Universal Basic Financing - Part I | Size Of Debt

How much debt could you raise reasonably for your project?

My favorite course was Financial Markets and Institutions in academia with an A grade. It is probably why I return to this topic often.

It is important to understand such concepts, if you work on business plans. This is especially true, if you are not a finance professional, but an engineer. Catching issues early can reduce costs of failure. It also helps to understand the scale of financing that you can reach out for your project.

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All money in our system comes from the Federal Reserve. It used to be different when gold money reflected the ownership of land and the produce tied to it. Nowadays, it is machines and buildings where people spend their borrowed money. The demand is proportional to population and the central banks are the best to adjust rates to make them abundant or sufficient at least.

The easiest way to get money is through a clearing house of the Federal Reserve. The rate is called the overnight Federal Funds rate. This is the rate on which the Fed lends money to investment banks. Investment banks then slice and dice, and trade. They pay the nightly interest rates and resell the loans to people as mortgages, corporations as bonds. They also trade with other investment banks with commercial paper to balance out the system.

The Federal Funds rate sets primarily, how much money is available for spending. If the rates are high, people will likely have fewer jobs available especially in investments above amortization like engineering and construction. Unemployment rises, cars are used longer, buildings do not get painted as often.

Should the rates go lower, the economy gets more investment. The money eventually gathers at venture capitalists. They fund startups and some of them succeed, some of them fail. The money is lost, and the central bank writes off the losses at the account of such failing banks.

The amount of loans also matters, not just the rate. Should the Federal Reserve lend less but at a lower rate, some companies will starve, cutting expenses. They seek financing abroad or from private equity. Equity partners get incentive to cut wages and save. Consumer spending declines as a result. Savings and income inequality increase. Quality jobs become scarce. A vertical banking system builds up. Other companies cut costs with possible deflation. Foreign arbitrage disrupts domestic lending. An apartheid like economy may build up with gated communities.

Should the Federal Reserve lend more but at a higher rate, the terms of loans will shorten. The banking system flattens to cut margins. Quick, viable proven energy and manufacturing projects get funded from credit money with low margins. Research that requires longer terms declines. Interest rate payments increase. Lowered margins force companies to cut salaries of essential workers increasing competition for the jobs available. Those who fall out are forced into expensive loans. Foreign arbitrage disrupts domestic lending. An apartheid like economy may build up with gated communities in this case as well.

It is important that disparities of rates and the quantity of financing available will cause inequality, private lending and eventually end up in conflicts and wars. Such disparities are like financing the currency of a big country if it was small, or financing the currency of a small country if it was bigger.

Quantitative easing refers to the term when the central bank loans money to the government in vast quantities. The government then uses Keynesian fiscal politics to give jobs to those, who lost out in the race of lower wages. In many cases it can prevent imbalances of rates and the amount of money available. The extra money will sometimes gather in the accounts of foreign central banks like what happened in China with USD in the 2010s.

Quantitative easing is about quality products and sufficient demand. Imagine that every American gets access to a financing of $1000 for 100 years. This is about $1.2 million not adjusted for inflation. This comes through a financial institution. The bank sets some rules. They give the $1000 as salary for a work arranged. They also insist on data on what the money is spent on. The credit card system allows them to see thoroughly how the money is spent in aggregates.

The $1000 is spent at different providers that pay the wages and pay back loans on machines, trucks, etc. to the bank. These are usually franchises that rely on the spending data collected to finance each venture. The bank then pays the daily Federal Funds rate from these coupon payments and the principal repayment. The system allows us to have enough pizzas for each resident.

What if the people spend the salary on wrong products, or do not use it? The bank may lend less, cutting the bad loans of companies whose products are less in demand. Risk increases, rates rise.

Benefits are similar in the US system. Large cap companies issue bonds, and they pay salaries, healthcare, and lots of benefits. They get tremendous amount of data. Many benefits tell you how you spend, and where you spend it. Sophisticated rules are going to cut your job, if you miss a policy.

Departments of human resources & benefits act as both the investment bank and the provider in this case. They can also build strong hierarchies to direct the labor supply on the projects they prioritize for the system.

What if the rates are low? Corporations will invest more, and they will grow on cheap capital. Manufacturing and servicing companies will eventually collect the profits.

The economy is made of circles. Money can build up, if the circle is like a snail's house and not a ring. Money can accumulate in B-Type societies building communities. These communities can collect the money as corporations, government funds, personal savings, etc. Money becomes a matter of status. It is the power, but it is never used. It never goes back to the economy. B-Type systems oftentimes are rich in peer services.

