Because I think it's useful to summarize the context of "Yamada Model" till now, I'll write it down.
Bubble is caused by peoples’ expectation that the price of certain asset(real estate) will rise in future, with pouring high-powered money to the asset side of economic entities’ balance-sheet. So, to solve this problem, such asset bubble on economic entities’ balance-sheet must be gotten rid of, by the new system as below.
Though it may be seen contradictory, high-powered money enables to work this new system.
1. Every economic entities’(including banks) assets that caused the bubble(real estate or CDO et al) on balance sheet should be evaluated on mark to market basis by the authorization of a third party(maybe on calculated basis by law firm, on assuming the bankruptcy filed), which brings about some insolvent(i.e. debt section surpasses asset section on balance sheet) economic entities..
2. FRB decide to write off a certain amount of the loans to the banks, which amount distributed to each bank according to the amount of each banks’ insolvency, calculated on 1.
3. Every bank that gets profit from written off should next legally enforced to, by using the profit from written off as original fund, write off its loans to its each debtor, in proportion to the amount of insolvency of each debtor. If the bank is unable to use all the written off profit it earned, the remainder is taxed all and absorbed by tax authority.
4. Other economic entity that gets profit from the written off by the bank should next legally enforced to, by using the profit from the written off as original fund, write off its loan(or trade claim) to its each debtor, in proportion to the amount of insolvency of each debtor. If the economic entity is unable to use all profit it earned, the remainder is taxed all and absorbed by tax authority. These processes are to be repeated operationally(multiplier effect).
5. In consequence, the bubble portion of the targeted asset is extracted from the economy, and is transformed to tax.
6. The tax claims is finally assigned to FRB. It’s up to FRB how they dispose of their above claims, considering the situation of economy, of each bank and of each economic entity. As a option FRB should examine the possibility of the bank’s and the economic entity’s turnaround, together with the other creditors, remaining desirable debt to the bank and the economic entity(empirically it's ten to fifteen times annual earnings before interest, taxes, depreciation and amortization, known as EBITDA), and writing off the rest debt, with taking into account the value of disposable collateral(that do not accrue earnings), of guarantor and of consolidated basis.
7. Every write off must be supervised and traceable by centralized function of the system. So every write off must be executed through this function. Every write off may be done through this function, which exist on internet for access.
8. For cross-border. For each non-residential economic entity, the amount of write off should also be calculated in the same way as 4. , on the only cause from specific asset depreciation in the resident country. Economic entity that will be written off should next write off in the same booked currency. In case profit of the written off exists on the non-residential economic entities, it's taxed and absorbed by the foreign(=non-residential) government and handed over to the sovereign(=residential) government of the currency, based on treaty.
9. FRB should carefully watch the rate of the number of insolvent economic entities to the number of all economic entities in the US, when deciding the amount of the loans(trade claim) written off on 2.
10. To keep FRB’s balance sheet sound, it must be permitted for FRB to generate profit by printing dollars in order to cover write-offs loss. These printed greenbacks is stored to the safe forever(I come to know the journalization if FRB’s profit is generated by their printing dollars is quite irregular). This may be extraordinary bookkeeping nowadays, but it should be permitted, under extraordinary situation.11. In case price inflation expectation exists(not now), the system enables FRB to on one hand raise benchmark rate to cope with inflation expectation, on the other hand restructuring the balance sheets of economic entities.
Saturday, December 27, 2008
Tuesday, January 15, 2008
General Comment
In the U.S. the real estate price has become about 300% from that of ten years before in average, and now is probably been adjusted for 20 to 30% downwards. And for about 4% is left for FRB as benchmark rate. Who can guarantee this 4% could be enough to normalize the U.S. economy? I think it's danger to rely too much on FRB. I know fiscal policy has not substantially yet implemented in the U.S. In Japan fiscal policy has been implemented for quite a long time(10 years), to bolster GDP, which left enormous national debt. I am surprized, when I came to know that the amount of national debt coincides with the national wealth lost(including the price of real estate) during the same period in Japan($10 trillion). The benchmark rate of central bank is still pegged near 0% in Japan. I hope this is not the case in the U.S.
