The idea is that a new business that needs start-up capital issues bonds. Like other bonds, they have an expiry date an an interest rate, or the like.

But you have no other rights. Even if your bonds fund 60% of the business, you get no say in how it is run. You don’t get discounts, priorities or rewards.

If the business fails, you become a debtor ranked according to the terms, and typically you only get something after those who supplied goods and services are paid.

The bonds can be traded.

It rolls together early-bird funding, angel investing, crowd-funding and an IPO into one, for the ease and convenience to get a small venture running.

Without the upside angel investors can usually hope for – exponential returns – the bond must return a rate of interest unobtainable from safe investments. Say 30% after 2 years.

The business might have some reverse re-investment clause. Like, at the 2-year mark, bond holders can extended the end date, for a higher total return, but lower relative return.

The post Non-participation bonds appeared first on Unism.

Debt has been a very useful tool for growing the economy and society, and has been a fundamental aspect of capitalism. The downside of debt it is that it increases inequality, and that needs to stop. It is also crippling to many people in pandemics and recessions.

I have written a lot about future versions of capitalism that can free us of debt, but they don’t help existing debt. How can we get rid of it?

In historical times there was the concept of debt jubilees. In the Bible (Deuteronomy) it says that every 7 years debts should be forgiven. And in modern times we know that many impoverished countries have had their debt forgiven. Bankruptcies are bad for the entire economy and should be avoided.

Joe Biden has to some degree been forgiving student debt, and it has been suggested that he do the same with medical debts. In both cases the debts are excessively burdensome for many people, and if the debts are forgiven, few would accuse those people of gaining something unfairly / ripping off the system.

Biden can forgive such debts because he can just print the money to do so. Via modern monetary theory, any country that issues its own currency and do that, as long as they don’t put so much extra cash into the economy that inflation occurs. We saw that with the COVID pandemic…

So for many types of debt, government intervention works beautifully. Effectively the burden of forgiveness is spread across all taxpayers (people and corporations) fairly evenly. And when we are talking about capitalism failing 30 years from now, the forgiveness can be done slowly.

Debt is a type of investment, but not the only one. When debt is forgiven via the government, the debt holders receive cash to replace that debt. What they do with that cash is up to them, but typically it needs to be invested.

Removing debt increases the capital value of where the debt is removed from. If your mortgage is forgiven, then the net worth of your property is a lot more. Here’s a simplistic scenario showing how debt can be replaced with ownership.

Ron owns a house worth $100K, has a mortgage of $20K – his equity is $80K. The government forgives all mortgages – people will fully own their homes and banks get paid off with government money. Suddenly Ron’s home equity rises from $80K to $100K, and the bank now has $20K in cash instead of the $20K mortgage.

Ron would like some cash, so he sells 20% of his home to the bank for $20K. They are essentially back to square one except that Ron now has $20K in his pocket, from the government. And the bank has partial ownership of a home, and no interest payments.

Debt is lucrative, essentially unfair, and a driver of inequality. Those who used to own debts will no longer reap the same rewards. That has to be the way, post-capitalism. But they can still be rewarded, just not as as well as before.

For residential property, it is a good result. The bank still profits from the rise in property prices. If the house is rented out, the bank gets their share of that as well. But as long as the property is owner-occupied, bank profits are lower. That is good, as it will send us on a path towards more home ownership and less rentals – good for reducing inequality.

Come 2050 and beyond, when globally the population will start shrinking, there will be less demand for homes. The current system (get a mortgage) will no longer be viable, because the equity in houses is (on average) going to reduce year by year. No bank will lend if that is going to happen – they would never get their money back.

If we have ended mortgage debt by then, it won’t be a problem. People won’t lose their homes and become bankrupt. Banks won’t suffer losses. But we need to start the transition today, while the inevitable consequences for banks are less obvious. Their 20% share in homes will be OK (not as good as now) for homes that are still occupied post-2050. For those that are abandoned, that is a loss for banks.

This is how we could achieve this slowly. As with many ideas like this that I have had, we need to use stealth. We cannot just announce that mortgages are going to end.

Many advanced economies have a perennial housing crisis, and every new government promises to fix it. Typically that is incentivising new home building, or building social housing. I suggest that government very slowly starts buying mortgages from people who are suffering financially, in exchange for equity. It is the same scenario as above, but government owns 20% of Ron’s home, not the bank.

Ron still has 80% equity in his home, but the burden of debt is gone. If he loses his job, the threat of foreclosure is gone. And we will be financially better off because he no longer has to pay mortgage interest. We would of course provide a mechanism by which Ron could buy that 20% from the government any time in the future, if he had the cash.

The criteria could be a based on a ratio of income and mortgage amount. If your mortgage is more than 10x your annual income, for example, you can ask the government to buy you out. This can’t be gamed, because you don’t gain. You’ve simply stopped the mortgage process at a certain point of time, which means your equity gets stuck where it is.

