(~10-minute read)
In the future, our primary monetary relationship will be with an artificial intelligence that determines the amount of interest-free credit we can have based on our potential and projected earning power, so let’s examine how interest-free money would work for an individual, a business, and the government.
The Individual
The amount of interest-free credit will be restrained by the discretionary income of the individual, but what about teenagers in high school before they have a job and expenses? How would they position themselves to qualify for an interest-free college tuition? Could the system truly be designed to create equal opportunity for all?
Obviously, not everyone has the same starting point in life, or the same degree of intelligences and skills, but the additional challenges of growing up in an impoverished home - whether financial or psychological - or in a violent part of town, or the many other circumstances that create extraneous hardships is beyond the scope of this article, which will focus solely on merit.
Keeping track of a student’s performance through a combination of their grades and teacher assessments from kindergarten through high school would create an academic snapshot of each person’s intellectual and emotional aptitude, ambition, and discipline. Think of qualifying for interest-free credit for college as distinguishing yourself in the eyes of an artificial intelligence that is continually assessing your future ability to pay back the loan through feedback from the education system.
Another piece of an academic snapshot could include a psychometric personality test the A.I. analyzes to help project the future income potential of the individual. The overall assessment would qualify everyone for an amount of interest-free credit to use for college with a predetermined payment schedule that automatically garnishes their future paycheck at a reasonable pace that isn’t burdensome. Being able to open your digital wallet and see the amount of tuition you qualify for as it continually adjusts to your academic performance would inspire and motivate students from junior high school through university, particularly if it was contrasted to basic living expenses to display how much discretionary income they would have on the path they’re currently on, and what it would take to improve it.
Once an individual is in the workplace, their digital wallet would have several accounts of interest-free credit available to them based on their personal balance sheet for a house, a car, and credit cards. The available credit in each of these accounts would grow or shrink based on their real-time finances, and their wallet could project future credit based on increases or decreases in income and expenses.
If the person loses their job, payments could be automatically (and temporarily) frozen, or the repayment timeline extended, or even some degree of forgiveness if an unfortunate circumstance like injury or disability caused a loss of earning power, but since there’s no 3rd party issuers of the credit, or a predatory collection process, there’s no need for bankruptcy proceedings. You owe what you owe. The artificial intelligence will automatically extract it at a reasonable pace, and limit the possibility of exceeding the capacity to repay it.
The credit in each account is created out of thin air but backed by their future labor, which is the exact same process as a bank loan today except without the bank. For those mired in double-entry bookkeeping, the debt is a liability for the individual and an asset on the ledger of the system itself, which acts as a universal bank. Every paycheck would be automatically garnished according to a predetermined formula to slowly pay off the loans over time. When the debt is paid off, it’s retired the same way debt is extinguished at a bank.
There’s literally no difference in the credit creation process except for the elimination of a middle man collecting interest, which also eliminates the interconnected chain of counterparty risk and exotic derivatives between mammoth centralized institutions using a common currency vulnerable to the boom/bust business cycles that cause a domino effect of credit impairment that puts the whole system at risk. With every individual creating their own credit it’s like millions of currencies backed by their houses, cars, credit card purchases, and labor, but siloed from each other, which eliminates the risk of credit contagion and “too big to fail” because there wouldn’t be any centralized institutions at the source of it. It’s simply transferring the power of currency creation from banks to individuals, who would be algorithmically restrained by their discretionary income. This is how you create the liquidity needed to replace our current system’s dependency on single sovereign currencies. The legacy banking system would dramatically shrink in size, so any distress it faced from defaults on its interest-bearing loans would truly be a tempest in a teacup.
I cannot overemphasize how transformative this would be.
A Business
The main difference with interest-free credit for a business is how the corporate legal structure protects an individual from the consequences of the business failing, much like a politician disconnected from the consequences of their spending, so a business would have to qualify for credit creation. I’m sure a mathematician could analyze the stats of thousands of businesses and develop a formula based on things like how long the business has been established and profitable, debt vs equity, market size, etc....to distinguish between Joe’s Rocket To Outer Space Inc., and Apple.
A startup or a growth company wouldn’t qualify because their business model is either unproven, unestablished, or has too much debt. One way to align the consequences of the people making decisions with their actions is requiring the board of directors to maintain 50% of their net worth in the company stock, and when it’s bought back, 50% in the company currency. Allowing deeply established companies like Apple to create their own currency backed by their products and services supplements the liquidity of currencies created by individuals to transition the monetary system from dependency on single sovereign currencies to truly decentralized credit. The size of the stock market would dramatically shrink in size and it would free the overall economy from dependency on its performance. This would temper the boom/bust cycle from the extremes of mania and depression to a slow, steady, balanced growth. And it would relieve the Fed from its mandate drift of constantly juicing the stock market higher.
Most likely, there will never be a company that survives forever, so the entire point of having thousands of currencies is to diversify the risk from single government currencies that perpetually get diluted by politicians and central bankers whose actions aren’t linked to their consequences with currencies from as many viable sources of productivity as possible, so any failures of single businesses would be siloed and isolated from contagion because each currency would be like .1% (or less) of the savings and purchasing power in each person’s digital wallet.