New system is needed, as "Logic of New Monetary and Tax Policy" published on Tuesday, August 14, 2007 on this blog, which focus much more on the balance sheet of each economic units, to overcome reverse wealth effect.
I would like to show here simple useful figure to capture the scale of bubble in the U.S.
Nowadays,
GDP of U.S. $10 trillion
National debt of U.S. $5 trillion
GDP of Japan $ 5 trillion
National debt of Japan $10 trillion
In Japan, under peak of bubble economy, the price of commercial real estate had been said to be 10 times higher than that of ten years before, and for the price of housing 4 times higher than that of ten years before. So may be its' higher than that of U.S. in average.
Because it took $10 trillion to recover from bubble economy in Japan, and because the scale of the economy of U.S. is about twice as large as that of Japan(by GDP), U.S. probably may need $20 trillion to recover. If the banks in U.S. are the only economic unit which hold the loan to real estates, and consideirng appropriate capital-to-asset ratio as 10%, the banks needs at least $200 billion for capital, in order to maintain financial system.
New system is needed, as "Logic of New Monetary and Tax Policy" published on Tuesday, August 14, 2007 on this blog, which focus much more on the balance sheet of each economic units, to overcome reverse wealth effect.
I would like to show here simple useful figure to capture the scale of bubble in the U.S.
Nowadays,
GDP of U.S. $10 trillion
National debt of U.S. $5 trillion
GDP of Japan $ 5 trillion
National debt of Japan $10 trillion
In Japan, under peak of bubble economy, the price of commercial real estate had been said to be 10 times higher than that of ten years before, and for the price of housing 4 times higher than that of ten years before. So may be its' higher than that of U.S. in average.
Because it took $10 trillion to recover from bubble economy in Japan, and because the scale of the economy of U.S. is about twice as large as that of Japan(by GDP), U.S. probably may need $20 trillion to recover. If the banks in U.S. are the only economic unit which hold the loan to real estates, and consideirng appropriate capital-to-asset ratio as 10%, the banks needs at least $200 billion for capital, in order to maintain financial system.
Monday, January 14, 2008
The Picture of B/S and P/L of Economic Units under Bust of Bubble
Let's see how bust of bubble affects the balance sheet(B/S) and income statement(=profit & loss, P/L) of economic units. To know this affecttion helps you to make sense on "Logic of New Monetary and Tax Policy" published on Tuesday, August 14, 2007 on this blog. I would like to notice beforehand that this edition requires you for basic accounting knowledge.
Every economic unit holds credits(assets) to other economic units, which relations that bring income to the former. The credit(assets) held by the economic unit is the debt(liability) carried by the other economic unit, and the debt(liability) carried by the economic unit is the credit(asset) of the other economic unit. When the credit and the debt take time to be settled, the value of the credit is appraised based on the debtor's current value accounting. The current value accounting of the economic unit is defined as the appraisal of the face value of the balance sheet(B/S) into current market value and it's reflection to the income statement(P/L). Those economic units who can maintain profit on the P/L continue to exist and those economic units who can not maintain profit go into liquidation. In recession(yield downward, money supply decreased, price deflation), generally many economic units reckon up the losses on the P/L. Furthermore, loss inflicted by assets deflation and with the effect multiplied by current value accounting, incur "spiral of insolvent" on quite a few economic units. We look over this phenomenon in the simplified case as follows:Five economic units from A to E are abstracted among all economic units in the economy. Economic unit A holds loans for B(B carries loan payable to A), so does B for C, so does C for D, so does D for E, so does E for A for the face value, and each economic unit hold assets such as real estate for the face value(stated immovable account) as below.
Figure 1
After fiscal(one) year, we assume the earnings of each economic unit is as below.
Figure 2
During the same fiscal year, assets deflation occurred and the face value of the real estate is revaluated from 100 to 96, on each economic unit as below.
