations, results, and mechanisms. The ultimate goal is to minimize or eliminate errors and mistakes in predictions and explanations. Recognizing errors and minimizing them enhances the evaluation of predictions and explanations.
The key is the balance of income and expenditure. The composition of income and expenditure significantly impacts the state of the economy. Income composition includes income, borrowing, and asset liquidation. Expenditure composition includes settlement, repayment, and asset formation. If the amount of settlement exceeds income, it indicates a shortage of funds. If the repayment amount exceeds borrowing, it means a reduction in debt. If asset formation exceeds asset liquidation, capital is accumulated. The relationship between income and repayment, settlement and borrowing, affects the stock, i.e., the increase or decrease of assets. The balance between borrowing and asset formation, income and asset depreciation, indicates investment efficiency. When the balance of these relationships collapses, the economy fails.
The primary requirement for the economy is sustainability. The second is fair distribution. The third is the realization of economic objectives. The most pressing issue is whether the current economy, especially the fiscal situation, is sustainable. If fiscal sustainability is not maintained, the economy cannot be sustained. All conditions will be overturned from the ground up. Sustainability is related to the essence of the economy. The essence of the economic system lies in distribution. Fair distribution means providing necessary items to those who need them, when they need them, and as much as they need. Fair distribution is related to the purpose of the economy. No matter how good the profits are, if income decreases, it is meaningless. The basic principle of a market economy is to earn a living by working and receiving compensation for that work. If this principle collapses, the essence of the economic system changes.
The economy is a purposeful activity. Each economic entity is constrained by its purpose. The realization of the purpose is constrained by the roles and functions of each sector. The state has its purpose, companies have their purposes, households have their purposes, and individuals have their purposes. The purpose of the economy varies according to each entity.
Economic analysis fundamentally depends on what the economy aims to achieve. The purpose of the economy is not to make profits or money. It is to support people’s lives. No matter how much profit is made, if the lives of the people working there cannot be sustained, it is meaningless. If production efficiency is overly emphasized, distribution will not be maintained. An economic system where some people earn more money than they can use while others struggle to obtain food for the day is flawed. If there is a large amount of food being discarded while others are starving, the economic system is clearly wrong. The purpose of the economy is not just production or consumption. The requirement for the economic system is how to link production and consumption. The key is how to connect income and labor, income and household, revenue and expenditure, and profit and cost. Profit is an indicator of the efficiency of revenue and cost, but if only profit is pursued, the true relationship between revenue and cost becomes invisible. Making money is a means, not an end.
If production and consumption are separated and their relationship is lost, the economy cannot be controlled. This is the danger of totalitarianism, controlled economy, anarchism, or MMT theory. Indeed, the economy becomes uncontrollable and runs wild when the relationship between production and consumption is lost, but severing it is reckless.
We must not forget to verify what changes policies have caused. Policies have purposes. The problem is how policymakers perceive the situation and what they aim to achieve with their policies. By comparing the purpose and results of policies, their effectiveness can be measured. However, often the purpose and aim of policymakers are forgotten, and only the results are focused on. Policies are sometimes used as tools for political strife or to evade responsibility, distorting the results. The purpose is forgotten. The economy is not a natural phenomenon. The root of economic policy lies in the intentions of policymakers. Policymakers’ intentions include short-term and long-term impacts. Usually, emergency measures and fundamental long-term measures are combined and executed.
Policies that influenced the bubble include land policy, financial policy, accounting policy, market policy, exchange policy, and industrial policy.
Economic phenomena arise from the interaction of multiple factors in the process of production, distribution, and consumption. Therefore, simply following individual factors such as interest rates, exchange rate fluctuations, income, prices, and land prices does not provide a clear outlook. The structure of the economy. How to assemble multiple factors and where to place assumptions and standards must be the basis of economic theory. Therefore, linear logical development cannot understand economic movements. Complex and structural analysis is required. The key is what kind of model to construct. The point to note is whether social utility is properly evaluated and whether products are properly distributed.
Observing the state where the economic system is not functioning properly reveals the original form and function of the economic system. In that sense, closely examining the occurrence and collapse of the bubble and what happened afterward reveals the original form of the economic system. It also clarifies what caused the economy to malfunction. This also clarifies the requirements necessary to control the economy.
The bubble is fundamentally a monetary phenomenon. In other words, the bubble is caused by the inability to control the function of money. The primary function of money is not its amount but its function. The problem is not how much, but what and how much can be exchanged. The problem with money is not its quantity but its flow or the bias in its flow, which distorts its quantity.
The economic system is about distributing the necessary resources to those who need them evenly and as much as they need. The fundamental problem of the economy is what people need to live and how efficiently the necessary goods can be produced. Can the produced goods be supplied as needed to those who need them? Can the distributed goods be consumed without waste, or can the necessary resources be preserved for continuous use or for emergencies?
The salvation lies in stabilizing people’s lives and realizing a peaceful life.
While the number of homeless people increases, vacant houses and rooms also increase. As a result of overeating, a lot of food is wasted, while in other countries, people suffer from hunger. While huge amounts of money are used for speculation and gambling, some people lack the money needed for daily living. These are signs that the economic system is not functioning properly.
Considering these points, the current Japanese economy does not seem to be functioning properly. Despite the prediction of declining housing demand due to the aging population, there is a boom in high-rise apartments. Despite the surplus of money, many people struggle to make a living. While it seems that the economy has become richer, the number of people struggling with poverty due to the lack of stable jobs is increasing. Despite the aging population, the burden of medical expenses on the elderly is increasing, the pension system is in crisis, and the number of elderly people living alone and dying in solitude is increasing. Additionally, the burden on the public is increasing due to tax increases. Considering these issues, it must be said that something is wrong with the economic system.
If the Japanese economic system is not functioning properly, the problem is what is causing it. Is it the economic system, institutional issues, market structure, or policy mistakes? We need to verify this and clarify the policies that should be adopted.
The key is the balance of income and expenditure. The composition of income and expenditure is crucial. Income composition includes income, borrowing, and asset liquidation. Expenditure composition includes settlement, repayment, and asset formation.
Gross production is the aggregated value of revenue, gross income is the aggregated value of income, and gross expenditure is the aggregated value of expenditure. Revenue, income, and expenditure are interrelated. The national economic accounts (GDP) are based on these premises.
The core of the economy is revenue, not profit. Profit is an indicator of the balance between revenue and cost.
The economy has times and places where the flow changes significantly. These are called turning points, tides, or bifurcations. The flow that had been expanding and rising suddenly shifts to a shrinking and declining phase. It is believed that there is a turning point approximately every ten years. Once a change begins, it accelerates from a certain stage. The change starts gently and ends rapidly. The key is to discern the overall direction of the market flow. At the same time, it is crucial to quickly detect turning points and bifurcations for decision-making.
The problem is how to align the flow of funds, the state of fund surplus or shortage, and the consistency of fund functions. What do economic factors such as business conditions, prices, revenue, and income react to? That is the key. To discern changes, it is necessary to clarify the shape of the change and the structure of the elements that constitute the change. Then, confirm whether the variables can be manipulated or not.
It is essential to pay attention to the movement of funds that do not appear on the surface, i.e., on the profit and loss statement. To understand the utility of profit, it is necessary to consider debt repayment. The repayment of the principal of the debt does not appear on the profit and loss statement and is paid out of profit. If profit cannot be secured, it will hinder the repayment of the principal of the debt, and refinancing will be necessary.
Interest rates used to be very easy to manipulate. When the economy was good, interest rates were raised to tighten the economy, and when the economy was bad, interest rates were lowered to stimulate the economy. However, today, it is not that simple to manipulate interest rates. After all, it is a zero interest rate. The important thing is what changed the function of interest rates. It is necessary to discern what events or policies reacted to what.
The result may be complex, but the basic operation at the root is simple. Invariance, variation, simplicity. It is about raising and lowering, input and output. In other words, find the elements that can be manipulated by raising and lowering or input and output. In any case, it is about binary logic, i.e., yes or no, true or false, good or bad, yes or no. Determine whether it is manageable or not. Determine whether it is a steady flow or an unsteady flow.
In any case, to predict the state of the economy, it is necessary to clarify the economic quantity. However, that is the problem. Measuring economic quantity is difficult. Above all, it is difficult to define the substance of economic quantity.
First, the substance of economic quantity cannot be measured by money. Economic activity is an activity for living. The substance of economic quantity refers to the amount of resources necessary for the people to live. It is fundamentally based on the relationship between people and things. Money mediates between people and things. Money is a subordinate element. The problem is what it means to live. What does it mean to live for the sake of living? The meaning of living can be broadly divided into two: living in a biological sense and living as a human being. The substance of economic quantity differs depending on which standard is used. The substance of economic quantity lies between the minimum amount of resources necessary for living and production capacity, supply capacity. If production or supply capacity falls below the amount necessary for living, the economy cannot function substantially. The amount necessary for all people to live constitutes the lower limit of economic quantity. Production capacity and supply capacity constitute the upper limit of economic quantity. The substantial economic quantity lies between the necessary amount and production capacity, supply capacity.
Economic figures differ in nature depending on the requirements that form their basis. The nature of figures is clearly different when the cause is clear and when the cause is unclear. Especially when trying to explore the causes of the bubble, the key is what policies had what impact. Clear causes are values directly determined by policies, such as interest rates and tax rates. Tax rates are drafted by the cabinet, decided by the parliament, and come into effect from the specified implementation date. Values where cause and effect are directly linked have clear causality. Physical phenomena have clear underlying laws, but the economy is often thought to be ambiguous. However, in reality, figures of different natures are mixed, making it difficult to understand the underlying laws. Clarifying the nature and attributes of figures makes it possible to estimate economic quantity. This also improves the accuracy of predictions. The nature of figures includes, first, values with clear causality. Second, measurable values. Third, values based on estimates. Fourth, values based on plans or predictions. Fifth, nominal values. The first, values with clear causality, are policy or manageable figures, such as interest rates, tax rates, and public investment amounts. The second, measurable values, are values based on some results and can be managed depending on conditions. Typical examples include sales, financial statements, population, export volume, import volume, and crude oil prices. Financial statements are records of business activities according to certain rules. Financial statements are measurable because economic activities are legally required to be recorded monetarily based on predetermined accounting principles, rules, and procedures. Institutional constraints allow for high-accuracy accounting records. However, measurable values are not necessarily manageable. Financial statements are just aggregated tables of results. Sales cannot be predetermined. The third, values based on estimates, are values statistically or probabilistically derived based on some grounds. Statistical data such as total income, total production, market size, and prices are often based on estimates. Production capacity, etc., often can only be estimated. The fourth, values based on predictions or plans, are values derived by back-calculating from objectives or goals. National budgets and investment budgets fall into this category. Plans and budgets are merely estimates. However, once a national budget is decided, it is regarded as a fixed value. This point is crucial. Estimates and predictions have a very delicate relationship. Predictions may be based on some grounds, and the definitions in this area are values classified according to individual requirements and objectives. The fifth, nominal values, are values that do not have substance themselves. In contrast, substantial values are values extracted from some substance. Prices are generally nominal and relative values. They are also dependent values. The nature of figures is a prerequisite for analysis and investigation, and the nature of figures changes the means and procedures of investigation. It is essential to first determine whether the figures are definitive or based on predictions or estimates when analyzing the economy.
The numerical information we can obtain is constrained by prerequisites. Prerequisites include the place, environment, standards, observation methods, purposes, and targets where the information was obtained. Especially economic phenomena are more likely to be influenced by human arbitrariness than natural phenomena. Therefore, it is necessary to clarify the purpose of the analysis first, specify the prerequisites and grounds, and then preprocess the figures to ensure the consistency of the analysis results.
In logic, the important thing is what the starting point is. The starting point must be clear and its basis must be clarified to verify the validity of the logic. The starting point must be placed on something self-evident, or the foundation of the logic itself will be weak.
When conducting economic analysis, the key is what causes what. The cause cannot be inferred from the data. This point must not be misunderstood. When wanting to clarify the cause, one must formulate a hypothesis.
Manipulate things with clear causality, confirm that they are measurable, and infer movements. Predict and plan based on estimates. This forms a series of decision-making processes. Start the engine, release the brake, step on the accelerator, and start the car. Once the car starts moving, measure the speed and estimate the path to take.
When trying to determine economic fluctuations, especially price trends, the key is how to measure economic quantity. The economy is based on the resources necessary for the entire population to live. The means of distribution is money.
The important thing about money is liquidity. If liquidity is lost, money’s function of distribution fails. No matter how much money is supplied to the market, if it does not flow into the real market, the market will fail. This is because the essence of the economy is to distribute an appropriate amount of resources to the people. The function of money is based on the relationship between people and things.
The market is a mechanism that links production and consumption through market transactions and controls economic quantity. Market transactions create added value. Therefore, the flow of money, such as public investment, taxes, subsidies, and grants, that does not go through market transactions does not create added value. Also, if the link between production and consumption is lost, there will be no motivation for production activities. Consequently, it becomes impossible to control production through consumption. It is simplistic to think that if there is no money, just distribute money. The economic system functions not independently but interrelatedly in production, distribution, consumption, and savings.
