The problem of issuing credit is typically seen as problem of trust or setting the cost of borrowing in terms of some kind of interest rate. However, it is possible to view credit entirely in terms of creating your own form of currency.
When someone accepts your credit in exchange for some type of loan, they are in effect, holding a form of money or currency which you have created. There are two principle factors which prevent it from being used as currency outright:
To the extent you can get your credit to be generally acceptable, and mitigate the risks of default, then your credit can, in effect, serve as a form of currency. This is, in fact the purpose of issuing what is referred to as "securities". Securities refer to a financial asset which can be traded or exchanged with other parties.
While very few financial assets can achieve the formal status of "currency", ie a medium of exchange and unit of account in which prices are denominated, the ability to freely trade credit, in the form of a security, makes credit relationships much more flexible. Specifically, if your creditor decides that he wants to in effect "call in" the money you owe him, he can simply sell that security to some other creditor, instead of having to badger you for money before it's due.
When credit is not securitized, this process becomes much more complicated. Either your creditor uses your asset as collateral to get credit themselves, or they must go through complicated legal chicanery to get them replaced on the contract so that another party takes their place. "Securitizing" a loan, takes care of this beforehand, eliminating the headaches of collateralizing or transfering the loan.
By issuing tokenized debt securities, instead of simply "getting a loan", it makes it possible for your creditors to freely use your contract in exchanges and trade it with others. In essence, you are turning a flow(your promise to repay money on regular intervals) into a stock (the tokenized debt securities which can be freely traded).
The final result, is that the interest rate approaches or achieves a zero or negative rate. This is because nobody in fact cares about an interest rate, they only care about their total wealth. Interest has nothing to do with which asset people will accept, or how they price those assets for exchange, but instead only influences which assets they would prefer to hold.
It is, in fact, impossible for all assets to have a real positive interest rate, because interest is denominated by comparing some assets to others. The fact that one asset accrues interest, must simultaneously mean that, relatively speaking some other asset is depreciating. A depreciating asset, however, is not worthless, it is not undesirable to accept a depreciating asset, only to hold it, so long as that is avoidable.
Thus, in accordance with "Greshm's" so-called "Law", the currency will generally depreciate. Greshm's law makes no sense, because any party receiving an asset will always want the highest quality thing, and any party spending an asset will want to use the lowest quality thing. So this so called phenomenon of Greshm's law, is more a consequence that the more widely acceptable an item is for payment, the less one is worried about depreciation or debasement, because they can always offload the item when they wish. So widely accepted assets tend to debase or depreciate, but it is not true in general that depreciating assets will gain wide use or acceptance as currency. The logic of Greshm's Law fails because it only considers the incentives of the party spendin a currency and not the party accepting it.
That aside, one will tolerate disparities of interest or returns, if it in fact allows them to increase their total net worth. No one will refuse to pick up a 10 dollar bill off the ground, simply because it is depreciating. When deciding to pick it up they consider the total value of the asset, and not the *change in value over time*.
Sophisticated parties may in fact, compute the present value of an asset, but if an asset can be easily bought or sold on the market the present value and the market value are tautologically the same.
But even when an asset is not marketable, it's total value is much more important, than its rate of change. An asset worth $1,000,000 which depreciates 10% per year, will be more desired than an asset worth only $100 which appreciates at 10% per year.
It is in fact possible for the total wealth in the world to constantly be increasing, even the value of any particular asset is rapidly depreciating. The difference of course being, that you are creating new things.
This mindset of constant creation and depreciation, may in fact, be the most healthy and robust way to view finance. Hopefully the expectation of interest and appreciation will soon become an awkward relic from an uncomfortably disfunctional past.
In the mean time, learning how to securitize your personal credit, can be beneficial, in that it will allow you to engage in exchange openly and fairly without dependency on any specific institution or government for a loan or to facilitate a payment system. In this essay, I will go over a general scheme for turning a flexible flow of payments (your credit), into a stock of tradeable securities which you can use to finance any type of operation.
The important factor, is that you are not dependent on any party setting or fixing a rate of interest on you. Ultimately, your securities will be accepted, provided that you are reliable, because accepting credit increases the total amount of wealth in the world. Accepting credit is basically a form of time travel, where future value can be instantly realized in the present day, which like all forms of time travel, violates any temporal notion of conservation of matter-energy. Just like a time traveller from the future moving into the past increases the total mass in the universe, issuing securities based on future payment flows is a simple way to hack the universe and increase total wealth, and if successful, enjoy zero or negative interest rates. I hope you enjoy!
The purpose of this scheme is to allow anyone to functionally enjoy "monetary sovereignty, which gives them control over their own rate of interest on their outstanding debts.
Thus, the Credit Problem, is one of relating a flow to stock. On the one hand, you have a stock of tokenized debt securities, and on the other hand you have a flow of redeemable payments.
The token issuer offers a flow in order to stabilized the stock. A helpful visual imagery is a lake, which you would like to keep at a constant water level. Having both a stream coming in, and a stream going out, helps to maintain that constant level.
Imagine that you have a run on a bank, such that customers attempt to withdraw all available reserves. While publicly backed insurance schemes, such as the FDIC are the best way to ensure that all deposits are available at face value, it is easy to design a simple and fair "failure" protocol, which turn bank "runs" into a fair proposition among customers-- provided that the condition that deposits are honored at face value is suspended.
The first step of such a protocol would be to "freeze and notify", meaning that, all customer depository accounts and payments are frozen, and all customers are notified that this protocol is being activated. After the notification period, perhaps 3-5 days, customers are then allowed to use their deposit balances to bid on the available reserves. In the mean time, the bank continues operating otherwise.
After "freeze and notify" the "deposit holders" are then allowed to use their deposit balances to "bid" on the reserves, as well as the incoming payments from accounts receivable when they come in. So imagine there are $1,000 dollars of deposits, and $100 dollars of reserves. The deposit holders could bid, perhaps $2 or $3 dollars of deposits for those reserves. Any deposit holder can make a bid, and a price of $10 would in fact clear all the deposits. But let's say that all those reserves are auctioned off, at a price of $2.50(two dollars and fifty cents). Then the remaining deposits would total $750. Those depositors would then have to wait for more payments to come in and could bid on those. In this manner, there is no "rush" to extract reserves, because all customers have the same opportunity to bid on their reserves, and they are merely honored at the trading price or auctioned ratio. If in fact, the institution was still solvent, but simply illiquid, then when the remaining $900 of debts are received, the depositors who waited would get $900 for their deposits of $750.
On the other hand, if the
While this could be a failure protocol for a bank to handle situations of illiquidity, and restore their solvency, in both a fair and flexible way, it would also be possible to issue bonds in which all redemption was based on a stock of tokenized securities being used to bid on a flow of
Once a token is mature it may be held indefinitely at face value, exchanged, used to bid on token flows, or rolled over into new bonds.
A continuously maturing bond is one which is callable at any time, at a certain percentage of face value. A linearly maturing bond offers 0% call value at the time it is issued, and 100% call value upon its date of maturity. So the call value v is v = xt/t1, where x is the face value, t is the elapsed time, and t1 is the point of maturation.
have a stock of tok
Central banks have "inverted reserves". While the system uses fed notes as reserves, the fed uses diversified assets as its reserves, because it can always print money, but it can't directly back the money. This is why a central bank must use "inverted reserves". The item considered to be reserves by the banking system, is a liability of the central bank, and they must use something else as reserves.
n this sense, for a taxing entity, the