What happens to such accumulated money? Societies that are built on sparing and frugality eventually spend it on something big. This is how large towers are built, or famous brands of startups are founded and grown.

A-Type societies are strict on accounting so that the circle is a ring and not a snail’s house. More individuals collect investment in such places, and money is spent on daily necessities. Accounting helps to build more circles, there is an abundance of choice of affordable products.

B-Type societies sometimes support risky, successful and failed research. Such research is not investment grade because we do not know all the related science, yet. It takes time. Investment banks rarely support them from Federal Reserve funds. Research is the profit of good systems, not a primary goal.

The system may fail if the upstream money from one central bank is not accumulated in the accounts in another downstream central bank. This is why it is not just the rate, what matters. The amount of lending also matters. Banks sometimes are deterred by large foreign reserves to set interest rates properly. They need to prepare to intervene, if such reserves are used to buy assets like government bonds or corporate equity.

The system usually fails two ways. If the wealthy B-type groups start spending the money accumulated on regular goods, it may be a problem. It is not a power game like in the Middle Ages. Such goods are meant for consumers. Supply chains will be disrupted if trillion dollar funds start spending on commodities, or food products. We saw this during the pandemic, when uncertainty forced governments to fill warehouses of essential supplies.

Timing can also miss circles. The author was surprised that basic medical needs had to be fulfilled by air from China during the pandemic over air freight. If US healthcare relies on China on such basic things that are funded by fixed monthly insurance payments, lots of money can accumulate. Medical supplies are perishable and need to be discarded soon.

However, such countries also spend dollar reserves for oil. Such money may come back as venture funding to the United States through different funds. This circle is so big on the other hand as it is influenced by a myriad of geopolitical risks. The feedback is delayed a lot. It adds to the risk.

The Federal Reserve Bank has not seen such a big player in the dollar market since the fall of the British Empire. This is not necessarily bad, but it requires a different mindset and quick decision-making from all participants to address money suddenly flowing in and out of the system. Bankers are usually risk averse, especially at the highest levels. They build assets that can be sold, if needed. The smaller the circle the less risky and the more valuable it is.

Lots of money is not a problem in the system. If a community or person piles up investments from value products, it is a pride of theirs. It is respected. They will build large investments in return. The monuments of pyramids, cathedrals were all built on money of such frugal “warlords”. B-type personalities are common in large density hubs like London, Delhi, Shanghai, Tokyo, New York. B-type personalities are keen on community building, hierarchies that are good at frugality and asset building.

A-Type communities can build at places with low density like the US Midwest or Russia’s Siberia.

If lots of money starts disrupting supply chains, removing access to basic goods or services such as healthcare, or education, then it is a problem. Quantitative easing addresses that problem by setting the available credit based on the population count and not the individual interests of each investment bank.

What if money is lent directly to citizens? It can be a problem. Citizens may just keep it to spend it later. Eventually the money collected will disrupt supply chains, and increase inflation. This is why the banking system is vertical.

What if the banking system is heavily regulated, too big vertically? It will deter investment by removing access to money to citizens. Citizens left to the median will starve investment, forced to do employment doing oftentimes unnecessary tasks just to improve statistics. Citizens right to the median will get more funds than they require. They overspend. They get all funding, and race for employees likely to increase salaries, inflation, and disrupt supply chains on tasks that create less value for the system.

The banking system solved the vertical integration issue by introducing credit cards in the 1980s for low quantity daily spending. It also allowed retail banks to finance long term mortgages with similar stabilizing scope. All these generate a constant flow of recurring revenues. It lowers rates.

Let’s get back to our original question. What is the scale in the banking system that you can reach as a project manager?

You can expect the amount of financing that is enough to support the salaries of the employees that will work on the project. If you build a new industry that will employ one hundred people for ten years, you can expect to get a thousand times the GDP. It is the same case if you can provide better jobs than the ones available. Once the product is sold, the system requires you to pay back the loan from it. Multiplication effects of such projects create even more jobs as a plus. This makes both Friedman and Keynes fans happy. Whether the government or private organizations accept the loans is a matter of taste of the sitting President. Tribalism, gated communities, and apartheid like structures disrupt the economy on the other hand.

Will you get the funds that you need? People would be unemployed or underemployed otherwise. If you see underemployed, you may find the funds needed. The project will be the recurring revenue, and possibly a lifelong investment for the people involved with a positive effect even in their retirement.

This article was revised on October 23, 2023.