Evolving a Stable Financial System

A Stable Financial System

A stable financial system is one where money retains its value. Inflation or shocks in one area of the financial system has little or no effect on other areas.  It is one where credit created for a project remains unaffected by financial events external to the project.

A short video summarising the benefits. https://youtu.be/6L-X90qBP0g

Promise Theory and Credit 

Promise Theory is a model of voluntary cooperation between individual, autonomous actors or agents. Agents publish their intentions to one another in the form of promises.

A description of Promise Theory from its author. https://youtu.be/VTR8GCP4n_M

A promise is a declaration of intent.  A promise is not an obligation and is a weak connection between actors.

Credit is a promise to repay the receipt of value with something else of value.  Credit becomes an obligation when expressed in the form of a given amount of a currency.  An obligation is a strong connection between actors.

Promise theory hypothesises on the complexity and cost of connections between autonomous agents. It says weak connections cost less than strong connections when systems have many autonomous agents. It says systems with strong connections are brittle and subject to catastrophic failure.

We can apply Promise Theory to credit. If it holds then credit based on currencies cost more than credit based on separate peer to peer credits. 

Credit in the form of money debt has strong connections between each credit.  When interest rates change this changes all issued credit. Central Banks use these strong connections to control the money supply.  This makes the financial system of debt vulnerable and controlling the system becomes expensive.  An estimate of the cost is the cost of risk.

With traditional debt inflation is a cost to lenders.  The total cost of risk is the cost of inflation plus the cost of interest on interest.  Inflation is of benefit to borrowers. Interest on interest is of benefit to lenders.  With double entry book-keeping they cancel each other out but they are real costs.  For the economy as a whole they are additive.  An estimate of the cost of risk is inflation times two.  For a 1.62 trillion dollar economy with inflation at 2.5% this is $80 billion per year.

Removing Monetary Inflation

We remove inflation by removing interest on interest on loans. We do this by making each loan independent. We do this by changing the way we repay loans.  Instead of paying back interest first we pay back capital first.  Instead of the amount owing reducing because of inflation we increase it with inflation. We use the same interest rate while ever we owe money on a loan.

Change the way we calculate loan repayments and financial costs will stabilise. Because they are stable the costs of finance drops. We use the savings that comes from stability to do more. 

Government debt without compound interest

Government can eliminate money inflation on their loans by issuing transferrable rights to pay future taxes at a discount.  This money must be used to create new value.  It is invested to create new value. Here is a short video to explain the concept. https://youtu.be/pFCyRWR1z_A

Each credit created using this approach is independent.  Inflation, or deflation, does not affect any individual credit repayment as the credit amount owing is adjusted. Governments or any other entity introduces new credit into the system to cover losses from unpaid failed credit. This controls the money supply.

The system is easy and cheap to introduce and it will scale.

It leaves all existing systems in place.  It gradually replaces existing loans where it makes sense to do so. All current institutions and loan arrangements continue. They are only changed when it makes economic and political sense to do so.

Promise Theory hypothesises the system will evolve towards stability loan by loan.