Resource Credits: The Solution to Bankruptcy
Last week, we were invited to join the SIS hackathon, wherein the organizers were looking for a tech solution for B2B cash management. The Covid pandemic has wreaked havoc on cash and many customers are unable to pay their suppliers.
Fortunately, our proposed economic system, called Social Resource Allocation or SORA, derived from Adam Smith, is purpose-built to predict and solve such problems. In fact, we had been warning of a huge global economic crisis as early as 2015. The current crisis came as predicted because of the dominant mentality that money is wealth. This idea makes people focus on the tool of trade and not on the actual goods and services that money circulates. This wrong focus then manifests as speculation which has caused every major crisis from the 1929 Great Crash to the 1997 Asian Crisis and 2008 Financial Crisis, as people tried to amass more and more money:
Mr. Locke distinguished money from other movable goods. He says that all other movable goods are consumable in nature, that the wealth in them are not dependable. On the contrary, money is a steady friend which is not wasted and consumed. He thinks the great object of its political economy should be to multiply that money. (Simple Wealth of Nations, Book 4, Chapter 1)
Domino Effect
The Covid pandemic caused travel and tourism to stop, which then created a domino-effect, affecting the industries that rely on travel such as transportation, events, food service, and hospitality, which then affected retail and other service industries. These forced many businesses to close permanently and liquidate their assets to pay back their debt. One of the most famous Covid bankruptcy was that of Virgin Airlines Australia, made insolvent by a massive $7b debt. It was later rescued by Bain Capital after failing to get a bailout from the Australian government. Bain will likely cut jobs, lower wages, and raise prices in order to recover its risky investment — to the detriment of Australian citizens.
Clearly, the current solution is not a win-win: the company loses control and the people lose benefits. Is there any better solution to insolvency? Adam Smith asked the same question over 200 years ago:
It has been said that the Americans have no gold or silver money. Without gold and silver it is impossible to pay taxes. How can we draw from them what they do not have? (Simple Wealth of Nations, Book 5, Chapter 3)
A More Sustainable Solution — Resource Credits
Instead of being bailed out of debt by getting more debt, we propose that companies bail each other out through resource credits. A resource credit is a right to a product or service of the issuer or beneficiary for a certain time period. It is a version of Adam Smith’s solution to the lack of money:
It might be unnecessary to remit any part of the American revenue in gold and silver. It might be remitted in bills drawn on and accepted by particular merchants or companies in Great Britain to whom some of America’s surplus produce was consigned. Those merchants and companies would pay into the treasury the American revenue in money after receiving the value of those goods. The whole business might frequently be transacted without exporting a single ounce of gold or silver from America. (Simple Wealth of Nations, Book 5, Chapter 3)
A resource credit can be offered in lieu of a money payment when cash is short. The receiver, called a benefactor, then can sell such a right for cash or other resource credits from other customers or suppliers. In this way, the economy can continue even without cash.
In our airline example, the airline can agree to pay its suppliers partly in money and partly in flights. Those suppliers will then offer to pay their own employees’ wages partly in money and partly in flights, which the employees can either use themselves or liquidate in the future for cash. The flights will be given at cost to offset the inconvenience and time-value of money to the benefactors.
The monitoring and administration of resource credits will then be an industry in itself, which we shall call resource banking, which can be run by normal banks. Unlike regular banking wherein the bank merely accepts payments and monitors balances, resource banking requires the resource banker to audit or estimate the productive capacity or inventory of the beneficiaries. This will most likely entail physical checks on the company’s production facilities or offices, or viewing a person’s actual work.
The process of converting money into resource credits is called resourcization, which is the opposite of the conversion of goods and services into money, called monetization. Resourcization is the planned slow-down of an economy in order to preserve its real value by reducing risk, while monetization is the speeding up in order to create more value by adding risk.
Although the operations might sound easy, the actual IT system for facilitating such credits is quite complicated. The resource credit data must be very detailed and must specify the time frame for the product or service. The value of a resource credit for a new 2020 automobile will decline greatly by 2025. The value of a resource credit for a direct labor can change rapidly as well. For example, the pay for a coder of some programming languages can decline quickly as the software industry changes. The IT system should therefore also account for the risk for such fluctuations, on top of the usual risk of non-fulfillment of credit redemption or transfer. Fortunately, the advances in data science and machine learning can help us make this complexity more manageable.
Timely Solutions
Now that the economic crises years are here, the solutions laid out by Adam Smith are more important than ever. Without them, the economic advances since World War II will likely be undone gradually through inflation, conflict, and other man-made disasters. We only have to look at the the Roman Empire which seemed so refined and civilized during its pax romana, only to revert to barbarity 200 years afterwards. We predict that such problems will begin to show themselves between the years 2023–2025.