The Government
The government doesn’t actually exist as an independent entity. It sits on top of the productive layer of the economy and extracts taxes from the profits of viable businesses to fund itself. Meaning, if you take the government away, the private sector still exists; but if you take the private sector away, the government does not because it's not self-sustaining. Sure, it could create its own currency, but without the ownership incentive to self-organize productivity, a government currency would have nothing sustainable to back it except the power to mandate its acceptance as legal tender and jail its citizens for disobedience - until it collapsed.
The reason capitalism works is because ownership stake incentivizes innovation, efficiency, and hard work to compete for every penny of profit since the owner(s) get to keep the excess once all the expenses are paid. Ignoring the incentive of ownership stake is the main flaw of Modern Monetary Theory and why Socialism fails. For example, I know someone who was hired as the head of maintenance for a local school district. During his first year he thought he was doing a great job saving the department money, but at the end of the year when his boss found out how much money he saved them, he was told to spend the rest of their budget on anything or it would get cut the following year. That wouldn’t happen in a business with ownership stake, and it’s the perfect example of government waste. The MMT proposal of buckshot government spending to fill the bathtub of aggregate demand is not grounded in the personal incentives that create and sustain the price discovery of a productive free market economy.
The real question is not how a government currency would work - it’s why should the government create its own currency at all? When the incentives of politicians are to appease the voters, they’re actually incentivized to be fiscally irresponsible, so they need to be restricted in their ability to spend, or the public debt will continually expand until the currency collapses.
The answer is simple: all government spending must come from taxes. If it’s worthwhile and necessary spending, the bill will get passed. If a natural disaster or World War Three pushes us over the budget, THEN a bond with a specific purpose can be issued with a repayment schedule that extinguishes the debt after it’s paid. The public will recognize when emergency spending needs to happen. The public will recognize when a military intervention is in the best interest of the nation, so the money to fund it will come from savings and not the monetary debasement programs of the Fed that steals purchasing power from the masses. All spending should be extracted from the current generation of taxpayers and not foisted upon people who aren’t even born. And the idea that a government who issues its own currency can never default is disingenuous. If the principal is repaid with money that lost half its purchasing power, that’s a default.
Alternatively, once we have thousands of currencies to choose from, and the ability to reject the government currency at will, go ahead with MMT - let the politicians spend like drunken lotto winners; it wouldn’t matter because blank check MMT spending restrained by inflation would quickly hit its limit and force raising taxes to save the plummeting currency. It’s the choice of competing currencies that would restrict politicians from profligacy. If you allow individuals and businesses to create thousands of currencies, and every merchant and customer has the choice to save and transact in whatever ones they want as legal tender, the value of the government currency would be kept in check by the public’s willingness to hold it.
Implementation
This system would run as a layer two application on one, or multiple, decentralized crypto currencies. It wouldn’t even matter if it was a decentralized government blockchain if it had the right design because it’s the protocol in charge, but I suspect the coming FedCoin whitepaper will reveal a permissioned centralized ledger, which will be resoundly rejected as an extremist continuation of failing institutions.
The recent fuss over AML and KYC regulations is not even the warmup act. The real fight will be about the legal tender status of alternative currencies in developed world economies. The government simply cannot allow mainstream adoption of cryptocurrencies as legal tender because the value of the dollar would collapse. It’s literally a national security threat. There is no cryptocurrency, no matter how well designed, that will be allowed to slowly replace the dollar as legal tender in everyday transactions. The only way for an alternative system to be implemented is through the legislative process. And the only way to generate enough political pressure from the public to truly change the system is if the new way is so beneficial to the general population that they don’t have to be convinced to fight for it because they will do it naturally.
This is why none of the cryptocurrencies will succeed in mainstream monetary adoption without the system of interest-free credit I am proposing. Most people don’t care what currency they use in their daily life, nor do they care enough to learn why cryptocurrencies would benefit them, so they won’t fight for cryptocurrencies alone. That revolt would look like Occupy Wall Street. In contrast, everyone would fight for interest-free credit. That revolt would look like American Revolution 2.0. In fact, a change of this magnitude would likely require a constitutional convention, so other important amendments could be included like campaign finance reform, terms limits, and other fundamental changes to course correct a corrupt Congress.
First, this alternative system of interest-free credit needs to be created and implemented in the developing world (like Africa) where this technology is needed to create their cultures with property rights, fair elections, and a sound currency. Once the system is operating in real-time and proves the concept, it won’t be hard to find support to implement it everywhere. Do you know anyone who would like to not pay interest on their house, car, credit cards, and college loans? I’m thinking 7.9 billion people would be interested in that once the vision is expressed.
I'll end with one of my favorite quotes:
“If you want to build a ship, don't drum up the men to gather wood, divide the work and give orders. Instead, teach them to yearn for the vast and endless sea.” - Antoine de Saint-Exupery
