Universal Credit Money Critics
Why doesn't the universal credit approach work today?
The primary reason is the Basel standards. These standards represent internationally accepted norms established by governments and financial institutions. Banks may encounter difficulties within transfer systems like IBAN, ACH, wire transfers, and Visa if they fail to adhere to these contractual requirements.
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These standards help protect liquidity, a cornerstone of economic stability. It remains unproven whether a universal credit line would provide sufficient liquidity, especially since it allows participants the freedom to accept or reject debt.
The next critical factor is productivity. As Western societies transitioned from feudalism, new working standards became essential. Divisions of labor, exemplified by Ford's conveyor belt system, necessitated larger company sizes. Not everyone could assume managerial roles. Teachers introduced credentialing and testing requirements until companies stabilized. Some regulations enacted during and after the Great Depression era were designed to maintain general welfare and unify society by prohibiting discrimination.
A society featuring larger steel mills and shipyards required discipline. Money became the simplest means to instill discipline among employees from diverse backgrounds. Consequently, money flows became unidirectional, with employers paying employees. Not everyone could afford to build factories or plants, reducing supply and elevating prices to profitable levels. Profits earned from customers circulated back to management, funding further salaries. This discipline, typical in companies of around forty employees, became standard. As a result, job loss significantly impacted living standards.
Extra profits also fund higher bonuses. The most sophisticated compensation systems often share company ownership with long-term employees through equity vesting over four to five years. Such stability fosters on-the-job learning, resulting in exponential productivity gains, growth, and customer expansion.
Nevertheless, some individuals inevitably fall outside this ideal state. Governments must therefore support disabled and elderly populations. This responsibility initially caused government officials to approach change cautiously. Central banks emerged as protectors of existing wealth.
Central bank leaders, appointed by majority vote, typically serve terms longer than those who appointed them. This tenure enables central bankers to protect the assets of prevailing property owners and shareholders.
A new shopping mall project, for example, might compete with an existing mall constructed during a period of higher interest rates. Favorable mortgages could give newcomers a competitive edge, a scenario not favored by existing owners or the general public. Disruption reduces tax revenues and creates uncertainty. Increased risk actually leads to higher rates for new projects.
Central banks strive to balance growth between existing and new businesses. Healthy economies with free markets allow central banks to set interest rates determining how much banks pay to increase money supply and growth. Excessively strict central bank policies can stifle growth, transferring wealth primarily to existing asset owners. A narrowing owner base could diminish demand, potentially triggering recession. Central banks' secondary tool, quantitative easing, permits governments to borrow assets instead of smaller businesses or individuals, channeling funds into economies through government grants or bureaucratic salaries.
Risk-free rates reflect the fundamental risk even the most lucrative businesses face. Customers can choose among various cloud providers, leaving some data center resources idle. Even monopolies face the risk-free rate, allowing consumers to defer purchases. Liquidity generates these rates, promoting competition, lower prices, and growth.
Private investors insist on returns at least equal to risk-free rates, ensuring repayment if investments are diversified. Central banks compete with private investors through investment banks to stimulate growth. Lending below risk-free rates risks losses or cheap debt benefiting only select banks. Such inefficiencies typically trigger government changes and missed growth opportunities.
Since the 1960s, American democracy has emphasized community-building over individual-focused democracy. Communities, a central tradition in Protestant countries, often established credit unions fostering independent economies with limited federal ties. Community-based banks and meticulous accounting practices became the foundation for unifying diverse societies. Community support rendered individual credit rights unnecessary.
American society further reinforced discipline through philanthropy and volunteering. Challenges solvable by individual credit were often addressed through increased communication within local churches.
Change accelerated following China's WTO membership. Overseas dollars circulating globally transformed American society, enabling conglomerates to challenge community banks through generous salaries. When projects failed, such as during the 2000 tech crash, expected investment returns evaporated. Currency fluctuations occasionally mitigated impacts. Typically, large paychecks benefited only a small proportion of individuals, lacking sufficient volume to influence society broadly.
Wars inflict particular damage. Every $1,000 spent on weapons can destroy assets worth $10,000, fulfilling their destructive purpose. Lost assets necessitate further investment, causing inefficiencies and inflation. Governments frequently initiate asset replacement for losses resulting from their own actions, requiring large investment banks and less direct democracy concerning personal credit lines.
Personal credit lines already exist, often labeled differently as first-home mortgages. Several tax and lending incentives help citizens finance home purchases, fulfilling the classic American dream. Citizens naturally invest universal credit allowances into homes - an established practice unlikely to change. Consequently, universal credit lines would benefit less than half the voting population, diminishing political incentives for adoption in the USA.
Another significant financial vehicle is credit cards, intermittently accepted among the minority customer base. Rarely do credit limits on cards significantly increase debt burdens. Crisis management or interstate migration scenarios are already covered. Consequently, banks see limited demand for expanding into universal credit lines.
Furthermore, higher GDP levels result in increasingly complex economic transactions. Individual credit lines alone likely cannot supply sufficient funds. Effective communication and accounting systems are also necessary. Securities regulations and stock exchanges enable transparent and rigorous decision-making processes. While crowdfunding initiatives have their place, the largest corporations remain listed on platforms like NASDAQ and NYSE.
Consumers rationally retain jobs primarily to maintain mortgage payments, sometimes limiting other expenditures. Employees often sign non-disclosure or non-compete agreements, preventing side businesses despite higher salaries. In return, they gain favorable mortgage rates over 15- or 30-year terms. Consequently, variable-rate credit accounts may appear less attractive, making conglomerates rational choices for consumers.
Division of labor necessitates specialized banks and construction companies for large projects. Universal credit lines might benefit small San Francisco startups whose founders trust each other and possess extensive experience. Yet, such startups represent too small a customer base to significantly influence the banking system.
Investment banks are large precisely to diversify project risks, thereby reducing interest rates. If one project fails, dividends from others sustain operations. Basel standards enforce this exact scenario. Smaller lenders assume higher risks, particularly regarding individual health or family circumstances. Ultimately, communities accepting small lenders bear these risks. Additionally, individual income streams are more vulnerable to sabotage, complicating loan repayments.
Consequently, banking system changes spread slowly. Sudden interest rate hikes may disproportionately favor existing businesses, limiting growth and creating imbalances, as seen during the Great Recession. Conversely, rapid rate cuts might generate excessive competition, eliminating established firms and destabilizing newcomers. Wise central banks adjust rates gradually, allowing adaptation. Moore's Law set predictable hardware price expectations, enabling software companies to remain profitable by regularly updating algorithms and introducing new features.
Interest rates ultimately capture deferred consumption and production, reflecting generational gaps and influencing consumer decisions regarding immediate consumption versus savings. Poor decisions or misfortune can force consumers to reconsider choices during inflation or unemployment periods.
Prohibiting usury extends beyond religious principles. If interest rates disconnect from actual risks, lending merely transfers wealth between asset-holder groups and asset builders without productive exchanges. Such imbalances persist only temporarily, usually until resources are exhausted. Voters often punish governments responsible for these decisions, with inflation and unemployment serving as economic corrections.
These factors necessitate extensive data analysis before introducing universal credit account products. Clearly, libertarian San Francisco startups with promising futures would primarily benefit from such schemes.