Figure 3
Concerning from A to E, we put two assumptions here. First, before the start of aforesaid fiscal year, due to asset deflation, the valuation of assets is so downward for assets section as to be equal to liability section (that is, on B/S the value of stockholders' capital is zero). Second, in appraising the loan by current value accounting of each economic unit, the total amount of earning(or loss) of the debtor must be divided by all the loan amount held by it's creditors, and we assume half the amount is the loan appraisal loss reckoned up on a single creditor. Hereinafter, we always apply this assumption to each economic unit. We must note that the same phenomenon occurs to the rest half. So, the loan held by A for B, asset deflation inflicts B for 4 and loss distress B for 4 so in total loan appraisal loss will be 8, and half the amount 4 is the loan appraisal loss reckoned up on A. The loan, held by B for C, though asset deflation inflicts C for 4, C earned 5 so no loan appraisal loss is to be reckoned up on B. The loan, held by C for D, D suffers Loss 6 and assets deflation 4 for total 10, so half the amount 5 is reckoned up as loan appraisal loss on C. The loan, held by D for E, though E suffers asset deflation 4, E earned 1, in summing up 3, so D reckons up half the amount 1.5 as loan appraisal loss. The loan, held by E for A, though asset deflation inflicts A for 4, A earned 4 so no loan appraisal loss on E(Phase Ⅰ). Each economic units' loan appraisal loss is as below.
Phase Ⅰ
And then, it moves on to next phase. E reappraises the loan for A by taking into account A's loan appraisal loss 4, and reckon up half the amount 2 as reappraisal loss. D reappraises the loan for E by taking into account the loan reappraisal loss 2 on E and reckons up half the amount 1 as reappraisal loss. C reappraises the loan for D by taking into account the loan appraisal loss 1.5 and loan reappraisal loss 1, in total 2.5, reckoning up half the amount 1.25 as loan reappraisal loss. B reappraises the loan for C by taking into account the loan appraisal loss 5 and loan reappraisal loss 1.25, in total 6.25, reckoning up half the amount 3.125 as loan reappraisal loss. A reappraises the loan for B by taking into account the loan reappraisal loss 3.125 on B and reckons up half the amount 1.5625 as loan reappraisal loss. And it circulates again. This proceeds lasts and spirally inflict the B/S of each economic unit as multiplier effect(Phase Ⅱ), and cause another asset deflation. This is "spiral of insolvency". Every single economic unit acts rationally, but on the whole economy fall into the fallacy of composition.
The spiral of insolvency is curbed by sufficient internal reserve that certain economic unit may hold, or by capital raise of economic unit or by earning increase of ecoomic unit. But in the possible case, spiral of insolvency is more effective to depress the economy than that, or the stimulation of the economy by lower rate or public investment. In that case there is little chance for the economy to recover. So new system is needed, which provide original fund for write-offs to the economic units. That original fund substitutes above internal reserve, capital raise and earning increase.
Every economic unit holds credits(assets) to other economic units, which relations that bring income to the former. The credit(assets) held by the economic unit is the debt(liability) carried by the other economic unit, and the debt(liability) carried by the economic unit is the credit(asset) of the other economic unit. When the credit and the debt take time to be settled, the value of the credit is appraised based on the debtor's current value accounting. The current value accounting of the economic unit is defined as the appraisal of the face value of the balance sheet(B/S) into current market value and it's reflection to the income statement(P/L). Those economic units who can maintain profit on the P/L continue to exist and those economic units who can not maintain profit go into liquidation. In recession(yield downward, money supply decreased, price deflation), generally many economic units reckon up the losses on the P/L. Furthermore, loss inflicted by assets deflation and with the effect multiplied by current value accounting, incur "spiral of insolvent" on quite a few economic units. We look over this phenomenon in the simplified case as follows:Five economic units from A to E are abstracted among all economic units in the economy. Economic unit A holds loans for B(B carries loan payable to A), so does B for C, so does C for D, so does D for E, so does E for A for the face value, and each economic unit hold assets such as real estate for the face value(stated immovable account) as below.
