There is a widespread consensus that the search for short-term profits destroys the planet's natural resources. To solve the various environmental crises, we need an economic system favouring long-term profits that maintain and restore natural systems.
Economics is a human invention that humans can change to meet the sustainability challenge. Profit is the difference between the money received and the cost to acquire or create something. It can provide funds to meet sustainability goals by investing in reducing the demands on natural systems.
Ways to increase profits are:
- Increase the price of goods.
- Decrease the cost of production.
- Increase the rate of investment.
Today's economic system has an inbuilt bias towards increasing prices because it drives money creation by increasing the price of money. This bias can be controlled by increasing the rate of investment and investing to decrease production costs.
Governments create money by promising that the money it creates can be used to pay the taxes it imposes. However, governments outsource most money creation to licensed banks, which create money and lend to borrowers. The Banks do it to make a profit; otherwise, they will not lend money. All the profit goes to the bank, so the way money is created increases its price. If governments create it themselves, they do not need to make a profit, but governments come and go, and their short-term goals tend to dominate their decisions.
For the Banks, the cost of creating money is the cost of unpaid loans, so the banks must charge something; otherwise, they will go broke. Loans are repaid slowly, and borrowers repay Banks at different rates. To overcome these issues, the Banks have a cash reserve that covers the different repayment rates and the failure to repay loans.
One way to lower costs is to accelerate loan repayment through a profit-sharing model between the borrower and lender. It's important to note that this does not come at the expense of the lender's profits. Instead, it speeds up the repayments from the bank reserves allowing the borrower to get a return by repaying the loan more rapidly. It increases profits by increasing the rate of investment or the productivity of the Bank Reserves.
With regular loans, the profit component accumulates in the Bank Reserves until it is periodically released through dividends to the bank owners or an increase in the share price. These still occur with faster repayment, so bank shareholders still get their profits. At the same time, borrowers pay less interest because their repayments make more use of the Bank Reserves, increasing its productivity.
Bank Reserves Analogy
Bank Reserves are like a Battery for the storage of electricity. Batteries take electricity when it is cheap and make it available when it is expensive. Each time it is charged and discharged, they produce a profit. The more cycles in a given period, the lower the discharge cost. Bank Reserves are similar. The more cycles the Bank Reserves undergo, the more profit it makes.
Sharing profits with borrowers reduces the time to repay a loan, reducing each loan's cost and increasing the average gain. With Bank profit sharing, the extra profits go to the borrowers leaving the Bank investors with the same profit. Bank investors sell some of their shares in the Bank Reserves to borrowers and take some of their Capital gains, leaving borrowers as investors in Bank Reserves.
Measuring the Productivity of Money Creation
A loan is a promise to repay it and a fee for its use. For a bank, the fee covers the risk that the money is not repaid and a fee for the cost of money sitting idle in the Bank Reserve. The productivity of Money Creation is the amount of money created divided by the total repayments. In the following example, the only difference is the sharing of the profits created by the 16.5% interest rate. Each year half the interest payments reduce the Principal. The lender receives the same profit. Reducing the Principal increases the rate of investment for no extra cost.
For a Credit Card percentage of 16.5%, the productivity improvement for repayment of a $10,000 loan is 32.7%
The Bank has no more risk and gets the same return on its Reserves, but the Borrower repays 32.87% less.
How can this be, and why don’t banks use Reciprocal Loans? The reason is that the Bank lends out the extra $3,287 at no risk to the bank as unearned or unnecessary income, and its shareholders benefit from the extra profit that costs the borrower a lot. Removing the $3,287 takes away a little from the bank shareholders but much less from borrowers hence the very large productivity improvement.
Community-owned banks could use this approach immediately and benefit their members. For long-lasting loans like house loans, the savings are about the same as the cost of the home.
The Reserve Bank could use this approach to increase loan productivity and resolve the problem of stagnant money that reduces productivity and the production of goods and services. It will also reduce the wealth disparity in the community by adding new wealth to the bottom without taking it from the top.
Regular businesses produce profits by charging more than production costs. Businesses can share their profits with customers similarly to Banks with borrowers. A business's reserves are its share Capital. Instead of repaying loans quickly, the business shares future production or provides shares to customers. Sharing increases the rate of investment of a given amount of share Capital. One way of doing this is for existing shareholders to sell half their new shares to customers. Existing shareholders still get the same return, and customers purchase shares that will give them a future share of profits. Shareholders can always arrange to retain their shareholdings by immediately repurchasing shares.
The price of a business's shares is fixed at the agreed rate of return on share Capital, and profits appear as extra shares created by investing all profits.
Customers want lower prices, so they prefer investments that reduce the price of goods. As investors, they want more profits, so they favour investments in reducing the consumption of resources as it reduces costs while increasing profits. Customers gain from reduced costs and increased future profits arising from the increase in the rate of investment.
Sharing as a Control Mechanism
Economic growth without any constraint on the consumption of resources must lead to the depletion of finite resources. Sharing of profits with customers provides a constraint on the consumption of finite resources. It does not reduce profits. Instead, it redirects investments to increase capital productivity by doing more with less.
Businesses that share profits with customers can redirect an increasing share of profits away from increasing sales to reducing costs by reducing natural resource use. Businesses can also invest in alternatives, like renewable energy, that reduce resource use. This approach is particularly attractive to lower finite resource use, as existing businesses in unsustainable products can transition seamlessly and equitably.
Sharing profits speeds up the investment rate, and the extra investment generated will tend to reduce the demands on the planet because it goes to consumers who want lower prices. The approach provides a pathway to a sustainable future.
Example calculations for sharing the profits from Loans.
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Sharing profits is the lowest-cost way of transferring ownership and of financing new ventures.