People and things are finite, and money is the means to distribute things appropriately to people. The market is where production and consumption are linked. Therefore, the amount of money circulating in the market determines prices. Money is merely a measure or standard. It is not an absolute standard but a relative standard. Because it is a relative standard, the amount of circulation is important. In other words, the amount of money circulation is determined secondarily according to the relationship between people and things. When production capacity is sufficient and resources overflow in the market, prices do not rise extremely. However, when there is a shortage of goods and excess funds are supplied to the market, prices rise.
The substance of economic quantity is based on the relationship between people and things, but the means of distribution is money. Therefore, in the economy, people and things are explanatory variables, and money is the dependent variable.
Factors causing economic fluctuations include economic growth rate, total production, income, prices, land prices, stock prices, oil prices, interest rates, and exchange rates.
The economic model can be directly replaced with a system. This is because the principle of operation is the same for both the economy and the system, i.e., input and output.
What Can We Learn from the Bubble
What can we learn from the past? It is to predict and prevent phenomena like bubbles in advance, or if prevention is not possible, to prepare measures to minimize the damage. Even if a disaster occurs, to minimize the damage, it is essential to quickly detect signs of the disaster and prepare for it. Learning from past examples is about how to capture the signs of disasters.
One way is to understand the actual state of the disaster in advance and take preventive measures. To minimize the damage caused by a bubble, ultimately, it is to prevent the bubble from occurring. Predicting and preparing for disasters involves measures to avoid the disaster, measures to deal with the disaster when it occurs, and post-disaster cleanup. These are the things we learn from past bubbles.
First, it is essential to decipher the signs of a bubble. Disasters and illnesses often show some signs in hindsight. Remembering and not forgetting these signs is the best way to protect oneself from disasters. However, people tend to forget unpleasant things as time passes, leading to repeated mistakes.
Signs are some form of abnormal values or biases. To find abnormal values, it is necessary to define what is normal and establish what constitutes an abnormal value. Zero interest rates are clearly abnormal, but over a long period, people become desensitized, and it creates an illusion that it is normal. Correcting such errors is difficult. First, it is essential to return to the basics and determine what is normal and what is abnormal. This is what we learn from bubbles.
Bubbles are man-made disasters. This is because bubbles are economic phenomena, and the economy is based on human actions. This must not be forgotten. Unlike natural phenomena, man-made disasters can be prevented if efforts are made. If bubbles cannot be prevented, it is due to human folly. The same applies to wars. Man-made disasters are caused by human will, desires, and intentions. Without clarifying what will, desires, and intentions caused the bubble, nothing can be learned from it. It is necessary to reveal what policies were adopted, what values were at play, and what desires drove the actions. Without this transparency, the true cause cannot be grasped.
From the given data, we learn inference and prediction. Inference involves estimating the underlying laws, rules, mechanisms, and relationships between individual factors from the limited information provided. Prediction involves estimating future phenomena or situations from the limited information provided. Both inference and prediction involve estimating some state from limited information. The difference is that inference works in a static manner, while prediction involves time dynamically.
What can we infer from the bubble? It is to understand why the bubble occurred, what the problems with the bubble are, and what actions and responses should be taken when encountering a bubble phenomenon. What should be predicted, and why is it necessary to predict? It is to clarify whether the bubble phenomenon is likely to recur in the future. Additionally, if a bubble phenomenon is to occur, it is essential to know in advance when and how it will happen to avoid taking wrong actions when it occurs.
Bubbles are monetary and market phenomena. Bubbles do not occur without money or markets. Therefore, it is necessary to clarify the functions of money and the mechanisms of the market.
The market economy operates through the movement of funds, i.e., the flow of money.
The movement of funds occurs due to the surplus or shortage of funds. The disparity caused by the surplus or shortage of funds creates the flow of funds. The surplus or shortage of money arises from the balance of money on hand, income, and expenditure. Funds move to compensate for the shortage of balance. The means of fund movement include buying and selling, lending and borrowing, gifting, and taxation. Among these, gifting and taxation are unidirectional, while the others are bidirectional. Economic utility is realized through settlement. Settlement is established through transactions. Lending and borrowing, gifting, and taxation mean fund transfer. Economic utility is realized through buying and selling, and fund transfer prepares for payment and settlement. Fund movement assumes the existence of both the giver and the receiver, and the total function of the transaction is zero. In other words, buying and selling, lending and borrowing are balanced.
To purchase or obtain something, money is necessary. However, money is not available from the beginning. Therefore, initially, it is necessary to borrow money. When money is borrowed, i.e., lending and borrowing occur, a surplus or shortage of money arises in the economic space. The fluctuation and surplus or shortage of money caused by lending and borrowing create the function of money and form the market. Money is not created through buying and selling but through lending and borrowing.
The utility of money is fundamentally realized through settlement. That is, income obtained from selling goods and expenditure paid when purchasing goods. Adding the time factor to income and expenditure results in period profit and loss. Income includes not only income (earnings, revenue) obtained from selling goods or providing labor but also income obtained from borrowing money, rent, dividends, interest, gifts, and taxation. There is also income from illegal activities, but income from illegal activities is treated as a crime and not recognized as formal economic activity. Income other than that obtained as income or compensation is considered fund transfer. Expenditure includes not only expenditure for consumption but also costs incurred for production and sales. Additionally, there is expenditure for debt repayment, investment in equipment and housing, and taxation. Income and expenditure cause the surplus or shortage of funds.
Lending and borrowing, gifting, and taxation prepare for payment. The function of the economy appears as the surplus or shortage of income and expenditure. The surplus or shortage of income and expenditure is compensated by lending and borrowing and accumulated as a balance. The balance of lending and borrowing becomes the payment preparation balance. Lending and borrowing, gifting, and taxation prepare for payment and settlement, meaning fund transfer, and do not realize economic utility. Such fund flows are considered fund transfers. Fund transfers are fundamentally considered not to realize the utility of money.
If period profit and loss represent the visible flow of funds, fund transfers are the underlying flow of funds supporting the economy.
Fund transfers, especially lending and borrowing, do not realize the utility of money but play a decisive role in continuing economic activities. If funds for settlement cannot be prepared, economic entities lose credit and go bankrupt, meaning economic activities cannot continue. Subsidies and grants also mean fund transfers.
In the formation and collapse of bubbles, the underlying flow of funds, i.e., fund movement, plays a decisive role. The danger of fund movement is that it can terminate the continuation, i.e., the life of economic entities, in the unseen, underlying part. The direct cause of corporate bankruptcy is fund movement, and although the impact of revenue is significant, it is not the direct cause. Economic entities go bankrupt due to dishonored checks. If there is no borrowing, there will be no dishonored checks.
Even if funds are temporarily supplemented and cash flow is managed, if revenue does not recover, cash flow will eventually run into difficulties. Temporary fund supplementation can instead cause cash flow pressure.
There are examples of financial aid and supplementation when revenue declines during bubble collapses or disasters. However, such financial aid measures need to be cautious. Fund supplementation is often done with unsecured, low-interest bridging funds, but it must not be forgotten that borrowing and lending are fund movements. Borrowed money will be repaid from income. In that case, repayment is not recorded as an expense. In other words, it is an expenditure that does not appear in profit and loss. Even if revenue recovers, expenditures exceeding previous expenditures will continuously occur in the part not recorded in profit and loss. Even if the profit margin recovers, cash flow will become tight. In other words, measures taken for aid purposes can instead become obstacles and backfire.
It must not be forgotten that taxes are also a form of fund transfer. The important thing about taxes is their use. Taxes often neglect cost-effectiveness and economic efficiency because there is no clear counter-benefit. There are cases where expenditures with unclear purposes increase under the guise of economic measures. For example, the free tuition for higher education. Basically, education costs include education that all citizens receive uniformly, like compulsory education, and education with limited beneficiaries, like higher education and specialized education. In the former case, it is not wrong to bear the cost with taxes because all citizens benefit uniformly. However, making education at vocational schools and universities uniformly free with taxes unnecessarily increases the fiscal burden. Compulsory education aims to equip citizens uniformly with the minimum knowledge, skills, and culture necessary as citizens. In contrast, higher education and specialized education aim to equip individuals with knowledge and skills useful in society. Therefore, higher education and specialized education, especially universities, are based on the desire to learn. Without individual awareness and will, it is meaningless. Simply wanting a diploma has no value. University and specialized education are based on the principle of beneficiary burden. Otherwise, economic effects cannot be expected. Certainly, it makes sense to supplement tuition to prevent education from being limited to a privileged class. However, there is no need to cover the tuition of those without the desire to learn or study. It is harmful. The cost-effectiveness is unbalanced from the beginning. Making tuition uniformly free is wrong. Even if it is said to be free, the cost is covered by taxes. Ultimately, it only shifts the burden from households to the fiscal side.
The capitalist economy is a system that adjusts production and consumption and realizes distribution through the market, with revenue and cost as the core. Debt, subsidies, grants, and taxes are fund transfers. They are actions to prepare for payment. If the capitalist economy becomes overly dependent on debt, subsidies, grants, and taxes, it cannot be called a capitalist economy. Also, the market cannot fulfill its original function. This is because demand and supply cannot be adjusted through the market. Production becomes independent of consumption, and the connection between production and consumption is lost. When the connection between production and consumption is severed, it becomes difficult to control production through consumption. Prices cease to function.
If money circulates, economic entities can continue their operations. Conversely, if money does not circulate and cash flow cannot be managed, operations cannot continue regardless of revenue. Even if profits cannot be made, if cash flow is managed, companies can survive. However, economic effects are realized through revenue. Misunderstanding this point causes the economic system to malfunction. Even if profits cannot be expected, the idea that it is fine as long as money circulates is a misconception. Therefore, it is necessary to understand the functions of subsidies, grants, and debt.
The market is a system that controls production by linking production and consumption activities. The purpose of debt is to prepare for fund movement and payment. Borrowing is income, lending is expenditure, and debt repayment is also expenditure. However, cash flow based on lending and borrowing does not appear in profit and loss. Directly linking borrowed money and taxes to consumption does not create added value. It is not connected to production activities. Relying on lending and borrowing severs the relationship between production and consumption activities. Basically, households are fund surplus entities, and private companies are fund deficit entities. The original state is for fiscal and financial policies to balance the differences. Currently, private companies have turned into fund surplus entities, and the fiscal side is unilaterally a fund deficit entity. Currently, subsidies and grants are being considered as measures against the coronavirus. It must not be mistaken that households and private companies are still fund surplus entities. In contrast, the general government is a fund deficit entity. In other words, subsidies and grants mean transferring funds from fund deficit entities to fund surplus entities. The current problem is that economic activities are suppressed, and revenue and income have decreased drastically. Therefore, production is partially and temporarily stagnant, and fund liquidity has decreased. However, the economy will eventually return to its original state. At that time, if there is a shortage of goods due to a decline in production capacity and excessive funds are accumulated, the important thing is the state of fund surplus and shortage, the flow of funds, and the consistency of fund functions.
The fact that the economic system operates through the surplus and shortage of funds and the flow of money means that the economic system is driven by differences. Extreme differences hinder the flow of money. The key to controlling the economy is how to create and maintain moderate differences. Differences include price differences, income differences, and regional differences, but the most important is time differences.
The act of compensating for the surplus and shortage of money through lending and borrowing is called finance. Financial activities involve costs called interest. Interest forms time value. Time value creates added value.
Money moves the economic system while being exchanged and transferred between economic entities. Economic entities gather and form economic sectors through their functions. Economic sectors include households, general government, non-financial corporations, financial institutions, private non-profit organizations serving households, and foreign sectors.
The balance of income and expenditure of money creates and forms the monetary space.
The flow of money is from production entities (non-financial corporations, general government, financial institutions, private non-profit organizations serving households) to consumption entities (households) through income obtained from labor, and from consumption entities to production entities. Money spent by households becomes the revenue and income of production entities. Additionally, there is a flow between production entities. The flow between production entities includes buying and selling, lending and borrowing between non-financial corporations, lending and borrowing between non-financial corporations and financial institutions, lending and borrowing, and taxes between financial institutions and general government. Buying and selling, lending and borrowing, and taxes between non-financial corporations.
The growth and development of the market economy are driven by added value. Added value is created through production activities. Production activities are conducted through profit-making businesses. Therefore, non-profit businesses do not create added value. In other words, non-profit businesses do not contribute to economic growth.
As the term operating surplus indicates, added value and time value are fundamentally surplus. Because they are surplus, they are inevitably compressed as efficiency increases. Profits, income, interest, and taxes are maintained only through some form of regulation. Profits, interest, and income are distributed according to the nature of the regulation. The problem lies not in the regulation itself but in the purpose and thinking behind the regulation. The idea of eliminating regulation is also a form of ideology. It can be said to be a rather biased ideology.
The cumulative sales of all industries and all sizes in corporate statistics show a strong correlation with nominal GDP. This is also supported by the fact that added value is created through market transactions.
In other words, it can be considered that economic growth has stopped due to the stagnation of corporate profitability. Conversely, it can also be considered that profitability is being squeezed because GDP is sluggish.
In any case, it is considered that the flow of funds from households to private companies has stopped, and lending to the general government has increased. Public works are fundamentally non-profit businesses, so they do not create added value. This has stagnated economic growth. Excessive dependence on public investment and public works as economic measures ultimately hinders economic expansion. This is generally considered in socialist countries and is an important key when considering the future of the Chinese economy. When China’s economy enters a mature phase and growth begins to wane, excessive dependence on public works can lead to a situation similar to that of Japan today.