Figure 1
| Loan 100 | Loan Payable 100 |
| Immovable a/c 100 | Loan Payable 100 |
| Loan 100 | Loan Payable 100 |
| Immovable a/c 100 | Loan Payable 100 |
| Loan 100 | Loan Payable 100 |
| Immovable a/c 100 | Loan Payable 100 |
| Loan 100 | Loan Payable 100 |
| Immovable a/c 100 | Loan Payable 100 |
| Loan 100 | Loan Payable 100 |
| Immovable a/c 100 | Loan Payable 100 |
After fiscal(one) year, we assume the earnings of each economic unit is as below.
Figure 2
| Earning 4 |
| Loss 4 |
| Earning 5 |
| Loss 6 |
| Earning 1 |
During the same fiscal year, assets deflation occurred and the face value of the real estate is revaluated from 100 to 96, on each economic unit as below.
Figure 3
| Appraisal Loss 4 |
| Appraisal Loss 4 |
| Appraisal Loss 4 |
| Appraisal Loss 4 |
| Appraisal Loss 4 |
Concerning from A to E, we put two assumptions here. First, before the start of aforesaid fiscal year, due to asset deflation, the valuation of assets is so downward for assets section as to be equal to liability section (that is, on B/S the value of stockholders' capital is zero). Second, in appraising the loan by current value accounting of each economic unit, the total amount of earning(or loss) of the debtor must be divided by all the loan amount held by it's creditors, and we assume half the amount is the loan appraisal loss reckoned up on a single creditor. Hereinafter, we always apply this assumption to each economic unit. We must note that the same phenomenon occurs to the rest half. So, the loan held by A for B, asset deflation inflicts B for 4 and loss distress B for 4 so in total loan appraisal loss will be 8, and half the amount 4 is the loan appraisal loss reckoned up on A. The loan, held by B for C, though asset deflation inflicts C for 4, C earned 5 so no loan appraisal loss is to be reckoned up on B. The loan, held by C for D, D suffers Loss 6 and assets deflation 4 for total 10, so half the amount 5 is reckoned up as loan appraisal loss on C. The loan, held by D for E, though E suffers asset deflation 4, E earned 1, in summing up 3, so D reckons up half the amount 1.5 as loan appraisal loss. The loan, held by E for A, though asset deflation inflicts A for 4, A earned 4 so no loan appraisal loss on E(Phase Ⅰ). Each economic units' loan appraisal loss is as below.
Phase Ⅰ
| Loan Appraisal Loss 4 |
| Loan Appraisal Loss 0 |
| Loan Appraisal Loss 5 |
| Loan Appraisal Loss 1.5 |
| Loan Appraisal Loss 0 |
And then, it moves on to next phase. E reappraises the loan for A by taking into account A's loan appraisal loss 4, and reckon up half the amount 2 as reappraisal loss. D reappraises the loan for E by taking into account the loan reappraisal loss 2 on E and reckons up half the amount 1 as reappraisal loss. C reappraises the loan for D by taking into account the loan appraisal loss 1.5 and loan reappraisal loss 1, in total 2.5, reckoning up half the amount 1.25 as loan reappraisal loss. B reappraises the loan for C by taking into account the loan appraisal loss 5 and loan reappraisal loss 1.25, in total 6.25, reckoning up half the amount 3.125 as loan reappraisal loss. A reappraises the loan for B by taking into account the loan reappraisal loss 3.125 on B and reckons up half the amount 1.5625 as loan reappraisal loss. And it circulates again. This proceeds lasts and spirally inflict the B/S of each economic unit as multiplier effect(Phase Ⅱ), and cause another asset deflation. This is "spiral of insolvency". Every single economic unit acts rationally, but on the whole economy fall into the fallacy of composition.
The spiral of insolvency is curbed by sufficient internal reserve that certain economic unit may hold, or by capital raise of economic unit or by earning increase of ecoomic unit. But in the possible case, spiral of insolvency is more effective to depress the economy than that, or the stimulation of the economy by lower rate or public investment. In that case there is little chance for the economy to recover. So new system is needed, which provide original fund for write-offs to the economic units. That original fund substitutes above internal reserve, capital raise and earning increase.
Subscribe to:
Comments (Atom)