Logic of New Monetary and Tax Policy

When asset was overvalued, and later downward adjusted, the economy is reversely wealth effected.
Usually reverse wealth effect is coped with by both monetary and fiscal policy.
But there might be the case when the effect of asset depreciation exceeds the effect of both monetary and fiscal policy, when deflationary spiral is occurring.
In that case fiscal deficit should get to the worst and interest rate should pegged to zero level at last.
In general, asset depreciation incurs balance sheet adjustment of economic units(banks, corporations and households), and that B/S adjustment incurs deflationary spiral.
Let me propose here the new policy for government and central bank, which directs economic units’ assets to exceed debts substantially on B/S without any expense.
The basic idea is as follows:

①Each auditors of economic units A, B1, B2, ･･･, Bn, C1, C2, ･･･, Cn, and so on, recognize the possible collection(=e1 on illusration 1) of the accounts “trade accounts receivable”, “non-trade accounts receivable” and “loans receivable”(=book value d1 in all, on illusration 1, together with the rest of asset accounts, based on current value accounting, with the only cause from specific asset depreciation(nowadays it is real estate)). That is in other words assessing real value of the assets on B/S, with the only cause from specific asset depreciation(nowadays it is real estate). Let us call the ratio “real asset value–debt ratio”(=c1/b1 on illusration 1). For A, B1, B2, ･･･, Bn, C1, C2, ･･･, Cn, and so on, to participate in the system, each auditor must disclose this information to the participants, who is going to write off.

②The fund of write-off is fixed on first A.
Then A writes-off on B1, B2, ･･･, Bn by allotting the fund according to the real asset value–debt ratio.
③Among B1, B2, ･･･, Bn, let us see what B1 will act next.
The fund of write-off is fixed on B1, then B1 writes-off on C1, C2, ･･･, Cn by allotting the fund according to real asset value–debt ratio.
B2, B3, ･･･, Bn do the same thing, and so follows C1, C2, ･･･, Cn, and so on.
④If any economic unit(A or B1 or B2 or ･･･ Bn or C1 or C2 or･･･ Cn or so on) can not find any counterpart at all, all the earning remained by written-off will be taxed.

Let me explain this by above illustration 1 of B/S of B1.
“a” stands for original fund, “b1” stands for debt for the book value, “c1” for real asset value, “d1” for the book value of “trade accounts receivable” plus “non-trade accounts receivable” plus “loans receivable”, “e1” for the real value of “trade accounts receivable” plus “non-trade accounts receivable” plus “loans receivable”, and “AB1” for allocation to B1.
The equality among these letters(except e1) is as follows:





(b2-c2) stands in the case for B2.

(bn-cn) stands in the case for Bn.

When AB1 > (d1-e1),
(AB1-d1+e1) will be taxed and absorbed by government.
And when AB1 < (d1-e1),

(AB1) becomes another fund to cause multiplier effect.

Next, let me explain the multiplier effect mathematically.

As above, “a” stands for original amount which A writes-off and “t” stands for tax ratio. Multiplier effect of the write-off is expressed as following illustration 2 and formula 1.

formula 1

In case t=0, formula 1 will diverge, and we can get infinite multiplier effect.

In case 1 > t > 0, by multiplying (1-t) on both sides, we get formula 2.

formula 2

This can be said because every economic unit won't write off to the next economic unit for the amount which he was taxed.

By reducing formula 2 from formula 1, we get

And expand

Because (1-t) <0,

is convergent.

If asset depreciation stops, the tax ratio is adjusted and become positive number, so multiplier effect becomes finite.

To put you in a whole picture of the system in operation, let A stands for central bank, B1, B2, ･･･, Bn for banks and C1, C2, ･･･, Cn, D1,･･･ for corporations or households. Later, the settlement should be made between central bank and tax authority.

This system in operation is the new channel for government and central bank to cope with reverse wealth effect in the phase as below.

･The economy in B/S recession derived from B/S adjustment further derived from asset depreciation.

･The economy in deflationary spiral.

･The interest rate pegged to zero level and is impossible to be lowered further.

･The majority of economic units being insolvent(debts to exceed assets substantially on B/S).

･Fiscal deficit in worst condition In the phase above, the B/S of economic units should be adjusted by the operation as above.

Because the operation is extraordinary, for government and central bank whether or not to put the system in operation is a significant judgment.