Public investment is not premised on repayment, in other words, it is a business not premised on debt through profit-making activities. Therefore, if an increase in tax revenue from households, companies, and foreign sectors cannot be expected, public debt will unilaterally expand. The expansion of tax revenue is fundamentally premised on market expansion, so it cannot be expected unless the market expands.
Economic expansion is premised on sales expansion. There is an illusion that economic expansion is due to the expansion of new businesses and new markets, but in reality, economic growth is due to the expansion of monetary value. New businesses and new markets were incorporated in the process of expanding monetary value. If new businesses and new markets cannot expand, the share of established industries will increase. The problem is the relationship between the overall trend of profitability and the share of industries in profitability.
High economic growth occurred in the process of new industries encroaching on established industries. The background of high economic growth was the transformation of industrial structure. As new industries matured, another transformation of industrial structure occurred. This was one of the causes of the economic void after the bubble collapse. Simply chasing technological innovation destroys the economic foundation. The economic stagnation after the bubble collapse is mainly due to the oversaturation of new markets such as home appliances and automobiles, while established industries are struggling. Such a transformation of industrial structure cannot be substituted by public works. This is because public works are not premised on profit. The crucial point is how to evaluate the changes in industrial structure. How to respond to changes in industrial structure must be at the core of economic policy to expect effectiveness. Economic policy should be based on a vision for the national economy. This is because industries are not only responsible for production but also for distribution. If employment is lost in the pursuit of production efficiency, the market will not function. If attention is focused on the flow of money and the economic reality behind the flow of money is lost, economic policy will be mistaken. Policymakers are required to anticipate changes.
Practical Time Series Data Analysis
The ultimate goal of economic analysis is to clarify the causes. However, it is important not to be mistaken that causes can be inferred from data alone. To clarify the causes, one must formulate hypotheses.
First, let’s supplement the flow of funds. Specific analysis comes after observing the flow of funds.
Time series is a trajectory, merely a result. What is important is the mechanism, the factors that caused the trajectory, and how human will was involved. The issue is not whether profit was made, but the intention and reasons behind the profit.
It is necessary to track the changing states, policies, and structures over time, rather than just following the visible trajectory. The limitation of regression analysis lies in its inability to capture structural and spatial changes. If these limitations are incorporated, regression analysis can be effective.
The primary purposes of time series analysis are prediction and factor analysis. There are two types of analysis: one where time works positively (regression) and one where time works negatively (factor analysis). Classification can be thought of as grouping. Regression captures changes as continuous. It is a method of predicting future events based on the extension of continuous numerical data. Since time series analysis is based on continuous numerical data, regression analysis is predominant.
In analysis, it is crucial to clarify the purpose. What is being predicted and for what purpose? This is an absolute prerequisite for prediction. Prediction plays a significant role in minimizing errors and approximations.
Time series analysis is fundamentally discrete. It is not continuous. Discrete time series can be equally spaced or unequally spaced. There are also univariate and multivariate series, stationary and non-stationary series, Gaussian and non-Gaussian series, linear and non-linear series, and outliers (as described in “Time Series Analysis” by Naoki Shimada, Kyoritsu Shuppan).
The primary goal of prediction is to minimize errors. Predictions can be made for scenarios where no action is taken and where some measures are implemented.
Data shows that significant forces changed the direction of money flow over the ten years following the bubble collapse. The issue is what forces acted where during the bubble formation and collapse, and what triggered these forces.
Time series analysis tends to become qualitative or a mere listing of facts, often leaning towards phenomenological analysis, especially in economic and social phenomena. However, the true purpose of time series analysis is to reveal the structures and forces behind the visible phenomena, not just to analyze the phenomena themselves.
People do not see the flight path of an airplane as a result of physical laws because it is piloted by humans. Similarly, the economy is the result of human manipulation, not a natural phenomenon like free fall. Yet, economic phenomena are often treated like the trajectories of objects, which is a limitation of statistics. The important thing is to understand the human actions and their results, the movements and changes that occurred. Economic movements cannot be understood without considering human actions. Time series analysis in economics involves examining the changes over time and the intentions at each point.
The significance of analyzing time series data lies in clarifying the trajectory of changes, understanding the factors that cause changes, and making changes controllable. In time series analysis, the first step is to observe the shape of changes and intuitively grasp whether there is any visible regularity. There may also be invisible, underlying regularities. Initially, it is about getting an overview.
It is essential to distinguish between logically clear propositions and ambiguous ones. Ambiguous propositions are based on conjecture or speculation, while logically clear propositions are based on predefined, agreed-upon, self-evident, or given facts. It is important to separate certain facts from uncertain ones. Certain facts are actual, while uncertain ones are conjectures or predictions. What is visible and what is not? Visible are positions and changes, while invisible are relationships. What we want to know are the relationships, the uncertain, ambiguous, and invisible aspects. In the case of falling objects, the position and movement are visible, but the forces behind the phenomenon are not. Forces represent relationships. The forces acting in the background and between objects are invisible. It is necessary to start by making these invisible relationships visible. Visible changes can be addressed, but invisible changes are frightening.
When conducting time series analysis, the first thing to observe is the shape of changes. From the shape of changes, one can judge whether there is any regularity and infer what might be lurking behind the changes.
There are trend components, seasonal components, and irregular components in fluctuations. Economic phenomena and time series data have cycles and waves, but not like electromagnetic or sound waves. The factors causing seasonal fluctuations are clear, and they are not physical waves. The crucial point is the factors causing seasonal fluctuations. Cycles and waves in economics are not physical waves.
Many economic waves are based on specific time units. For example, monthly salaries create monthly income and expenditure waves, and meals create daily waves. The units of fluctuation are daily, weekly, monthly, quarterly (seasonal), semi-annual, and annual, forming hierarchical fluctuations. To observe long-term changes, it is necessary to smooth out these daily, monthly, quarterly, and semi-annual waves. One common method used for this is the moving average method. How to capture daily, weekly, monthly, quarterly, semi-annual, and annual waves is the key to time series analysis.
The number of meals per day is fixed, but what is eaten varies. This means that while the quantity is constant, the quality is not. This is one form of the economy. The key to economic analysis is distinguishing between changing and unchanging parts. The essence of economic analysis is invariance, variability, and simplicity. The order of things is particularly important, which is the key to solving time series data.
Types of time series data include continuous time series, discrete time series, univariate time series, multivariate time series, stationary time series, non-stationary time series, Gaussian time series, non-Gaussian time series, linear time series, and non-linear time series.
The basic shape of changes is waves and periodicity. Whether there is periodicity or waves is a key point. The shape of waves is also an issue. The basic shape of periodicity is long-term and short-term changes based on the width of the period. The important thing in the shape of changes is the type. Periodic changes do not have clean waves like sound waves but often involve irregular ups and downs. Waves in economics are not physical waves. The reason why economic fluctuations are fundamentally waves is that the core of economic activity is rotational and cyclical motion.
There are arithmetic and geometric changes, and the economy primarily undergoes geometric changes. This means that changes are fundamentally compound rather than simple. Geometric changes are difficult to control.
Changes are based on position, movement, and relationships. Relationships between objects are derived from position and movement. Changes are functions of time, making them fundamentally time series. When time works negatively, it represents static structures, which show the basic relationships between elements.
Economic changes have factors that cause them. Changes are results, and results have causes. The most important thing to know is causality. In time series data analysis, the first relationship to understand is correlation. Once correlation is clear, delve deeper into autocorrelation and causality.
Position is a static factor, while movement is a dynamic factor.
There are changes due to field effects, structural effects, and inherent effects. Structural effects include static and dynamic structural effects, both of which are relative.
Changes have starting points, initiation points, and endpoints. It is important to note that starting points and initiation points are not always simultaneous and may differ. The starting point is when the change occurs or the phenomenon becomes visible. The initiation point is when the trigger or action causing the change occurs. For example, heating water starts at the initiation point, and boiling begins at the starting point. The time difference between initiation and starting points in economic phenomena makes causality between factors difficult to understand.
The dependent variable is the surplus or shortage of funds, and the explanatory variables are interest rates, land prices, income, and prices. The analysis begins with verifying the prerequisites.
What Causes Change
What we want to know is what to do. How can we foresee and control the economy? Otherwise, policymakers will deceive the public and commit wrongdoings.
When analyzing statistical data, we must not be distracted by the phenomena that appear on the surface. There are clear causes for the bubble’s formation and collapse, such as the Plaza Accord and land policies. It is evident that fluctuations in asset values have influenced both the formation and collapse of the bubble. Trying to infer the causes of the bubble solely from statistical data is quite reckless. What we want to clarify is what caused the fluctuations in asset values. Only by comparing the phenomena that appeared on the surface with the policies taken at each point in time can we reveal the truth.
To clarify the nature of change, we need to understand what is causing the change. Is it the forces at play (such as declining growth, rising prices, rising incomes), changes in environmental conditions (such as falling land prices, asset values, epidemics, exchange rate fluctuations, market saturation, changes in the direction of money flow), or direct factors such as financial policies, public investment, or tax increases? Without clarifying the factors that trigger change, we cannot properly evaluate economic policies.
There are direct and indirect incentives for change. What is certain and what is uncertain? We need to determine whether it is direct or indirect. Certain things are direct, while uncertain things are indirect. Factors causing change include, first, policy and strategic factors; second, structural and institutional factors; third, forces at play, situations, and environmental changes; fourth, disasters such as earthquakes, tsunamis, typhoons, epidemics, and accidents; fifth, changes in regimes or political situations such as wars, revolutions, and coups, along with rising oil prices; and sixth, changes in preconditions due to technological innovations.
Policy factors include financial and economic policies. Financial policies mainly involve interest rates and exchange rates. Economic policies include market policies and fiscal policies, with fiscal policies involving public investment as economic measures, income redistribution through subsidies, tax increases or decreases, and government bond issuance. Strategic factors include oil price hikes due to oil strategies, oil shocks, Nixon shocks due to changes in economic strategies, and the Plaza Accord. Military strategies (such as the Gulf War, Iraq War, and economic blockades) sometimes have a decisive impact on the global economy. National defense strategies, if mistaken, can lead to the downfall of a country.
Structural and institutional factors include changes in accounting systems, capital systems, legal systems, exchange systems, financial systems, monetary systems, market systems (such as deregulation), and political systems. Changes in population, population composition, industrial structure, widening wealth gaps, and employment systems are also included. Spatial changes include changes in market environments (shifts from expansion equilibrium to contraction equilibrium, stages from growth to maturity), changes in the flow and function of funds, trends in asset values and prices, and natural environmental changes such as global warming. Changes in consumption tendencies also fundamentally affect the economy.
Disasters, in a broad sense, include climate changes such as global warming. However, they primarily refer to sudden and large-scale changes and significant triggering events. Climate changes are better viewed as spatial changes or changes in preconditions. Stock market declines can also be considered a type of disaster. Wars, revolutions, and coups are man-made disasters. Decisive political changes include shifts from liberalism to socialism and vice versa. Technological innovations, as seen in the Industrial Revolution, can have a decisive impact on the economy, especially by fundamentally changing market structures and lifestyles. Innovations affecting social infrastructure need attention.
Given the complexity of these factors, high-precision predictions cannot be expected solely from time series analyses such as autoregressive and multiple regression analyses. However, time series analysis can still be effectively utilized if this point is considered.
Correlation needs to be considered in terms of whether time acts negatively or positively. If there is a temporal order in the correlation, it forms causality. Identifying this point is key to time series analysis.
Time series analysis tends to focus on whether correlations exist. However, the visible trajectory is merely a result. The crucial point is the forces and mechanisms at work behind the scenes. The issue is not whether correlations exist but under what conditions they exist (or did not exist) and what changes in conditions caused correlations to cease (or exist). For example, there is some causality between exchange rates, economic conditions, and interest rates. However, correlations between exchange rates, economic conditions, and interest rates do not always exist. This is the problem and the cause of the complexity in financial policies.
Economic data are often aggregated values, and the product of quantity and value is fundamental. This fundamental form is key. Statistics tend to analyze parabolas as parabolas, but the background of a ball’s parabolic trajectory involves gravity. Without understanding gravity, predicting the ball’s trajectory is difficult. This is also a limitation of regression analysis. No method is absolute; methods are fundamentally relative.
When predicting the economy, correlations between income, demand and supply, land prices, banknote issuance balances, government bond balances, exchange rates, and current accounts are important. Regression analysis generally focuses on correlations, but visible correlations are merely results. The issue is the cause. Correlations are emphasized over causality because correlations do not necessarily clarify causality. The change in correlations is more important than the correlations themselves, and it is crucial to clarify what changes correlations.
In the case of the bubble, there was a strong positive correlation between land prices and total income during the high-growth period, but this correlation weakened after the bubble collapse. During the growth period, investments based on the correlation between land prices and total income were effective, but after the bubble collapse, investments based on the correlation between economic growth and land prices were no longer viable. If we rely on data obtained at each point in time, the correlation between land prices and total production can only be interpreted retrospectively.
