Theory of Circular State Finance

General
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Theory of Circular State Finance

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Summary
  1. Abstract

This white paper presents a new national financial framework, the “Theory of Circular State Finance,” in which the government and citizens function as equal participants in credit creation and income distribution.

The current financial system is characterized by an asymmetric structure in which credit creation is concentrated in the government and central bank. This theory redesigns that structure by incorporating citizens as active credit creators, aiming to achieve both economic stability and fairness.

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  1. Problems of the Current System

2.1 Asymmetric Financial Structure

The current financial system can be expressed as:

Government + Central Bank : Citizens

This structure leads to:
• Concentration of credit creation
• Distorted income distribution
• Delays in economic stabilization
• Passive financial roles for citizens

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  1. Core Concepts

3.1 Egalitarian Finance

Egalitarian finance refers to a system in which the government and citizens are positioned as equal agents of credit creation.

3.2 Structural Transformation

This model adopts the following structure:

Government + Central Bank ⇄ Citizens + Government Bank

3.3 Transition from Asymmetric to Symmetric System

This theory assumes a transition from an asymmetric financial system (Government + Central Bank : Citizens) to a symmetric financial system (Government + Central Bank ⇄ Citizens + Government Bank).

This transition is realized through institutional, technological, and social processes.

This redistribution of financial power across two symmetric financial institutions ensures that money does not stagnate but continuously circulates between the government and citizens.

(Circular Finance Theory)

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  1. Institutional Design

4.1 Government Functions
• Currency issuance
• Fiscal spending
• Macroeconomic stabilization

4.2 Citizen Functions
• Credit creation (via decentralized finance)
• Investment and consumption
• Participation in governance

4.3 Government Bank

A decentralized financial infrastructure that enables citizen-side credit creation.

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  1. Basic Income (BI)

Basic Income in this model is not merely income support but serves as:
• Initial allocation of credit
• Economic stabilizer
• Reverse taxation mechanism

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  1. Mathematical Structure

6.1 Credit Equilibrium Condition

L_top = L_bottom

6.2 Money Supply

M = L_top + L_bottom - R

6.3 BI Adjustment Rule

B = B0 + α(π* - π) + β(Y - Y*) / Y*

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  1. Macroeconomic Effects
    • Automatic economic stabilization
    • Reduction of inequality
    • Mitigation of deflationary pressure
    • Increased economic autonomy of citizens

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  1. Implementation Methods
    • Central Bank Digital Currency (CBDC)
    • Stablecoins
    • Smart contracts
    • Decentralized finance (DeFi)

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  1. Challenges and Risks
    • Inflation control
    • Moral hazard
    • Excessive credit expansion
    • Compatibility with international finance

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  1. Conclusion

The Theory of Circular State Finance fundamentally transforms the asymmetric structure of the current financial system and redefines the relationship between the government and citizens.

This theory provides a new foundation for building a sustainable and stable economic system.

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© 2026 Author: Rui Enomoto

This document is released under CC0. It may be freely used, reproduced, modified, and distributed for both commercial and non-commercial purposes.