MyCHIPs Digital Money
Financial Panics
One of the objectives of new money is to avoid bank failures and financial panics. Under our current system, most of us have a notion that money actually is a thing—and we store it in our bank.
Some of us still think we could go in there and find a bunch of money in the vault that is “our money.” But it doesn’t really work that way.
Banks do usually have some cash money in their vaults. But it is a small fraction of the total money supply. Instead, most money exists just as numbers in a computer—credits payable from one party to another.
So under the current system, much depends on confidence and belief. As long as we think our money is safe in our bank, we feel comfortable going about our business. But if we think our bank is managed badly, we might fear they will “lose our money.” And then when we go to withdraw it, they won’t have anything to give us.
Under US federal regulatory management, the banks are watched pretty closely. And any time a bank gets close to insolvency, the government intervenes and shuts it down. Under this scenario, people could lose their deposits, except the federal government guarantees them.
Then, the remaining assets of the failed bank are sold to a hopefully fitter, already existing bank. The country ends up with one fewer small banks, and one of the too big to fail banks just got even bigger.
Under MyCHIPs, the system is de-centralized—the opposite of “too big to fail,” so the failures that do happen are more frequent, and on a much smaller and more manageable scale. There really need not be any such thing as a bank failure or a financial panic. Perhaps the closest thing might be a wide-scale, long-term power outage. And even then, we could use paper and/or mobile credit exchanges for a time until we managed to get the power turned back on.
Traditional bank failures happen because a bank’s liabilities outweigh its assets. The decision to shut it down and merge it with another bank is an arbitrary one—made by government. It would be just as possible instead, to liquidate the bank’s assets and give all depositors a fraction of their original value, for example 90 cents on every dollar.
Under MyCHIPs, there are potentially millions of different issuers of credit, or money. If one fails completely due to fraud or catastrophe, the impact on the entire system is quite small. If individual members resist the urge to accumulate credits from only a single issuer, the impact on them can be very small as well. Contrastingly, we might even say: “too small to matter.”
A more realistic scenario might be, a bundle of collateral, thought to be worth 1,000,000 CHIPs, is found instead to be worth only 900,000. This could be due to bad management, or improper underwriting of credit certifications. It might just be due to falling commodity prices say, in the construction industry.
Regardless, it affects the potential quality of the credit issued against that collateral. But it doesn’t mean the holders of the money automatically lose everything. If the people and companies issuing the debt honor their obligations, it may never matter what the ratios are on the securing collateral. The credits will eventually be redeemed and everyone will be made whole.
If the debtors’ promises do fail and creditors have to resort to foreclosure, they still don’t have to lose everything. In fact they might lose very little, especially if the falling collateral values are detected and dealt with early.
For example, if a fault in a credit issuance is detected, the debtors would certainly have some time and an option to redeem the money, for example by selling the subject collateral themselves. They might also find a way to refinance the debt before getting foreclosed on. In any case, the incentive would be for them to honor the debt by whatever means possible rather than incur harm to their reputation.
And if that is a lost cause, the entity’s owner still has a strong interest in redeeming the debt in order to avoid losing all his equity.
Finally, if an asset is eventually foreclosed on, that doesn’t mean creditors automatically lose their value either. It just means they now own the asset and can liquidate it if, and when they so choose. Remember, assets can go up in value, as well as down. Foreclosure is not always a bad thing for a creditor, as it is for an owner.
In addition to individual bank failures, we also see occasional panics caused by a lack of liquidity in the system. There are debts to be paid, but not enough money to cover everything. This is a result of the inherent flaw in our central banking model that all money has to be issued from a single, independent monopoly. Not only does this create a potential bottleneck in the economy, but the dynamic also requires exponential growth of the money supply in order to prevent defaults.
Most official money in circulation is the result of borrowing from a bank which is part of the central banking system. And that money has to be paid back, along with some extra for interest. So there is never enough money in the system to fully satisfy the debt unless some more money is issued. And that means obtaining more debt through the same central banking system.
Some people believe the solution to this problem is to eliminate the concept of interest altogether. But that is not reasonable either—at least not in all circumstances. Capital has a value, just like labor, food or any other commodity. So it deserves a return on its value when it is productively deployed in an economy.
The real key is, we should never issue money (think debt), and then require repayment of that debt, with interest due in the same kind of money (i.e. credits from the same issuer). Otherwise, the debtor has to keep coming back to the same creditor to get more money to cover the original debt. Another way to say it is, we should avoid borrowing from a money monopoly.
MyCHIPs solves the problem by allowing people and companies to issue their own credit. No more monopoly. And interest on the mere issuance of debt may not be necessary because it is often in the best interest of both parties, as long as the debt can be trusted. But even where interest is appropriate, such as with a long term CHIP mortgage, there is still nothing to require exponential growth of the money supply.
You borrow CHIPs that are backed by real estate and used, to buy your house. But as you repay the debt, you use other CHIPs, which can be thought of as coming from your employer. These are the result of your work at your job. And the system can create as much of them as are justified by its associated productivity. They are not limited by the size of the original issuance based on the real estate.
In other words, your work is what pays the loan off, and you are just required to return a certain number of hours, or their standardized equivalent. You work enough to pay off the principal. Then you work some more to pay the interest. And you are done. No more borrowing required from the original issuer of the credit.
When we truly understand that money is debt, and debt can be secured, it brings a whole new perspective to historical problems such as bank panics and liquidity crises. In our centralized model, large banks control most of the money in an economy, and are responsible for growing or shrinking the money supply as circumstances may demand. It then makes one wonder, when we do have financial breakdowns, is it because the central bank is too slow or ignorant to react properly? Or might some of these panics even have been caused on purpose?
While we probably can’t say for sure, it is instructive to note what happens during a monetary crisis: Small banks go out of business and big banks get bigger. Many people, particularly at the margins, lose their homes and businesses. And those collateral assets end up being owned by others—either the banks themselves, or those who have the connections and liquid capital necessary to purchase large bundles of distressed properties for a fraction of their original value.
Hmmm...