Change is a function of time and signifies movement. Movement appears as a change in position, which includes spatial positions and relationships such as temperature and prices. Change is relative and appears based on the relationships between objects or elements. To clarify what causes change, we need to elucidate the relationships between objects and elements. Change depends on the relationships between objects and elements. Relationships between objects and elements signify correlations, and causality is a type of correlation.
We tend to focus on direct actions between objects and elements as causes of change. However, the forces creating correlations are not necessarily direct. Changes can also result from indirect forces such as spatial or environmental changes, legal or institutional forces. The overall economy is more influenced by indirect forces such as spatial or environmental changes and changes in preconditions like laws and institutions.
For example, direct actions like hitting, kicking, or throwing a ball cause changes, but changes can also result from indirect forces like falling, flowing, spatial or environmental changes, and supply and demand pressures. It is crucial to determine whether economic changes result from direct or indirect forces.
Thus, the measures differ depending on whether changes are caused by financial or fiscal policies or by market forces like supply and demand. Additionally, since change is a function of time, it takes some time for events, operations, or decisions to affect the target. The time lag between events, operations, decisions, and the transmission of information to the target can have significant consequences. This time lag includes decision-making time, procedural time, physical transportation or manufacturing time, and information transmission time. Without fully considering this elapsed time, correlations and causality cannot be clarified. Change is a chain reaction and spreads like waves.
Order is crucial in correlations and causality. Order constrains relationships.
Some operations, keys, switches, or triggers can cause change. Once a switch is turned on, the path, mechanism, process, order, procedure, logic, or algorithm by which information is transmitted becomes important.
When formulating economic policies, it is essential to know what causes economic fluctuations. However, in many cases, the focus is on the phenomena or changes that appear on the surface, and the underlying causes are often neglected or explained with ad hoc reasoning.
For example, investors and critics often explain stock price movements with plausible reasoning, but this reasoning is merely a hypothesis. I have never heard of these hypotheses being verified. Even if later explained with some theory, practical elements like system malfunctions or panic are often discussed, but the overall economic structure and systemic issues are rarely addressed. Nevertheless, the common belief is that stock crashes triggered the Great Depression and the bubble collapse. What caused the stock crash, and how did it lead to the Great Depression or bubble collapse? Without clarifying this, we cannot determine the measures to take for the economy after the Great Depression or bubble collapse. Ultimately, we end up reacting too late.
Good medicine can also be poison. Administering it without considering dosage and side effects can worsen the condition instead of curing it. Economic policies are similar. Depending on the conditions, economic policies can be good or bad.
Change is not caused by a single point. Forces, flows, momentum, inclinations, and biases at play also influence change. Various factors overlap to cause change. There is no panacea for the economy. It is not about deregulating everything or strengthening regulations. The same measures may work or not depending on the situation, environment, and preconditions. Giving aspirin for every fever is the mark of a quack doctor. Saying that public investment should be made during recessions or that deregulation should be done for everything is an illusion. Dogmatic thinking cannot keep up with changing situations. Stereotypes cannot cope with the real world. First, we need to clarify what has what effect on what. It is dangerous to take symptomatic measures without examining the efficacy and side effects.
The market economy functions through market changes. Therefore, clarifying what forces act on the market and how they change is essential for predicting and addressing market economy changes. Confirming preconditions and preprocessing are indispensable for this. Predictions and problem-solving begin with confirming preconditions.
In a market economy, the force driving the economic system is money. Money works both on the market surface and behind the scenes. The economy is a means of distribution, producing goods through the power of money, distributing them through money, and purchasing necessary goods from the market to achieve distribution. The utility of money is realized through market transactions (buying and selling). The surplus or shortage of money is supplemented by lending and borrowing. Buying and selling constitute the flow, and surplus funds are accumulated as stock (balance). Therefore, the market’s power is stored through lending and borrowing and realized through buying and selling. The manifestation of money’s function is period profit and loss. Whether the economy functions normally is reflected in the flow and balance of funds between sectors. The economic reality becomes clear by observing the lending and borrowing of funds and balances between sectors. Lending and borrowing prepare for payment, are stocked, and work behind the scenes. Asset values fluctuate just by being held, affecting unrealized gains and losses. Unrealized gains and losses influence the economic entity’s funding capacity and payment preparation. Payment preparation affects the circulation of funds and prices. The bubble is decisively influenced by the fluctuations in stock and asset values working behind the scenes. Without revealing the hidden workings behind the visible phenomena, the true nature of the bubble cannot be seen. Subsequent policies on stock were the main cause of the economic void. The economic scale is determined by the market scale, which depends on added value. In this respect, fiscal policies may show temporary effects but do not directly contribute to economic growth. Fiscal policies are not effective unless they impact the market. Fiscal policies are behind-the-scenes in a market economy.
Today’s economic phenomena appear as monetary phenomena. Therefore, attention must be paid to the movement of money. However, focusing solely on the movement of money risks misunderstanding the essence of the economy and making critical mistakes. This is because money itself does not hold value; its value lies in its function, not its existence. The essence of value lies in the relationship between people and things. Therefore, the economic foundation is in the relationship between people and things, i.e., population composition and its transition, and changes in production and consumption patterns.
To clarify the factors causing change, we need to understand the structure of economic quantities. Economic quantities are the product of people, things, and money.
The human factor is rooted in people’s lives. The foundation of the human factor in the market is the state of the population. The state of the population is reflected in changes in the total population and population composition.
The total consumption is significantly influenced by population trends. Total consumption expenditure is the product of total consumption and unit price. Total consumption is derived from the average consumption per person and the total population.
The foundation of the physical factor in the market is production capacity. It includes the surplus or shortage of funds, the direction of money flow, and the total amount. It is fundamentally a vector determined by position, movement, and relationships. Investment is determined by future revenue and underlying assets. Factors causing changes in money related to the bubble include exchange rates, interest rates, prices, and oil prices.
On the Shape of Change
What can we decipher from change? First, we should graph individual items such as land prices, sales, income, and total production over time to observe the characteristics of change. It is essential to look at the shape of change without preconceived notions or biases. Understanding the shape of change is the first challenge in analyzing economic quantities.
Initially, we grasp the presence or absence of regularity intuitively from the shape of change. We observe whether any regularity is hidden in the appearance and form. This is why the shape of change is crucial. From the shape of change, we can see correlations between factors, linear (proportional) changes, periodic changes, and seasonal changes.
The economy consists of three layers formed by people, goods, and money. It also comprises three stages: production, distribution, and expenditure, structured by non-financial corporations, finance, households, fiscal, and foreign sectors. People, goods, and money form independent fields while being interconnected through the movement of entities. The physical space is governed by the laws of matter, and the monetary space is governed by the logic of money. Population changes independently but are linked to the physical space through production and consumption and to the monetary space through income and expenditure. The market forms a multilayered field.
In economic analysis, the shape of change and the shape that causes change are essential. The shape refers to the structure. As the economy becomes more complex, linear logic alone is insufficient, and structural approaches are required. Industries have shapes, markets have shapes, populations have shapes, and lifestyles have shapes. Changes in these shapes induce economic changes. Economic changes are more structural than logical. Multiple factors intertwine to cause a single change. It is known that industrial structures transition from primary industries to secondary and tertiary industries as the economy develops. Markets also saturate and mature with growth, and lifestyles change with improved living standards, reflected in consumption structures and expenditure compositions. Changes in industrial structure, market structure, population composition, and living standards affect the flow and distribution of money, the relationship between flow and stock, and the resulting economic phenomena.
The shape of change appears as the shape of assets and the flow of funds between sectors. Balances are scalars, and flows are vectors. Predicting the output based on how the input is set under certain preconditions and taking policies based on that prediction is required.
The premise of change lies in the income structure and expenditure structure. Income is at the entrance, and expenditure is at the exit. In principle, expenditures are made within the range of payment reserves. The source of payment reserves is income and owned assets (physical and financial assets). The expenditure structure reflects the industrial structure, which constrains income. Economic collapse occurs when people’s lives become unsustainable, and the economic system can no longer be maintained.
The preconditions for the bubble were, first, the end of high growth, market saturation, and entry into a low-growth era. Second, the oil price surge due to two oil shocks. Third, the yen’s appreciation trend, which began with the Nixon shock and became decisive with the Plaza Accord. Fourth, the worsening fiscal deficit, leading to the start of the second Provisional Commission for Administrative Reform in 1981, and the privatization of Japan National Railways, Nippon Telegraph and Telephone Public Corporation, and Japan Tobacco and Salt Public Corporation. Fifth, the worsening Japan-US trade friction. Based on these preconditions, the economic foundation structurally changed, leading to the bubble and post-bubble economic changes.
As mentioned in time series analysis, we first read the shape of change and infer whether any regularity is hidden. The shape of change includes regular and irregular parts. Generally, the change of a single target is a combination of regular and irregular parts. First, we separate the regular elements from the irregular elements. Regularity generally refers to periodicity. Periodicity can be like waves occurring in a fixed shape over a fixed period or like seasonal fluctuations occurring singly over a fixed period. The period of change includes short-term, long-term, temporary, and inherent changes. Additionally, there are changes with constant and variable periods and widths. Changes have speeds, accelerating or decelerating. The shape of change is formed by the overlap and combination of multiple elements.
To find regularity in change, we look at order, repetition, branching, and state. To find regularity, we observe whether there is any order in the change, whether there is repetition, and whether there are any branching points. Order means whether there is a sequence. Branching can appear as peaks and valleys, i.e., turning points. When observing repetition, we pay attention to the width and frequency.
The branching points of the bubble include the peaks of stock prices, land prices, interest rates, exchange rates, price trends, income trends, and tax revenue peaks. The appearance of the bubble varies depending on what is considered the starting point.
In the national economic accounts, order is crucial. Without seeing the order, the national economic accounts cannot be understood. Order creates flow, organizes flow, becomes the source of flow, and follows the flow.
The smoothness of change is also important. Whether the change is smooth, jagged, intermittent, elastic, constant in speed, uneven, or has strengths and weaknesses.
There are stationary and non-stationary changes. We should pay attention to changes in the nature of movement. Changes that were based on certain rules becoming irregular at some point suggest that some force was lost or weakened. Losing correlation is like falling into a zero-gravity state. Movement differs between a field with gravity and a zero-gravity state. Objects inside a rocket move differently inside and outside the atmosphere. The gravity acting on a climbing airplane differs from that on a plane in level flight.
There are regular and irregular changes. Regular changes include periodic and non-periodic changes. Periodic changes include short-term and long-term changes. The determination of short-term or long-term is based on the unit period. Unit periods include a day, a week, a month, a quarter (three months, a season), a half-year, a year, two years, three years, five years, etc. In the past, China and Japan considered a sixty-year cycle combining the ten heavenly stems and twelve earthly branches. The sexagenary cycle structured days, seasons, and years, giving rhythm to life. This system is excellent and a testament to human wisdom. Modern society is negative towards such seasonal festivals and rituals, resulting in a loss of color in contemporary life. Seasonal festivals and rituals were not set by superstition but to give rhythm to life. Ignoring the practical effects of such rituals, customs, festivals, and traditions is foolish when understanding economic changes. Work without seasons lacks distinction. Calendars are not for fortune-telling but to create a framework for life. Without understanding the role of such festivals and rituals, controlling the economy is difficult.
The shape of unit period fluctuations includes trends, seasonal fluctuations, and irregular fluctuations. When the regularity of change differs, it is necessary to clarify what aspect of the nature of change has changed.
Change is a function of time. The appearance of change differs entirely depending on whether time acts negatively or positively.
Economic development has three stages: survival, living, and self-realization. The needs change according to the stage. The approach to needs also differs at each stage. Are the minimum necessary resources for survival adequately distributed? Are the resources to enrich people’s lives adequately distributed? Are the resources for self-realization adequately distributed? It starts with securing the necessary resources for survival. The focus then shifts to enriching life. Once life is reasonably fulfilled, the final stage is seeking self-realization. In the survival stage, the primary concern is securing the necessary resources, which involves competition or struggle. Once survival is assured, efforts shift to improving living standards, from makeshift huts to standard housing, and eventually to homes that suit personal preferences. These changes appear as differences in the early, growth, and maturity stages, and appropriate measures must be taken at each stage to avoid decline. Policymakers must accurately discern the changes of the times.
Decline does not only occur in the final stage. It begins immediately if inappropriate measures are taken.
Stock may seem to lack the flow of money, but there is a significant flow. However, it does not appear on the market surface because it is not for settlement. This flow influences economic trends and is controlled by finance.
The nature of assets is crucial. Assets include financial and non-financial assets. Non-financial assets are divided into productive and non-productive assets. This classification forms the basis of stock. The core of finance is financial assets, which are nominal assets without physical substance, having only monetary value, essentially claims. Claims simultaneously constitute liabilities, meaning claims and liabilities are two sides of the same coin. Financial assets and liabilities are inseparable. Non-financial assets are the opposite of financial assets, forming the basic structure of stock. The process of separating claims and liabilities creates representative money.
The difference between financial assets and other assets is that financial assets have the same value as cash. Being equivalent to cash means they are not affected by monetary value fluctuations, allowing financial assets to be treated as transfers. In contrast, other assets are subject to market prices and gains or losses from transactions, meaning they cannot be treated as simple transfers. There are also differences between depreciable and non-depreciable assets.
