How to solve the debt crisis by changing the way we repay debt

A Google search of the string “How to solve the debt crisis” gives 119,000 direct matches. Why do we need yet another suggestion? We need one because the other 119,000 have yet to come up with a simple practical easily implemented, non disruptive answer.

The full title of this article is “How to solve the debt crisis by changing the way we repay debt”. This string had returned zero entries before this article. The article says we can solve the debt crisis by repaying debts with goods and services instead of money. It makes the claim that changing the way we repay debt will fix the debt crisis because it lowers the cost of repayments. It will fix it because it is incremental and leaves the existing system intact. It replaces loans, where appropriate, with loans that require less administration and fewer costs.

The reason we have a debt crisis and the reason our financial system has problems is that the financial system costs too much to operate. It costs too much because we repay debt with money instead of goods and services. We create debt or money so we can exchange goods and services. When we repay debt with money, this means the money tokens we created for any purpose takes on a common value. For example, the government creates money so we can pay our taxes. A bank creates money for a person to build a house. Unfortunately, even though we say the money tokens have the same value they have different values; but we make money tokens have the same value. Paying our taxes is something most of us have to do whereas money to construct a house has limited use. The financial system has to reconcile these differences in value and doing so is expensive.

By giving money tokens a value we think we have improved the efficiency of our financial system because it makes it easy to exchange money tokens and hence value. The money becomes fungible. It seems a sensible thing to do, but it comes at the cost of interest.

To give an example let us assume a person owns a house and wants to sell it and would like equal payments over ten years. One way to do this is to sell the home for cash and then invest the money by buying an annuity. Let us assume they sell the home for $100,000, and buy a 5% annuity on the money. It means they will get payments of about $13,000 over ten years or $130,000 in total.

Another way to transfer the assets is through a Co-op where there are many buyers and many sellers of homes. The person transfers the title of the home to the Co-op in return for receiving $13,000 as an annuity income for ten years.

Buyers in the Co-op pay rent of 5% per annum on the value of the home and in return get 5% of the title transferred to them. When they reach 100% ownership of the title, they stop paying rent. In this case, the seller has received a 5% annuity on the value of their home over ten years while the buyer has purchased the home for $100,000 without payment of interest and has saved $30,000 in interest payments.

The Co-op might decide that the savings should be shared between the buyer and the seller and ask the buyer to pay $15,000 or $1,500 extra per year to the seller. In this case, both the buyer and seller share the $30,000 in saved interest.

We do not have to change all our loans to this approach, and we can leave the existing financial system intact. What will happen will be many Co-ops will be formed for different investments and they will gradually replace existing debt. The process will be orderly as existing wealth moves to these new forms of loans.