The criteria would be based on say the worst 1% of income/equity ratios. So perhaps only 0.1% of homes are involved in any year. And then, every so often, the criteria loosens a little. And decades from now, a big portion of mortgages have been removed from the system.

Stealth.

It can be sold as a way of making sure that people with tragic circumstances – job loss or an expensive health crisis – do not lose their homes. It should be an easy thing to sell to the public.

Next up: the sharemarket.

NOTE, not for the purposes above, but the Victorian government in Australia has a shared equity scheme, where they pay for 25% of your home at the time of purchase, and they own 25%. With time you are meant to buy them out.

The post Ending Personal Debt appeared first on Unism.

Debt – we don’t even question it – if you can buy a home or car for cash, you are some kind of freak. If you don’t own a credit card, ditto.

When we have a financial crisis, or a pandemic, the least resilient businesses will fail. This sounds like survival of the fittest, and it is, but the game is rigged.

The barrier to entry for any business is capital. You can’t just choose to start a casino or airline, a restaurant or a roller blade hire operation. You either need cash (already rich, can take risks), or a loan (when circumstances beyond your control go sideways, you can easily fail).

In a pandemic, any business without debt can simply mothball, put things on hold. The only remaining factors are the survival of the owner (who might depend on the profits) and the employees and the suppliers. But in many countries, the government looked after those, to some degree. Debts, far less so.

(OK, there are ongoing utilities, rates, stale stock… but the killer is debt)

Debts don’t stop. They are not a partner in your business. They are are a leach.

Debts don’t stop, with the exception of debt jubilees when creditors literally thought the world would end (or some other confabulation) and figured their deeds would be judged.

We have two ways of fixing this:

Trigger-based debt pauses. When X, Y and Z happen, nobody has to pay interest or repayments on debts, until things come right again. If your business is based on profiting from debt – no sympathy!

Ban lending. It can’t happen overnight, too much change. But anything can be phased out. Hey people! No more debt 50 years from now, start adjusting! Fun!

Fundamental change cannot happen in big moves, well, not easily. This needs to be fixed subtly. Tax works well… Place an extra tax on interest and rent earned. Because it is “unearned”, no finger lifted.

Ha! Your business is rent and interest, you must pay a lot of tax!

The post Imagine a World Without Debt… appeared first on Unism.

There is a third component, debt.

Everything runs on debt. The mall will still owe debt from when it was built. I’m quite sure there are no debt-free major shopping malls anywhere.

The retailers are typically part of a chain, and that chain typically grew rapidly by taking on debt.

We are so used to debt that we do not question if we need it, if we should have it.

Imagine COVID-19 happening where the shopping mall and the retailer are both debt free. Stores closing would still be problematic, and employees would still be without work. But debt wouldn’t drive the mall or the retailer to bankruptcy.

There is a solution for crazy times like 2020. The government compels all lenders to freeze debt repayments, and not charge any interest, during the pandemic. All lenders of all types.

Lenders are the only “industry” that can put their business on hold without going bankrupt. Yes, they will have staff without work – that is a universal issue the government must also address.

But lenders, by nature, don’t have debt. And if they are somewhere in a chain of debt, then they aren’t receiving interest but they aren’t paying it either.

So here’s the radical concept. At any time, but generally reserved for recessions, the government can freeze all debts. Any debt that comes from overseas, the lenders need to accept that your country might do that one day, and maybe charge more accordingly.

And unemployed people? In a pandemic or other economic catastrophe, if we already have the UBI in place, that is sufficient for people to survive, unless they pay high rent. So the freeze would cover residential rent as well. Because the landlords do not have to pay off their mortgages during the period, they don’t need the rent.

Would it work? Probably not. This type of government intervention works if it can be proportional, whereas this is more of an all or nothing idea. You can’t have zero repayments in August, then 38% repayments in September, etc.

Also, an unknown is whether lenders accept that it works best for the economy, and therefore them, or if they charge higher rates always to cover the potential for a freeze.

COID-19 was the perfect excuse to try it and see…

The post Debt and Rent appeared first on Unism.

And is a problem in a pandemic – every corporation does everything they can to stay operating and generating revenue – regardless of what is best for society.

A key factor is debt. Without debt, you can mothball a business, not pay for staff, turn off the lights. During the pandemic that could be the least worse option, compared to trading, if you have full operating costs and reduced revenue. For example, a fairground with social distancing.

But debt is rarely something you can pause. For many businesses during this pandemic, it is not a case of profits versus public welfare, but whether they do not go bankrupt from debt.

Everybody now knows that cruise ships are a risky place to be in a pandemic, and yet for whatever reasons, there are still customers. So what should a cruise company do? If they have debt interest to pay, if they are legally allowed to operate, and they hav willing customers?

This week, deep into the pandemic, two cruise ships in Norway have had virus breakouts.

The post Corporate Duty vs COVID-19 appeared first on Unism.