Credit creation involves the transfer of asset value through lending and borrowing transactions, but profit and loss transactions are necessary to create asset value. Therefore, lending and borrowing and profit and loss are symmetrical.
What is a Bubble
After the bubble collapse, Japan has been said to have experienced a lost decade or two and has yet to recover from its aftermath. What exactly was the bubble? Without clarifying this, the Japanese economy cannot regain its former vitality. Was the formation of the bubble inevitable or a result of deliberate intent? The approach to addressing it fundamentally differs depending on whether it was inevitable or deliberate. The parties involved never admit their mistakes, which has distorted subsequent policies.
A bubble is a phenomenon where stock abnormally inflates relative to flow. For example, financial assets like land and stocks abnormally expand relative to everyday expenses. The danger of a bubble lies in the stock volume significantly exceeding the funds required for flow, thereby compressing the flow. For instance, the abnormal rise in land prices cools the actual demand for land. The danger of a bubble is that the inflated asset value of non-substantial money prevents funds from flowing into the real market. The harm of a bubble is that during its collapse, the compression of nominal asset values creates negative asset values, i.e., it pressures companies’ funding capacity and hinders the supply of money to the real market.
The impact of falling stock and land prices on the economy is due to their effect on working capital. Many companies experience seasonal fluctuations in revenue and often invest in stocks and land to prepare for low-revenue periods. Falling stock prices exploit this point.
Funds for fixed assets and production means, i.e., investment funds, are implicitly divided into long-term borrowings as the source, while working capital is primarily sourced from short-term borrowings. The term “loan recall” after the bubble collapse refers to working capital being collateralized. Working capital primarily secures latent assets, which is why slight inflation was considered beneficial for the economy.
The underlying cause was the rapid yen appreciation following the Plaza Accord. The sudden yen appreciation led to a recession, and companies sought financial engineering as a way out when they could no longer generate revenue from their core businesses. In the early bubble period, accounting and finance departments were required to generate profits. Managers who could not engage in financial engineering were deemed incompetent. Many managers praised for their financial engineering during the bubble were held accountable and ousted after the bubble collapse.
When real value and nominal value diverge, money deviates from its original function, rendering it ineffective.
The harm of money failing to fulfill its original function is that the normal circulation of the market economy is not maintained. The market economy fundamentally operates by recovering funds through revenue and distributing them as expenses. Finance’s role is to lend funds to economic entities lacking funds to prepare for payments. Lending and borrowing are subordinate activities, not the main actors. Debt cannot function like revenue because liabilities do not correspond to expenses.
The capitalist economy is a system that adjusts production and consumption and realizes distribution through the market, with revenue and expenses as the core. Debt, subsidies, grants, and taxes are fund transfers, actions to prepare for payment. Excessive dependence on debt, subsidies, grants, and taxes means it is no longer a capitalist economy. The market also cannot fulfill its original function because supply and demand cannot be adjusted through the market. Production and consumption become independent, losing their connection. When the connection between production and consumption is severed, controlling production through consumption becomes difficult, and prices cease to function.
If money circulates, economic entities can continue their operations. Conversely, if money does not circulate and cash flow cannot be managed, operations cannot continue regardless of revenue. After the bubble collapse, many economic stimulus measures were taken, but few succeeded. One reason is the lack of understanding of money’s function.
We tend to be captivated by the visible profit and loss and settlement functions on the market surface, overlooking the underlying lending and fund transfer movements. However, one of the significant forces sustaining operations is the lending and fund transfer functions working behind the market. Fund transfers compensate for fund surpluses and shortages. When funds do not flow smoothly in the market, effectively utilizing fund transfers is necessary. Policies utilizing fund transfers include subsidies, grants, and loans. Therefore, understanding the functions of subsidies, grants, and debt is essential.
The economy consists of the interaction between production and consumption. Production and consumption are not independent but are linked by distribution. The economy is controlled by the linkage of production and consumption through distribution. If production and consumption are not linked, the motivation for production activities is lost.
The traces of the bubble are evident in companies’ cash flows. Cash flows are broadly divided into operating cash flow, financial cash flow, and investment cash flow. Following the Plaza Accord, investment and financial cash flows increased with the bubble’s formation, and liabilities rose above operating cash flow. Liabilities began to decrease sharply after the bubble collapse. Temporarily recovered cash flows declined again with the financial crisis. The bubble and post-bubble void are caused by the financial and investment cash flows working beneath the surface, not the visible operating cash flow.
During the Lehman Shock, apparent cash flows increased. However, this was not because the economy was good but the opposite. Abundant funds do not necessarily mean a good economy.
Visible profit and loss alone cannot capture the actual economic movements. The economy involves not only the visible flow of funds but also the underlying lending flow. Understanding both the surface and underlying movements is necessary to grasp the economy’s function.
Before the bubble collapse, investments were primarily made through financial cash flow. After the bubble collapse, funds for investment were generated from operating cash flow. This trend indicates expenditures for settling past investments rather than future investments. This significant change occurred around the bubble. If future investments are restrained and past investments are settled, the market inevitably shrinks.
Confirmation of the Background
First, it is necessary to confirm the background. Why is it necessary to confirm the background? Simply listing facts or checking the progress without a clear purpose is meaningless. The purpose and what you want to achieve will determine what background needs to be confirmed.
The ultimate goal of economic analysis is to create guidelines for determining measures and policies that benefit people’s lives and livelihoods. If it does not help people’s lives and livelihoods, the existence of economics is meaningless.
We are about to enter a turbulent era. How can we survive this turbulence? Economics exists to learn this. Economics exists to enrich and make people’s lives happier. This noble aspiration and sense of mission have developed economics. Economics that cannot explain the meaning and effects of current economic and fiscal policies lacks this noble spirit and aspiration. Whether it is grants or loans, understanding the differences in their effects and meanings is something that those who aspire to economics should pursue with all their might.
The economy is about to fall into great confusion due to the coronavirus. It is said to be worse than the Great Depression and the Lehman Shock. However, what exactly is worse than the Great Depression or the Lehman Shock? It is pointless to make a fuss without clarifying this. We are now at a historical crossroads. Economics is required to save this country and guide humanity. Economics is different from archaeology or literature; it is a practical science to improve reality.
Policies have purposes. The issue is how policymakers perceive the situation and what they aim to achieve with their policies. By comparing the purpose and results of policies, their effectiveness can be measured. However, often the purpose and aim of policymakers are forgotten, and only the results are focused on. Policies are sometimes used as tools for political strife or to evade responsibility, distorting the results. The purpose is forgotten. The economy is not a natural phenomenon. The root of economic policy lies in the intentions of policymakers. Policymakers’ intentions include short-term and long-term impacts. Usually, emergency measures and fundamental long-term measures are combined and executed.
Policies that influenced the bubble include land policy, financial policy, accounting policy, market policy, exchange policy, and industrial policy. These policies need to be examined, and their mutual effects clarified.
Modern economic policies are full of prejudice and dogmatism. For example, deregulation is considered good, or everything should be competitive. Industry protection and cross-shareholding are considered bad and against democracy without any basis. At the root is a disdain for commerce and discriminatory thinking. Profit is seen as ego. It is a contradiction of capitalism. While saying that selfishness develops the economy, there is guilt in profit-making businesses. There is guilt in pursuing profit. The role of interest is not recognized. There is an attempt to give it a strange indulgence. This leads to the condemnation of industry protection and cross-shareholding as evil. Without economic basis, it reaches ethical considerations, distorting economic policies. Bringing strange moralism into the economy is a source of error.
In sports, it is natural to protect athletes. Without protection, it could lead to killing each other. Sports cannot be played safely. A contest without rules is not a competition but a struggle. A place without discipline is not a market but a battlefield. If regulations are removed indiscriminately, the market will turn into a battlefield.
Behind the bubble collapse are such prejudices and speculations. Why is industry protection considered bad? Why is interest condemned as evil? Why is cross-shareholding considered unfair? Without showing any basis, bad things are condemned as bad. Even verification of what is bad is not allowed. This is one of the causes distorting economic policies.
Doctors understand the human body’s structure to heal diseases, not out of mere curiosity. Interest and curiosity may contribute to the development of medicine and science, but mere curiosity and interest alone cannot contribute to their development. They only satisfy personal desires.
Why confirm the background of the bubble and its collapse? It is to clarify the problems of the bubble, the mechanisms and causes of its occurrence, evaluate the bubble, evaluate the policies and measures at each time, and know how to respond when the bubble occurs again. This is important. For this, it is necessary to clarify what was related to the bubble and the factors that caused it. Ultimately, it is to clarify causality. However, even if causality is not clear, correlation must be clarified.
Clarifying the background inevitably means time series analysis. It means ordering changes based on the passage of time. This is the procedure to clarify causality. Causality involves time, order, and process as important factors. In time series analysis, the interrelationship of phenomena occurring simultaneously or in parallel is important. The economic structure has both dynamic and static aspects.
From the formation of the bubble to its collapse and the so-called lost decade, we should confirm the changes annually and quarterly. Decompose the changes into trends, short-term cyclical fluctuations, seasonal fluctuations, and irregular fluctuations.
The appearance of change differs entirely depending on whether time acts negatively or positively. A structure where time acts positively is dynamic, and where it acts negatively is static.
Looking at the situation before and after the bubble collapse, it can be seen that the time value, which acted positively until the bubble collapse, began to act negatively.
First, clarify the environment and conditions that created the bubble. To understand the environment and conditions that caused the bubble, it is necessary to clarify the preconditions. In the process of clarifying the preconditions, we want to define what a bubble is.
First, what phenomenon does the bubble refer to? A bubble is foam. It refers to a phenomenon like foam. Foam expands to its limit and bursts suddenly when it reaches the limit. A bubble is a phenomenon that rapidly expands and bursts suddenly without warning. From the mid to late 1980s, asset values rapidly expanded and then suddenly burst and shrank. This economic phenomenon is called a bubble.
What caused the asset values to expand and burst? Let’s clarify this.
Factors that expand asset values include money, goods, and people. Let’s clarify these in order. First, the background that expanded asset values.
First, the yen’s appreciation. Second, the end of high growth. Third, interest rates. Fourth, prices, especially the surge in crude oil prices. Fifth, fiscal policy. Sixth, consumption trends. Seventh, trade friction.
The economy changes due to the interplay of multiple factors: changes in money, production, consumption, income, asset values (especially land prices), etc. To understand complex economic changes, it is necessary to decompose the overall change into changes in individual factors. Another important aspect is the flow visible on the market surface and the flow of money working behind the market.
The background of the bubble includes the value of money, i.e., exchange rate fluctuations, the rise in asset values (represented by land and stock prices), interest rate trends, financial policies, market (flow) changes (crude oil prices, other price trends), fiscal policies, consumption changes, and international situations and trade changes. Let’s confirm the progress of these elements.
Changes in money refer to exchange rate changes. The background of the bubble includes changes in money.
It started with the Nixon Shock. Then, the Plaza Accord in 1985. In August 1971, the US stopped exchanging gold for dollars. In 1973, the yen moved to a floating exchange rate system. It sounds simple, but stopping the exchange of gold for dollars means changing the core of the monetary system. It is the end of the post-war Bretton Woods system. This inevitably changes the essence and nature of money. The Plaza Accord presents this more realistically to Japan. After the Plaza Accord, Japan faces a severe yen appreciation recession.
The important change in money is the chronic yen appreciation trend, accelerated by the Plaza Accord. This casts a dark shadow on Japan’s economic growth, another background of the bubble.
Two years after the Nixon Shock, the first oil shock occurred in October 1973. Then, the second oil crisis in 1979. The 1970s began with the Nixon Shock and ended with the oil shock. The 1970s also marked the end of the high-growth era. These events prepared for the bubble. Then, the Plaza Accord. The Plaza Accord is at the entrance of the bubble.
The core of the bubble is the surge in asset values. What caused the surge in asset values? The core of the bubble is hidden there. The bubble is symbolized by the surge in land and stock prices. The surge in land prices is generally considered to have occurred after the Plaza Accord, but signs of a surge were already present around 1983. The yen’s appreciation after the Plaza Accord accelerated this. The rise in land prices cannot be understood solely from the perspective of actual demand. It is reasonable to think that speculative motives also increased asset values. The background of land speculation includes the upward trend in land prices and the land myth. At the same time, we must not forget the land collateral principle and latent asset management. As long as land prices were rising, latent assets and land collateralized financing were viable. This also worked to offset past management mistakes.
In December 1989, the Basic Land Law was enacted. In March 1990, the total volume control was implemented. In May 1991, the land value tax was introduced. Land prices began to decline immediately after these measures.
The problem with the bubble is not only the formation period but also the process of bursting and collapsing the bubble. Let’s look at this next.
