Wednesday, March 19, 2014

#10 VEN Finance Models

[Originally written 17 November, 2011] 

In this report, we will examine various kinds of financing contracts that would be available through the Valun Exchange Network (VEN), which would fit the criteria established by E. C. Riegel as follows:

1. Interest on loans, specifically defined as asking money back that was never created, (and certainly compounding of interest) are forbidden. When practised universally, usury enslave humanity in a false monetary scarcity

2. Any activities that have anything to do with making money on money through any speculative tricks or leverage is prohibited as an invalid and unethical use of money

3. The fractional reserve model of banking is roundly discarded by the VEN as patently dishonest, allowing certain people (bankers, financiers and their hostage governments) the right to create more money out of nothing (regardless of the other tricks they use to try and convince us that their money is “backed” by anything of any tangible value).  Riegel of course believed that banks do not actually lend any money at all, they lend credit, all the money lent is paid back except the interest.  The interest paid is actually required from someone else, thereby creating scarcity.  [This is one contributing factor to the "musical chairs" economy, requiring that someone's concern always has to fail or be gobbled up by someone else, resulting in actual contracting of business activity ... and destruction of wealth; YES usury always results in destruction of wealth as it centralizes it in fewer and fewer hands until the debt required finally can't be repaid and the whole thing collapses.  It has happened before, it shall happen again because that is the curse of usury .] 

Perhaps not so curiously, these basic and fundamental ideas have much in common with Islamic financial practices and are actually in strict accordance with traditional Christian and Jewish values as well. Be not deceived by prejudices spun by others, though perhaps we will not agree with them on much else, we can certainly find agreement with Muslims (and Orthodox Jews) concerning their methods of finance where they happen to agree with E. C. Riegel's principles.  

Shariah does not consider money a commodity for exchange. Instead, money is a medium of exchange and a store of value.” Adil Manzoor Bakhshi - Developing a financial model for Islamic credit card for the UK. (2006)

We would be in agreement with the first point, but regard the second (the intrinsic store of value idea) as a superstition; money is backed only by what it buys and contains no intrinsic value in and of itself, except to settle terms of a sale by barter; the exchange of one commodity or service for another commodity or service.

For example, those who assume that “sound” money must be backed by gold or silver (or anything else for that matter), are merely substituting one commodity for another in a barter arrangement; the trade is made in terms of gold and silver, represented by paper or coin of some inferior metal, etc.

It is also widely believed, erroneously too, that somehow this “hardness” of the money enables it to retain its purchasing power and stability. These are absurdities spawned among the populace, actually fostered by bankers and their economist accomplices, whose ideas harken back to the age old fractional reserve banking model, which creates “bad notes” in excess of good ones in hopes that all will not seek to redeem them at the bank (storehouse) for their gold at the same time.  Instead, we put forth the idea of a single transaction establishing a set unit of purchasing power at a particular point in time.  That becomes a Value Unit.     

[20 March, 2014: You said, “It is also widely believed, erroneously too, that somehow this “hardness” of the money enables it to retain its purchasing power and stability,” and yet elsewhere you prove that your own Valun proposal produces “hardness” of the money if and when precious metals reach new highs. I think I know your answer, but I'd like you to explain this.

Yes, I was speaking of the classical gold or silver backed money. Under the classical monetary system, if there is some correspondence between a store of precious metals and circulating tokens of currency that supposedly represent this store of value, the money is said to be “hard” relative to a complete fiat currency issued by a state and obtained as a loan at interest.

The flaw at the root of this classical understanding, accepted as well by the Austrians, is that precious metals are themselves commodities traded in controlled markets. One arrives at E. C. Riegel's observation that we're sure precious metals are worth something, we're just not sure what.

All we know is that if we are about designing a better money system, it will have to beat any paper competitor and precious metals, whatever any of them do, at retaining purchasing power and the Valun proposal does that remarkably easily and remarkably well. The Valun proposal will provide a naturally “hard” money that will only get harder over time. Real hardness of the money is attainable without pegging to precious metals (we only use them to make exchanges with foreign “public” currencies). Other than that, within the VEN, using Value Units, everything finds its own price.)

This fiction that people believe that money itself must have intrinsic value in and of itself, used as a fractional reserve, not even a total reserve, plus the terrible consequences in creating that which has no real basis in anything (all those “bad notes” in circulation), has been tried over and over again down through the centuries, in hopes that it will someday finally last and become the vehicle for certain power mad people to take possession of the entire world! It is in point of fact, criminal insanity masquerading as respectability.

The truth is fast approaching the tipping point, where more and more people begin to understand that, in particular, billionaire speculators and hedge fund mangers, are neither worthy of much respect nor are anything but merely the latest scourge of robbers and pillagers to have declared war on a civilization they mostly despise, because that's the attitude most genuinely criminal minds have of the rest of humanity. In fact, the present hugely dishonest financial system, is nothing more than a vast criminal network serving its own goals, its dreams of world domination, etc. the participation in which more and more ordinary people would like nothing further to do with.

Those who have been tricked into beliefs that money has a store of value in and of itself, or that a time value for a store of money is a valid point of departure for structuring investments, are ultimately left with the incontrovertible fact that any money they have made from these activities has been stolen from the productive uses that money might have served in developing or moving goods and services or buying and selling of real assets.

We have every intention, in establishing our Valun Exchange Network (VEN), to throw to the sidelines any and all speculative activities that cause huge stores of capital to be built up on nothing more than clever financial gimmicks. I suppose there will always be those who prefer gambling to real business. They certainly have no business being funded by the finance businesses within the VEN.

