Low-Risk Investing for All
Covid19 and other economic crises like the Global Financial Crisis (GFC), gives communities the opportunity to try out new ways of organising their economic systems. Covid19 has created a worldwide economic crisis. Modern communications and computing technologies provide the tools to try out local innovations that all can use. Low-risk investing for all is an economic innovation that will resurrect local communities in easily replicated ways.
The GFC exposed the brittleness of the economic system. A change in the internal operation of the debt system to allow, even encourage, collateralised debt caused the GFC economic crisis that impacted all economies. We observe every day the pernicious effect of great wealth disparity within communities and between communities. Wealth disparities within communities mean some people starve while others are obese. It means some nations have few funds for development while exporting immense wealth. We see unnecessary conflicts over access to abundant resources.
We can address many of these threats and existing problems by evolving local economic systems in ways that scale. Today only a small proportion of the world’s population receive their income from the direct deployment of capital. Everyone receives benefits in the form of goods and services provided by capital but only a few receive income directly from the earnings from capital.
This article outlines how we can make local changes to allow consumers of goods and services to acquire capital through consumption. The article Circular Money outlines the method.
The approach can apply to any common investment. The example outlined below is the one that will make the biggest difference in the shortest time in Australia. If applied it will help address the economic disruption from Covid19.
Finding Money for Life after Covid19
Covid19 gives Australians an opportunity to move the financing of new and existing housing into the hands of occupiers via home funding cooperatives. The reason now is an opportune time is that the government will need to stimulate the economy by increasing the money supply. All government in Australia, quite rightly, do not want to go into excessive debt. They want Australian money used to develop industry and jobs in Australia and they would like to keep local ownership of the infrastructure.
One way to address the shortage of capital to stimulate the economy is to have a way to move the capital value of housing to the occupiers of dwellings. If we do this we make the capital tied up in housing available for investment in other productive enterprises. We can do this by local communities banding together in funding cooperatives.
Within each cooperative, the capital is kept in the form of future payments to occupy dwellings. Investors receive their money back as a 5% inflation-adjusted annuity over 40 years. Occupants would pay a percentage (not less than 25%) of their net income to occupy the home. Existing mortgage holders could convert their interest-bearing debt to future payments. Homeowners who own their homes could sell them to the cooperative and receive future payments for their accommodation. They would be able to use some of the future payments for other living expenses.
When an occupant has obtained 100% of the value of the home their equity converts into future payments to occupy a dwelling in a cooperative. This makes home-ownership affordable because the capital value of the homes does not exit the cooperative in which the house sits. This frees up the capital of traditional lenders for other infrastructure and industry use and answers the political question of “where does the money come from?”.
In Australia, with rent subsidies, a single person with an income from all sources of $25000 can afford to purchase a home or a room in a cooperatively funded dwelling with a capital value of $220,000.
As people pay to live in a cooperative home so they acquire equity in the place they live at a minimum of 50% of the amount they pay. The other 50% goes to those members who redeem their prepayments.
Each household that joins a prepayment cooperative frees up the capital value of the home in which they live for other investment purposes. These could take the form of nation-building income-generating infrastructures such as the conversion of the economy to renewable electricity and green hydrogen. Taken to its extreme the nation can convert all the wealth tied up in housing and other buildings into wealth in other income-generating assets. It also means that every household that joins acquires a small stake in the place they live each time they pay to occupy a dwelling.
Prepayments Compared to Equity and Loans
Prepayments are not the same as equity but have similarities. With prepayments, the capital value cannot be removed from a cooperative unless someone lives in a dwelling and pays to live there. The prepayment could be for a day or it could be for 50 years. Prepaying reduces risk and moves what risk there is to all the properties in a cooperative. In return for the reduced risk, prepayments cannot be moved from the cooperative unless another member purchases them.
Prepayments are not the same as loans but have similarities. If the borrower of the loan ceases to repay the loan the borrower can force the repayment. With prepayments, there is a prearranged agreement that the prepayment repayments are reinvested. In return, the borrower is encouraged to repay more rapidly.
Capitalism works well when there is a risk associated with an investment — meaning the output from the asset may not have a market. Risk capitalism is not suited to productive assets, like housing, that most people need to have. Risk capitalism allows investors to make capital gains from an asset before the asset has generated income. Low-risk capital is best for investments in assets we all need and for which there is a market. When we use risk capital for infrastructure (meaning something that everyone could use or is part of the ‘commons’) we inevitably get asset inflation as investors can get a return without the need to take a risk on the sale of the product from the asset.
We can use prepayments for ‘everyday’ expenses of its citizens. In doing this we eliminate the cost of risk and so we can provide the essentials at a lower cost.
Prepayments Enhance the Market Economy
Prepayments leave the market system intact. The housing market becomes more competitive. It means prices in the housing market is determined by the desirability of the dwelling as a place to live. Using risk capital means prices tend to reflect how much buyers can borrow and it means those with access to loans have an advantage over those who don’t. The housing market becomes a surrogate money market.
Risk capital drives higher prices and so reduces economic efficiency. Low-risk capital drives lower operating costs and increases economic efficiency.
Organisational Structures to Implement Prepayments
With complex human systems, form follows function and vice versa. This means it is best to use an organisational structure to reflect the operation of prepayments.
With prepayments, there is no profit from the capital and so a not for profit cooperative is a good fit. Also not for profit government enterprises or existing not-for-profit social enterprises can be a good fit.
A distributing cooperative, qango or company can use the approach but the governance of those organisations work against the distributed prepayments system as they are driven by the need to make profits in the form of money. Prepayment systems are driven by the need to provide goods and services for the lowest possible costs.
Australia needs investment in productive businesses to restart the economy. Investment money typically comes from loans on money generated by the banks. By occupiers of homes banding together in not-for-profit cooperatives homes can be refinanced using low-risk and hence low-cost prepayments. Refinancing plus generating prepayments on existing homes without loans frees up loan funds that banks can lend for productive businesses. Some of those businesses — like education, electricity, water, roads, railways, and health can also use low-cost prepayments supplied by banks.
Funding housing with prepayment cooperatives decouples the capital cost of housing from income and allows repayments to automatically adjust to changes in home occupiers incomes. This makes the economic system more resilient and reduces the impact of events like Covid-19.