The 1997 Diet session is known as the Jusen Diet because it deliberated the injection of 6.85 trillion yen in public funds. Housing loan companies are representative non-banks. Non-banks are companies that specialize in lending without relying on deposits. Among them, housing loan companies specialize in housing funds and mortgages. Housing loan companies were established in the 1970s with investments from city banks, trust banks, regional banks, life insurance companies, and the Norinchukin Bank. While tightening loans to land by financial institutions through total volume control, they left a loophole for agricultural and forestry financial institutions, allowing land speculation to continue under the guise of non-banks like housing loan companies. This delayed the collapse of the land bubble. In the final stages of the bubble economy, the Ministry of Finance issued a directive to banks to restrict loans to construction, real estate, and non-banks, including housing loan companies, but did not issue such directives to credit unions and mutual aid associations. When lending from agricultural cooperative financial institutions to housing loan companies, the director of the Banking Bureau required the parent bank to issue a written pledge not to inconvenience the agricultural cooperatives, but a rubber stamp was sufficient. This created loopholes, complicating the handling of non-performing loans. Policy inconsistencies and mismatches result in the loss of policy effectiveness.
In February 1987, NTT was listed, causing an NTT fever. In October 1987, the stock market crashed due to Black Monday, but it could not stop the bubble’s momentum. However, the impact of Black Monday made it difficult to tighten finance, becoming a background for the bubble. In December 1989, the Nikkei Stock Average recorded an all-time high of 38,915 yen at the year’s end closing. It began to decline from the New Year’s opening the following year, marking the beginning of the bubble collapse.
A year after the stock price peaked, land prices began to decline. Let’s follow the progress to understand what this one-year gap means.
The bubble’s formation and collapse are due to the imbalance between stock and flow. Distortions occurred between the movement of money below the surface and the flow of money on the surface. The imbalance between stock and flow eventually distorts the relationship of surpluses and shortages between sectors.
It is important to note that land and stocks fall when sold in large quantities and rise when bought in large quantities. This became an issue when handling non-performing loans. What are non-performing loans? To understand non-performing loans, it is necessary to understand the function of claims. Claims do not exist independently. Claims exist in pairs with liabilities. Non-performing loans mean that there are non-performing liabilities in the background. Non-performing loans refer to a state where the actual value of claims falls below liabilities. The reason they are non-performing is that claims falling below liabilities result in losses at the time of settlement. This is the essence of non-performing loans. Forcibly settling non-performing loans expands losses. If settled all at once and in large quantities, losses expand infinitely, like falling into a bottomless swamp. When trying to settle the bubble, there was such a bottomless decline in asset values. Asset values fell as if being sucked into a black hole. It can be said that the market bottom was breached.
The acceleration of stock price declines was due to the unwinding of cross-shareholdings. Cross-shareholdings have supported stock prices. Cross-shareholdings were deemed wrong and forcibly unwound. However, cross-shareholdings have moderated economic volatility through loose corporate alliances. It is unclear what is wrong with cross-shareholdings. Instead of fully endorsing cross-shareholdings, it is necessary to clarify what is wrong and what is right, identify the strengths and weaknesses, and understand the situations where they are effective and where they have adverse effects.
Cross-shareholdings mean that multiple companies hold each other’s shares. The purpose is for companies to have loose alliances. This has also grouped companies around banks and former zaibatsu companies. The advantage is that having shares held by trusted companies ensures stable shareholders and stabilizes stock prices, preventing takeovers. However, if the relationship becomes too close, it becomes exclusive and worsens management efficiency. Cross-shareholdings can sometimes function like a Konzern. However, whether Konzern or cartel, it is necessary to clarify what is wrong and why. Konzern generally means zaibatsu, controlled by a specific family. However, cross-shareholdings are not necessarily tied to any family or faction. In this sense, they should be distinguished from zaibatsu. Instead, they should be seen as corporate groups centered around financial institutions. The movement of financial institutions to unwind cross-shareholdings undoubtedly pushed down stock prices. Such downward pressure risks breaching the market bottom.
In economics, the state is important. Therefore, it is necessary to clarify what state to maintain to avoid misjudgment. Simple, uniform, dogmatic ethics alone cannot suffice.
In an era when asset values were rising and inflation was the norm, the role and utility of interest rates were clear. When the economy overheated, the official discount rate was raised, and when the economy stagnated, it was lowered. Watching the official discount rate trends allowed for economic trend predictions.
The role of finance has gradually changed. The first stage is when the official discount rate ceased to function. The second stage is the zero interest rate era.
2001: Financial Instruments Sales Act 2002: Announcement of the “Financial Revitalization Program” and establishment of the “Banks’ Shareholdings Purchase Corporation” 2003: Identity Verification Act 2004: Financial Function Strengthening Act 2005: Full-scale lifting of the pay-off system and Personal Information Protection Act 2006: Depositor Protection Act and Financial Instruments and Exchange Act 2007: Revised Money Lending Business Act 2008: Act on Prevention of Transfer of Criminal Proceeds and Electronic Record Claims Act 2009: Act on Special Measures for Strengthening Financial Functions of Small and Medium Enterprises and Revised Installment Sales Act
Interest rates, i.e., financial policies, played an important role both during the bubble formation and collapse.
The lending and borrowing of financial institutions mirror the lending and borrowing of other sectors. Deposits are liabilities, and loans are assets. Total assets (claims) and total capital (liabilities) are flat. If the overall situation does not change, changes in distribution mean changes in the function of funds.
It is noteworthy that since the start of unprecedented monetary easing, the balance of cash and deposits has been rising. Cash and deposits are squeezing securities.
The fact that cash deposits are accumulating in financial institutions means that funds are stagnating in financial institutions. It is also noteworthy that the total assets of financial institutions were almost flat until the Lehman Shock and rapidly expanded after the Lehman Shock with monetary easing. Even with expanding total assets, loans did not increase, only cash deposits rose.
Overestimating the role of public investment leads to fiscal errors. The essence of fiscal policy lies in national management, and economic measures are secondary. Confusing situations like the current coronavirus with the Lehman Shock or bubble collapse is dangerous. The prescription differs depending on whether it is an economic measure or a crisis measure. Increasing public investment indiscriminately because of economic downturns leaves only negative consequences. Public investment without clear grounds should be avoided.
Changes in production are changes in the market. The background of market changes includes high growth and the end of growth.
The problem in modern society is the antagonism towards costs and debt. This ironically leads to the expansion of costs and debt. Costs are not unnecessary. Maintaining appropriate costs while increasing productivity is crucial. Costs are the key to distribution, and denying costs undermines the market economy. Overemphasizing competition and aiming to reduce costs leads to the collapse of the market economy. The idea that cheap is good is dangerous in a market economy. The important thing is how to maintain appropriate costs. This also applies to debt. Debt is not bad; excessive debt is bad. This point must not be misunderstood. Unprincipled deregulation aimed solely at price competition devastates the market. If appropriate revenue cannot be maintained, companies lose a major means of fundraising through revenue. Moreover, during declining asset values, companies lose both revenue and latent profit as means of external fundraising.
Income is deeply related to employment. The important thing is the collapse of regular employment. Stable jobs and stable income are prerequisites for debt.
1986: Enforcement of the Worker Dispatch Law 1996: Expansion of target industries to 26 1999: Further expansion of target industries 2000: Lifting the ban on dispatch with the intention of employment 2004: Lifting the ban on dispatch to manufacturing
Among these measures, the substantial liberalization of target industries in 1999 and the lifting of the ban on dispatch to manufacturing in 2004 are particularly significant. These two policies created a hole in the foundation of employment, which is stable jobs and stable income.
Consumption is based on population. Consumption and expenditure can be predicted to some extent because there is a limit to the consumption per unit. In contrast, revenue, income, and production are uncertain. Production volume can be predicted to some extent in manufacturing. The ability to predict production volume is a significant achievement of the Industrial Revolution. However, many raw materials for food are still subject to chance. Even if production can be predicted, predicting sales volume is difficult because customers are fickle. While production volume can be planned, sales volume cannot. Investment in equipment is made based on uncertain sales plans. Production investment inherently involves a gambling element. Profit is made by taking risks.
Therefore, consumption and production are linked by supply and demand. Changes in supply and demand are the background for price changes.
Ultimately, the long stagnation after the bubble collapse was due to overlooking the fundamental cause of the bubble and relying on superficial symptomatic treatments. The true cause of the bubble lies in the distortion between the visible money and the money flowing below the surface. Focusing on immediate phenomena leads to overlooking the essence of things.
The Bubble and the Surplus and Shortage of Funds
The economic system operates through the flow of money created by the surplus and shortage of money. In a market economy, the flow of money functions through market transactions. There are two flows of money: buying and selling, and lending and borrowing. The problem is that the flow of buying and selling is recorded in profit and loss and appears on the market surface, but the flow of lending and borrowing does not appear on the market surface. Therefore, the impact of lending and borrowing cannot be measured by current economics. Lending and borrowing form stock as balances and are considered fund transfers in national economic accounting, but in reality, it is lending and borrowing that can cause economic collapse. However, balances alone cannot capture the supply and demand of funds through lending and borrowing.
Without considering the interaction between the visible workings of money and the underlying flow of money, the true state of the economy cannot be seen. This is because the correlation and causality between stock as payment reserves and the flow actually settled cannot be understood. The ratio of the total amount of money to the amount of money in operation represents the efficiency of money.
The economic system is driven by the surplus and shortage of funds and the flow of funds resulting from this surplus and shortage. The important factors are the flow rate of funds and the distortions between sectors. To grasp the state of fund operations, it is necessary to start by confirming the flow and balance of funds.
The essence of money is its function. Money has utility, i.e., value, through its function. Money has no value if it does not exhibit utility. What enables the utility of money is its exchange with goods. The function of money is exhibited through the surplus and shortage of money resulting from its exchange with goods and the flow to compensate for this surplus and shortage.
Money has both positive and negative functions. When money flows towards the market, it simultaneously generates an equal amount of claims and liabilities. Claims generate positive functions, while liabilities generate negative functions. Claims become assets, and liabilities become debts.
Claims and liabilities expand when money flows towards the market and contract when it flows in the opposite direction, i.e., towards collection. Conversely, when claims and liabilities are expanding, money is flowing towards the market, and when claims and liabilities are contracting, money is flowing towards collection, i.e., towards financial institutions. Additionally, when money flows from liabilities to assets, claims and liabilities expand, and when money flows from assets to liabilities, claims and liabilities contract.
Money exists in pairs with counter-performance. Money alone does not exist. This form of money is the basis for claims and liabilities. The value of money is realized through its exchange with goods. There is a flow of goods in the opposite direction to the flow of money.
When we think of money, we often imagine physical items like banknotes or coins, but the essence of money is information. Representative money has no physical substance; its essence is its function. Therefore, it can be made cashless and replaced with electrical signals or electronic information. The value of money is determined not by the amount issued but by the issuance amount. The physical substance lies on the side of goods.
In the market, money is lent out to prepare for payments. Lending and borrowing are thus flows of money transfers.
The development of industries has stages: creation, growth, maturity, and decline. The measures to be taken differ depending on whether it is the creation, growth, maturity, or decline stage. In the final stage of decline, operating cash flow becomes negative, investment cash flow also becomes negative due to increased renewal investments, and financial cash flow becomes positive as past financial assets are liquidated and consumed. Thus, the final stage of decline resembles the creation and growth stages.
The key to distinguishing between growth and decline stages is not the state but the direction of change, the vector. It is crucial to determine whether the market is heading towards expansion equilibrium or contraction equilibrium. Focusing only on the market’s current state without correctly identifying the direction of change will not lead to the right measures. Relying on precedents is dangerous because if the direction of change differs, the same measures can have opposite effects.
Modern economics is based on the growth stage, but results are more likely to be achieved during the maturity stage. The maturity stage is also when strength is built up to survive the decline stage. Sustaining and continuously harvesting the fruits of the maturity stage is the essence of economic policy. The essential requirement for enriching and sustaining the maturity stage is market discipline. Assuming growth, competition is encouraged even at the expense of market discipline. However, unprincipled excessive competition only devastates the market.
It is important to remember that the most fulfilling stage in the economy is the maturity stage. By constantly pursuing growth and denying market maturity, the peak period is missed, leading to market devastation and rapid decline.
Money has different functions and uses depending on the role of economic entities. Economic entities form sectors based on their primary roles. The roles of economic entities include production, distribution, consumption, and preservation. Added value is created by the market because the market is where goods and money are exchanged. By observing the surplus and shortage of flows and stocks between sectors, the direction and utility of money flow become clear.
Clarify the functions and structures of each sector’s economy. Investigate the role of money in the functions and structures of sectors. Then analyze the current situation of each sector. Private companies are responsible for production, creating employment and distributing income in the production process. Households primarily handle consumption, providing labor and other production means to the production sector to earn income. Public institutions collect taxes, enhance social capital, and redistribute income. Financial institutions circulate funds through lending and borrowing. The power of money enables the utility of each sector.
In principle, the primary creators of added value are non-financial corporations responsible for production and households responsible for consumption. In contrast, finance, general government, non-profit organizations serving households, and foreign sectors are neutral. This principle collapsed after the bubble burst. Non-financial corporations, having lost their funding capacity due to the decline in asset values and profitability, stopped external funding, halting the increase in liabilities. Consequently, they became surplus in funds within a unit period, increasing assets, but maintaining a certain level of liabilities. Households, being surplus in funds due to the relationship between production and consumption, continued to accumulate financial assets. As a result, the total assets of society continued to rise, and the opposing liabilities also continued to rise. Without takers for the surplus liabilities, they stagnated in financial institutions, leading to a surplus of money, lowering interest rates, and pressuring financial institutions’ management. If left unchecked, this leads to financial instability. The general government issued government bonds to take on the stagnant liabilities.
