Additional Comment

This is an additional comment on "Logic of New Monetary and Tax Policy" published on Tuesday, August 14, 2007 on this blog.

1. To the extreme, the Central Bank are obliged to pay for the bubble, because the bankrupted economic units are unable to return write-offs as tax. In that case debts might exceed assets on the substantial B/S of the Central Bank. But it might be permitted to put the presuppossion that the Central Bank never bankrupt, by nature, even in this situiation, in order to overcome the burst of bubble.
And, in case the economy in deflationary spiral, with expectation for inflation entirely disappeared, the Central Bank is given a great chance to put new system in operation.
Or, even if inflationary expectation exists, the system enables the Central Bank to on one hand raise benchmark rate to cope with inflationary expectation, on the other hand restructuring the inflicted balance sheet of economic units.
The system is more realistic than helicopter-money under liquidity-trap.

2. Every write-off must be traced, by centralaized function. So every write-off must be executed through this function, which might exist on the internet.

3. The traced write-offs must be distinguished from high-powered money.

4. For cross-border
(1)AB1 is calculated for each non-residential economic unit, with the only cause from specific asset depreciation(nowadays it is real estate situated in the residential country).
(2)But the economic unit that will be written-off should next write-off in the same booked currency.
(3)In case surplusses of the written-off exists on the economic uint, it's taxed and absorbed by the foreign government and handed over to the soverign government of the currency, based on treaty.

Illustration on Multiplier Effect of Original Fund of The Central Bank and it's Absorption by The Government

Here, let me illustrate the pragmatic picture of Logic of New Monetary and Tax Policy published on Tuesday, August 14, 2007 on this blog.
As you can see, the Government is substituting the loans for tax claims, the contents of which composed bubble. In other words, the Central Bank and the government succeeded in extracting the cause of bubble form the economy.
When the Government assign the tax claims to the Central bank, the Central Bank hold the claims toward the economic unit.
It's up to the Government or the Central Bank, how they dispose of the claims, considering the situation of economy and of the economic unit.
Talking about the latter, the government should examine the possibility of the economic unit's turnaround, together with the other creditors, remaining desirable debt to the economic unit(empirically it's ten to fifteen times annual earnings before interest, taxes, depreciation and amortization, known as EBITDA, of the economic unit), writing off the rest debt, taking into account the value of disposable collateral(that do not accrue earning) and of guarantor.

(Please note that
･amount is book value
･amount in parentheses is on current value accounting of above book value)



(And please neglect the odd two lines at the most right side and on the bottom, in the illustration.)

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.