Non-financial corporations, relying on internal funding and not incorporating external funds, faced a shortage of payment reserves, causing funds not to circulate in the market. The general government compensated by taking on liabilities. However, public works do not create added value, leading to an increase in overall market liabilities, with the surplus absorbed by households and non-financial corporations stagnating in the financial market. Essentially, households are the surplus entities. The diagram of fund circulation shows that other sectors borrow from households to circulate funds. The cycle of lending funds from surplus households to fund-deficient private companies, creating added value, was established.
After the bubble burst, the positions of non-financial corporations and the general government reversed. Public investment and public works, being non-profit activities, do not create added value. The reversal of positions between non-financial corporations and the general government prevented the market from creating added value, suppressing economic growth.
Stock continued to expand until the Lehman Shock, temporarily contracted afterward, but continued to expand. In contrast, flow repeatedly expanded and contracted. The following graph shows the surplus and shortage of stock between sectors.
Overall, as stock prices fell, flow rapidly decreased, and the ratio of overall stock expanded. It can be said that the phase changed. Moreover, the demand for funds from private companies decreased, and they turned to the supply side of funds around the financial crisis, which slowed the economy. Since 1999, they have consistently turned to the supply side of funds. They have shifted from being recipients to providers of funds. The general government and foreign sectors have taken on the role of fund recipients instead of private companies. In other words, the flow of funds from households to companies changed direction towards the general government. The problem is that added value is created by market transactions, and transfers to public institutions do not create added value. This does not expand GDP.
GDP should ideally move in proportion to the expansion and contraction of stock surplus and shortage. In this sense, the distortion can be said to have started in 1980.
After the bubble burst, the problems are clear. One is that flow was compressed relative to stock. Another is that private companies became surplus in funds, and the general government took on the liabilities. Some misunderstand that private companies are hoarding funds, but the problem is that funds are not flowing towards the market.
Noteworthy is that from 1987 to 1991, the general government was surplus in funds in terms of flow. Households, being surplus in both stock and flow, saw a decline in flow from 1992, the year after the bubble burst in 1991.
After the bubble burst, the general government rapidly increased liabilities, while private companies rapidly reduced liabilities and increased assets. This trend represents the entire private corporate sector rather than individual companies. It merely means that the general government took on the liabilities of private companies. Public works do not create added value, so they do not contribute to overall economic growth. In other words, public works are inefficient in terms of funds. Repeating public works without circulating money in the market only expands stock, compressing flow. Before the bubble burst, companies borrowed from households to supply funds to the market, creating added value.
Observing the changes in the surplus and shortage of funds by sector, it is clear that the flow of funds changed before, during, and after the bubble formation. First, before the Plaza Accord, the fund shortages of private companies and the general government were balanced, with households being the only surplus entities. During the bubble formation, private companies fell into significant fund shortages, and the general government became surplus in funds. After the bubble burst, non-financial corporations became surplus in funds, and the general government turned into a fund-deficient entity. Households remained surplus in funds, but their flow capacity declined after the financial crisis. This indicates a loss of market vitality.
The issue is the policies adopted from 1991 to 1997. One is the aggressive bursting of the bubble and deregulation. The bursting of the bubble involved financial tightening, restricting funds for land, and aggressive handling of non-performing loans. Deregulation is symbolized by the accounting Big Bang. The bursting of the bubble caused asset values to plummet bottomlessly, and deregulation reduced profitability. This significantly reduced the funding capacity of private companies.
Observing the surplus and shortage of flow, it is clear that the general government and non-financial corporations moved symmetrically after the bubble burst. When the bubble burst, the general government reduced assets, and non-financial corporations reduced liabilities. They crossed in 1993, and during the financial crisis in 1997, the general government significantly increased liabilities, and non-financial corporations increased assets. In other words, the general government took on the debts of private companies. However, considering their respective roles, this is a fallacy.
When measuring fund efficiency, the key is the relationship between flow and stock. In the 1988 year-end closing, the Nikkei average hit a record high of 38,915 yen and began to decline from the New Year’s opening in 1990.
Observing the ratio of flow to stock balance, flow, which was around 8% to 10% relative to stock, fell to around 3% in line with the decline in stock prices and continued to fall with each financial crisis and zero interest rate policy, compressing to below zero during the Lehman crisis. This movement is almost identical to the decline in interest rates. Fundamentally, the relationship between flow and stock is at the root, and structural distortions cannot be resolved with superficial policies alone.
Observing the transition of flow and stock balance, flow rapidly expanded after the Plaza Accord, then rapidly contracted after stock prices hit a record high, and hit bottom around the time land prices collapsed. It further contracted during the zero interest rate policy and the Lehman Shock, falling into negative territory.
While stock is on an expansion trend, flow is not always expanding, repeatedly expanding and contracting. If fund efficiency is sought from the ratio of flow to stock, it indicates that fund efficiency is not constant. It is necessary to clarify whether this relationship between fund flow and stock causes economic fluctuations or is a result of economic fluctuations.
The key to solving this mystery lies in the rapid expansion of private company liabilities after the bubble burst, accompanied by the expansion of general government assets. Additionally, observing the relationship between flow and stock from a bird’s-eye view, the rapid contraction of flow following the stock price crash is also a significant factor.
During the bubble formation, flow expanded and rapidly contracted during the collapse. The flow of funds tends to fluctuate temporarily around financial crises and the Lehman Shock.
Observing the surplus and shortage of flow, it is clear that flow significantly contracted after the bubble burst. The relationship between flow and stock represents the relationship between operation and payment reserves. While payment reserves are expanding, operations are contracting. This is believed to have caused the long-term stagnation after the bubble burst.
This large trend is clearly reflected in the cash flow of all industries and sizes.
Ultimately, the obstacle to economic growth was the forced compression of liabilities. Liabilities always exist in balance with claims. Forgetting this leads to irreparable policy failures.
The function of funds within a unit period appears as surplus and shortage. Observing the surplus and shortage of funds within a unit period reveals the direction of fund flow. After the bubble burst, funds flowed from assets to liabilities, i.e., from the market towards collection. This led the market towards contraction equilibrium.
Observing the relationship between the surplus and shortage of stock and flow by sector:
During both the bubble formation and collapse, stock expanded unilaterally, while flow fluctuated and did not expand unilaterally. This means that flow did not accompany the expansion of stock. If the flow volume did not increase significantly, it means that funds were circulating through adjustments between sectors.
Observing the composition of stock, it is clear that the proportion of private companies rapidly declined after the bubble burst, while the proportion of the general government expanded.
The proportion of non-financial corporations in the stock of liabilities declined, with the general government and foreign sectors taking up the slack. Conversely, households continued to occupy the sector with the largest assets, but finance gradually rose. The background includes the phenomenon of excess money, but the decline in market function is also a factor.
What this means is that non-financial corporations, having lost their funding capacity due to the decline in asset values and profitability, reduced external funding. Without this, funds would not circulate in the market, so the general government compensated for the reduction. However, the general government does not create added value, so economic growth stopped. This is the aftermath of the bubble.
The gap between fiscal spending and tax revenue is likened to a crocodile opening its mouth. This state, seen throughout post-bubble economic statistics, is exemplified by the gap between market value and book value of land. This reveals the problems of the post-bubble economy. The decisive factor is the divergence between real value and nominal value, flow and stock.
The crocodile’s mouth opening signifies the divergence between the visible market movements and the underlying fund movements. Even if the surface appears to be expanding or maintaining the status quo, the underlying funds are contracting.
The biggest problem is the loss of funding capacity due to the decline in private company profitability and asset values. The background is the market’s dysfunction. Stock prices and profits are merely created by the state. Unless the market fulfills its original function, the current confusion will not be resolved, leading to catastrophe.
This trend is clearly reflected in the flow trends. Observing only the flow, it is clear that non-financial corporations and the general government have completely switched roles, with non-financial corporations shifting from liabilities to assets. The proportion of households in assets has declined, while finance has temporarily increased.
The proportion of households in flow has been compressed, suggesting that household savings have reached their limit. The biggest cause is that private companies cannot procure funds externally and are in contraction equilibrium. For companies to move towards expansion equilibrium, asset values, real values, especially land prices, must start rising. Of course, a rise in land prices without actual demand, as seen during the bubble formation, will only result in a new bubble. Policies to gently raise land prices through effective land use are necessary.
The balance of financial assets is a mirror image of financial institutions and non-financial economic entities. It reflects the surplus and shortage of financial assets between sectors. Households are the surplus entities, and the general government is the deficit entity.
Stock is balanced by the sum of financial institutions and non-financial sectors. Flow is balanced by the sum of households and other sectors excluding households.
Observing the flow during the Lehman Shock, it seems to have experienced a meltdown.
Observing the surplus and shortage of stock, it is clear that households are unilaterally supporting it. Household surplus funds are the source of funds for non-financial corporations, the general government, and foreign sectors, but recently, financial institutions have been playing a role next to households. Originally, finance played its role by being neutral.
During the bubble formation, private companies expanded liabilities. Even after the bubble burst, the level of liabilities was maintained.
Observing the relationship between private company borrowings and fixed assets, it becomes even more evident. The stock price hit a record high at the 1989 year-end closing and began to decline from the New Year’s opening the following year. At the same time, private company long-term borrowings also began to decline. Long-term borrowings have since stagnated, but fixed assets maintained a certain level for a while.
The ratio of long-term and short-term borrowings to fixed assets also reflects this. Nominal value and real value began to diverge. Except for the 1979 oil crisis, the supply and demand of long-term borrowings never took a negative value until the bubble burst. It generally rose in a right-shoulder-up trend.
The market economy creates added value through market transactions. This added value is the source of distribution. In other words, the relationship between revenue and expenses is the pillar. This point must not be forgotten. Revenue and expenses, income and expenditure are not the same. Revenue and income are not the same, and expenditure and expenses or consumption are not the same.
Lending and borrowing are fund transfers, not settlements. However, they are part of the balance. Without understanding this difference, the meaning of the bubble cannot be understood.
During the financial crisis and the Lehman Shock, non-financial corporations significantly underperformed. The decline in stock prices in 1989 also compressed the flow.
Observing the ratio of flow and stock by sector, excluding the foreign sector due to its abnormal fluctuations, reveals the domestic fund operations. The relative expansion of stock weakens the function of flow.
This trajectory is also reflected in interest payments. The relationship between added value and stock is linked to the relationship between flow and stock. It is dangerous to consider flow and stock independently. The background of stock hides invisible, unmanifested fund movements.
The financial sector fluctuates significantly. Excluding the financial sector, it is clear that the general government’s deficit significantly increased immediately after the bubble burst.
Observing the ratio of flow and stock surplus and shortage by sector:
In terms of fund
Limits of Borrowing
How far can borrowing be allowed? In fact, the limit of borrowing is the key to solving current economic issues.
Setting the limit of borrowing is a serious issue not only for companies but also for households and the general government. The limit of borrowing is clearly constrained by income. The basic premise is that the monthly repayment amount, including interest, should not exceed the total income. However, even if it does not exceed the income range, there are other expenditures besides loan repayments. Not all income can be allocated to debt repayment. The minimum cost to maintain a basic standard of living must be secured. If borrowing exceeds a certain level, no matter how hard one works, it becomes impossible to keep up with debt repayments. At this stage, debt begins to self-replicate.
Some view the disposable income, which is the income after deducting non-consumption expenditures such as taxes and social insurance premiums, as the limit of income. Others consider the repayment capacity, including savings and assets, as the basis. Economic trends and rising prices also affect debt. Inflation can reduce the burden of debt. However, rising prices are not a constant state. It is important to remember that deflation after the bubble burst has increased the burden of debt.
In any case, the limit of borrowing is undoubtedly a guideline to prevent economic activities from going bankrupt. The relationship between flow and stock becomes crucial here. The limit of borrowing cannot be uniformly defined. Each sector has its economic role, and the approach to debt varies accordingly. The key factor is the means of debt repayment. The source of debt repayment for households is income, for non-financial corporations it is revenue, and for the general government it is taxes. The differences in revenue, income, and taxes constrain the borrowing limit. However, borrowing remains a preparation for payment and a fund transfer. Debt repayment is non-negotiable.
If goods are not sold, money cannot be paid. However, debt is not just about the inability to pay money; it leads to economic collapse.
The borrowing limit can be set for both flow and stock, but fundamentally, it lies in stock. Essentially, over-borrowing becomes the issue. The principal of the loan is assumed to be repaid over a certain period.
When considering the borrowing limit, thinking about housing investment might help.
Housing investment can be for a house to live in or for renting out. For a house to live in, there are owned homes and rental homes. To invest in housing, it is necessary to calculate the total investment amount. The issue then becomes how much to cover with personal funds and how much to borrow. The most critical factor is the monthly income and repayment amount. The rent for a house under the same conditions serves as a reference for the repayment amount. The primary condition is that the monthly repayment amount fits within the range of fixed income minus necessary living expenses. However, there are risks such as unexpected accidents, illnesses, disasters, or sudden unemployment. Insurance is taken out to prepare for such situations.
It is essential to remember that the premise of borrowing is having a stable job and income. Conversely, the evolution of borrowing techniques can be attributed to the establishment of stable jobs and income. If irregular employment, such as dispatch work, becomes the norm and the stable job and income system collapses, the modern economy will be fundamentally shaken.
The problem arises when borrowing exceeds the conditions or income that can repay it. In the past, many people went bankrupt due to borrowing beyond their repayment capacity from high-interest lenders, which became a social issue. This is an example of exceeding the borrowing limit.
When taking out a mortgage, how much needs to be repaid monthly? How long will the repayment take? What value will the house have after the repayment is completed? The total expenditure incurred when acquiring a house becomes an issue. The next issue is repayment capacity.
When considering the bubble, the value of the house, monthly repayment amount, repayment period, repayment capacity, and comparison with the time of borrowing become crucial factors. In reality, if only considering living, it is sufficient if the repayment amount and repayment capacity meet the conditions compared to the time of borrowing. The subsequent consideration is the speculative thought towards housing.
However, the surge in asset values and land prices took the purpose of housing investment away from actual living and real demand. Investment became detached from actual living, eventually expanding to all elements. As a result, the economy began to expand in areas far removed from reality, making actual living unsustainable. This is the true nature of the bubble. The bubble is destined to burst because its expansion makes actual living unsustainable.
Housing investment has another aspect: investing to earn income by renting to others. In this case, the discussion differs from when it is based on personal income. The meaning of debt also changes. The difference between personal debt, corporate debt, and national debt becomes a decisive key when considering the bubble phenomenon. Personal debt is based on personal income and assets for consumption. In contrast, corporate debt is for investment in production means to generate revenue. National debt is for public welfare. Personal debt is constrained by income, while corporate debt is constrained by revenue, which is highly uncertain.
Investment for personal use only concerns the alignment of personal income and debt repayment. In contrast, housing investment for renting out involves revenue, costs, and debt repayment amounts. Costs include depreciation. In other words, it is not just about cash flow but also the function of profit and loss. When investing for personal use, the primary issue is the amount of personal income. When renting out, the primary issue is the amount of revenue generated. This difference arises from the nature of money’s function. Debt also functions differently depending on whether it is for consumption or production.
As a side note, the term “rich” can refer to asset owners or high-income earners. Generally, high-income earners are often asset owners, so the term “rich” often includes both meanings. This is useful when considering the relationship between stock and flow. During the peak of the bubble, there were quite a few “poor asset owners.” Due to the surge in land prices, they appeared to be asset owners but lived in poor conditions with low income. In reality, being a “poor asset owner” leads to various troubles. Despite low income, they face high taxes, cannot pay inheritance taxes, and have to sell land, leading to family breakdowns and involvement in crime. Many people remain unaffected by the rise in asset values in their actual lives. This reflects one aspect of the bubble: the separation of the real economy and the nominal economy. Even if the reality is poor, it can hold enormous nominal value. This makes one think about the essence of wealth.
When assessing fund efficiency, it is important to look at the ratio of flow to stock in each sector. The numerical values that form the basis of added value play a crucial role because they are the resources that create added value. The ratio of the elements that create added value to the base that forms added value supports the overall efficiency and balance of flow and stock. This becomes the standard and meaning of the interrelationship between interest rates, profits, income, prices, etc.
The flow of funds through debt, i.e., the flow of money in lending and borrowing, lies beneath the market surface and does not appear on the surface. The flow exhibited on the surface is through buying and selling and the function of profit and loss. However, the flow of buying and selling and profit and loss is the result. The flow that prepares for this result is the flow of lending and borrowing. The flow of lending and borrowing determines the survival of economic entities. People focus only on the visible results, such as revenue, profit, and costs. Revenue and profit are also results. The economy functions smoothly when the balance of profit and loss and lending and borrowing is maintained. However, when underlying debt begins to expand, money stops flowing into the market. The bubble occurred when underlying debt expanded, and the balance with claims could not be maintained. The rapid expansion and contraction of asset values disrupted the balance of debt and claims, obstructing the flow of funds in the market.
The fear is when the volume of lending and borrowing exceeds profit and loss. Debt repayment exceeds revenue. When income is cut off due to sudden accidents or illnesses, the mortgage becomes a heavy burden. Companies do not go bankrupt if they cannot make payments without borrowing. It is debt that drives companies to bankruptcy. This highlights the difference between loans and grants. Even if favorable conditions are provided for temporary funds, repayment begins the following month. After the bubble burst, the overall level of debt in society relatively increased, causing economic stagnation.
If personal income is exceeded by debt repayment, it becomes impossible to repay the debt. This leads to a loss of morality. Debt has an addictive effect like a drug. Once a person becomes overwhelmed by debt, their rationality is paralyzed. They may commit any wrongdoing or even commit suicide due to debt. However, this is not just a household issue. If a nation becomes overwhelmed by debt, its independence is threatened, and it may lead to war. Some argue that a nation can print as much money as it wants because it has the right to issue currency. However, it must not be forgotten that currency is a debt to the people.
Debt is debt. Once people learn to live on debt, they lose productivity and the will to work. They lose morality and self-control. Some may think it is fine to live without working, but it is through working to live that people find meaning and purpose in life. Once people learn to live comfortably on debt, they cannot escape from it. The greatest fear may not be debt itself but losing the goal of living. When a nation faces difficulties, it quickly issues subsidies and grants. However, subsidies and grants are funded by taxes. It is like an octopus eating its own legs. It is like lending money between parents and children. Even if tuition is made free, the funding source is taxes. The purposes of compulsory education, specialized education, and higher education differ. The uses of money differ. Learning without effort does not stick. It only increases the nation’s debt meaninglessly.
Some argue that debt must be repaid. Indeed, debt involves repayment. However, it is not just about repaying. The problem is that the flow and function of money through debt are not visible. This leads to the misconception that a nation can borrow as much as it wants. The balance between flow and stock is forgotten. Debt also creates added value. Therefore, it is simplistic to condemn debt as bad. The issue is to correctly recognize the advantages and dangers of debt. Currency was established as an extension of promissory notes. In other words, modern economics is built on debt. As long as the volume of money flowing through lending and borrowing and the volume of money used in market transactions are balanced, there is no problem. The problem arises when the economy relies on debt because money can be borrowed indefinitely. In this sense, national finances are the most precarious. When discipline is lost in national finances, economic collapse is imminent.
We need to firmly grasp the function of money flowing beneath the surface.
Public investment is not a panacea. A drug that is effective in the early stages may not work at all in severe conditions. Public investment may be effective in the early stages of economic recovery but not necessarily in the maturity stage. It may even cause harm, which must be kept in mind.
Recessions, bubbles, and hyperinflation are serious because they affect the real economy. The most important thing is not to undermine the foundation of people’s world.
When looking at the entire economy, financial assets and liabilities, net assets, and non-financial assets are consistent. However, breaking it down by sector reveals the characteristics of each sector.
Overall, the ratio of net assets does not seem to have worsened. The issue lies in the state of each sector.
Comparing households and non-financial corporations, it is clear that the composition of liabilities is contrasting.
In households, the proportion of financial assets has consistently increased since the bubble burst. Conversely, non-financial assets swelled during the bubble.
Particularly noteworthy is that the net assets of the general government turned negative in 2009. This means that the general government fell into insolvency.
As seen in the year-end balance sheets of financial institutions, most of their assets and liabilities are financial. This reflects the nature of financial institutions.
Fundamentally, added value is primarily created by non-financial corporations responsible for production and households responsible for consumption. Finance, general government, and non-profit organizations serving households are supposed to be neutral. This principle collapsed after the bubble burst. Non-financial corporations stopped external funding, halting the increase in liabilities. Consequently, they became surplus in funds within a unit period, increasing assets, but maintaining a certain level of liabilities. Households, being surplus in funds due to the relationship between production and consumption, continued to accumulate assets. As a result, the total assets of society continued to rise, and the opposing liabilities also continued to rise. Without takers for the surplus liabilities, they stagnated in financial institutions, leading to a surplus of money, lowering interest rates, and pressuring financial institutions’ management. If left unchecked, this leads to financial instability. The general government issued government bonds to take on the stagnant liabilities.
Non-financial corporations, relying on internal funding and not incorporating external funds, faced a shortage of payment reserves, causing funds not to circulate in the market. The general government compensated by taking on liabilities. However, public works do not create added value, leading to an increase in overall market liabilities, with the surplus absorbed by households and non-financial corporations stagnating in the financial market.
Many people are focused on the direct impact of the coronavirus, but the more serious issue is the economy. The initial response to the coronavirus was slow. The relatively short duration of SARS may have led to underestimating the coronavirus. There was also a tendency to only be wary of highly lethal diseases like smallpox and plague, initially dismissing the new coronavirus as just a new type of cold. This led to a lax initial response. However, it is necessary to view the coronavirus calmly. During the Spanish flu, the death toll was said to be between 30 million and 100 million. The scale is different. While infection control is important, it is crucial not to make mistakes in economic policy. Policies must be forward-looking. Eventually, the coronavirus will subside. The economic crisis that follows poses a greater threat to humanity. A single mistake could lead to war. The first point is that while the Lehman Shock and the bubble were caused by money, this time the real economy has suffered severe damage. The issue of money is a monetary issue. However, when production means are damaged, it directly affects survival. Money is a nominal issue, but a shortage of goods is a reality.
Production, logistics, and the real market have all suffered severe damage, and recovery is expected to take time. Even if the infection subsides, a delay in the recovery of the production sector will lead to a shortage of goods. A shortage of goods will lead to an endless rise in prices, resulting in hyperinflation. If there is an abundance of money during a shortage of goods, prices will rise endlessly and become uncontrollable.
In essence, it is expected to be similar to the state immediately after World War II. After the war, essential goods such as food, energy, and daily necessities were in short supply, driving up prices.
Currently, oil prices are falling, but it is uncertain when they will rebound. While a shortage of oil is not highly anticipated, the concern is food. There are reports of large locust swarms in Africa, and if China’s production decreases significantly or if US-China trade is disrupted, there is a high risk of food prices skyrocketing.
In addition to the high risk of a shortage of goods, there is an increasing risk of fiscal collapse. To avoid fiscal collapse, the Bank of Japan will have to take on government bonds, essentially printing unlimited money. This will lead to excess liquidity, resulting in hyperinflation. There is debate on what level of inflation constitutes hyperinflation, but the risk of abnormal price increases is high.
The second point is that market closures have prevented revenue generation. The cycle of producing goods, selling them in the market to earn revenue, and covering costs from that revenue has stopped. Money is not flowing.
It is important not to misunderstand. The lack of consumption is not due to a lack of money but because the market is closed. Misinterpreting cause and effect will lead to serious mistakes.
Another point not to overlook is the meaning of uniform distribution. Uniform distribution does not achieve income redistribution. The goal is to allocate funds to those in need of money. Uniform distribution only inflates the amount of money without a purpose, increasing excess liquidity and leaving future problems.
It is a misconception that everyone is in need of money. Only a limited number of people are in need of money. Those not in need of money remain silent, while those in need desperately appeal. This creates the illusion that everyone is in need of money. Distributing money indiscriminately will only accumulate excess money. The problem is not a lack of money but its uneven distribution. The issue is income inequality. It is an issue of income redistribution, not a lack of money. Households are fundamentally surplus entities. The lack of consumption is not due to a lack of money but because the market is closed. It is a market issue, not a money issue. Those in need of money are those who cannot earn income due to market closures. Most salaried workers are not immediately in need of money, and even if they have money, there is no way to use it while the market is closed. The current issue is production and commercial activities, and funds should be concentrated on areas where distribution is stalled while minimizing damage to the production sector.
Pension recipients already receive a certain amount of funds. Civil servants and politicians receive a certain salary, and employees of large and medium-sized companies receive a certain salary even during layoffs. These people are not immediately in need of money and remain silent. On the other hand, many people are genuinely in need of money, and for them, it is a matter of survival, causing a great uproar. It is indeed an urgent issue that must be addressed promptly. However, for those genuinely in need of money, a one-time payment of 100,000 yen is insufficient. For them, 100,000 yen is too little. Those not in need of money will save it due to the market closure, leading to the relative expansion of stock. Those genuinely in need of money are those whose revenue prospects have diminished due to market closures. Even if money is distributed to consumers, the distribution mechanism should ensure that money is distributed through production entities. Funds should be concentrated on those in need, which is the purpose of the social security system. Money and resources should be concentrated on the social security system. It is important to clearly distinguish the issues.
What is the real issue? It is necessary to identify who genuinely needs money. Distributing money indiscriminately is not the solution.
Uniform distribution of money goes against income redistribution and may only worsen fiscal conditions.
It is important to remember that households and companies are surplus entities, while the general government is a deficit entity. Subsidies and grants mean supplying funds from the general government to households and companies. This means transferring funds from deficit entities to surplus entities. The current issue is that private companies are experiencing temporary shortages of working capital due to declining consumption, leading to severe revenue deterioration and resulting in reduced employment and income.
Households and private companies are surplus entities, while the general government is a deficit entity. Money flows from the deficit government to surplus households, increasing government debt and household assets. The issue is not solved by distributing money indiscriminately. Supplying money to households does not necessarily boost consumption. The decline in consumption is due to market restrictions, and the issue is the increase in unemployment. Therefore, social security systems such as