VEN Finance 

Recent questions received have revealed, not too much to my surprise, that issues concerning finance are very important to those seeking to benefit from participation in the VEN. Let's begin by establishing a clear understanding of what finance really is. It's very simple:

By “finance,” we mean that which enables someone who can't afford something on the date of purchase to be able to buy it. The Austrians say the buyer is exercising his "time preference."  In all cases he's paying extra for it too.

We will give examples of the models for finance that will be acceptable in the VEN. The significance of these financial models derives from the understanding that nowhere is any new money created which has not already been created elsewhere in the VEN.

1. The Down Payment Model

This works for all those who will have saved up the money to pay a down payment for the money required to make the purchase. It is suitable for all residential real estate, the purchase of a vehicle or even a specialized piece of machinery. Terms of such loans could also be structured to purchase a business. 

An example:

The sale price of a home: VU 100,000.00
The down payment:           VU 10,000.00

The seller has title to the home and exchanges it for 100,000 Value Units from finance sources in the VEN; B members engaged in short term or long term finance businesses; VEN finance. Now VEN finance has the title and owns the home and sells it to the buyer on the instalment plan with the down payment serving as the transaction fee. The buyer pays nothing back to VEN finance but the principal and there is no compounding of interest. When the buyer has successfully paid back the loan, VEN finance gives the buyer the title.

[19 July, 2015: Just how mush in dollars is VU 100K today?  Due to the continued fall in the prices of the precious metals it now takes more to purchase a Value Unit (Valun).  Our experiment is working perfectly well.  It beats both dollars and precious metals in holding its value.  Currently at $2.90 that works out to VU 100K = $34,482.76]  The monthly payment schedules could be set up for any number of monthly payments, but would normally be settled in 10, 20 or 30 years. The significant savings to the buyer are in all usual interest charges which would not be part of any financial agreement between a buyer and VEN finance.

Payment schedules might look like this:

10 year mortgage: VU 10,000 per year, VU 833.34 per month.
20 year mortgage: VU 5,000 per year, VU 416.67 per month.
30 year mortgage: VU 3,333.34 per year, VU 277.78 per month.*

* In VEN finance, any accrued fractions are paid back to the buyer because they do not belong to VEN finance. 

2. The Fee Bundled Model:

This financial model is really identical to the first one, except that it bundles the finance charge into the instalment plan. This method would be suitable for certain categories of individuals who would be entering into credit contracts with VEN finance, in order to secure financing for a home, farm or property that they have already purchased with existing financing. The effort here is for VEN finance to pay off the existing loan and secure financing for the reminder of the equity.

This finance model would also be suitable for certain people who cannot come up with a down payment. This VEN finance model implies that the financier would be in a position to offer such a buyer a “lease to buy” schedule.

Let's look at an example of each: 

Example 1: A buyer with an existing property requiring re--financing. 

Initial selling price: VU 100,000.00 
Equity = amount buyer has already paid: VU 35,000.00
Amount remaining to be financed: VU 65,000.00
VEN finance transaction fee: VU 10,000.00 **

** We will determine what these transaction fee schedules look like based on risks associated with the potential loss to the VEN financier. The intention is always going to be to keep all VEN transaction fees stable, predictable and easy for the average human being to understand. 

In this example, the total to be financed would be 75,000 Value Units. 65,000 would be used to pay off the creditors and secure the title which would be held by the VEN financier until the buyer successfully paid off the loan.

Payment schedules on 75,000 Value Units would look like this:

10 year mortgage: VU 7,500 per year, VU 625 per month. 
20 year mortgage: VU 3,750 per year, VU 312.50 per month.
30 year mortgage: VU 2,500 per year, VU 208.34 per month.**

Example 2: A buyer without a down payment wants to buy something.

In this example a buyer wants to buy a home with no down payment. The risks involved here are such that the VEN financier would enter into a “lease to buy” contract that would be simple for everyone to understand.

The sale price of a home:             VU 100,000.00     100,000 Value Units
The VEN financier transaction fee  VU 10,000.00       10,000 Value Units

The VEN finance business buys the home from the seller and retains the title and attaches the transaction fee as part of the scheduled payments. Rather than considering this an interest charge, it is better to describe this as the price one must pay for not having the money to buy it outright. The buyer leases the property from the VEN financier agreeing to a repayment schedule. When all the payments are made, the title is turned over to the buyer.

Provisions to protect the VEN financier from default would include the understanding that failure to pay back the loan results in either one of the following:

1. Ownership of the property is retained by the VEN finance business and the buyer / lessee forfeits rights to habitation or use of the property or

2. The lessee must refinance what remains of the loan with the VEN finance business which would subject the buyer to another transaction fee.  

We assume that there will be far less default and foreclosure required in the VEN because the whole system fosters more business than the present banking models and does not produce less money than it asks borrowers to pay back.

Both of the models presented here would have their various applications in financing all kinds of purchases, with fee structures that will be stable and make sense to the average human being. Just knowing what to expect when a prospective buyer interacts with the VEN finance business should veritably fire the imaginations of many prospective entrepreneurs, inventors and businesspeople worldwide.

It should be noted that in all the examples covered so far that no new Value Units are created that are not paid back and that no further Valuns must be grubbed from others to pay back what was never created. Usury is removed from the system.

Permissible VEN Financial Contracts

Finance by way of Trust - This is a partnership between the a VEN business where the business borrows money from the VEN financier in exchange for the financier's share of the business profits based on a predetermined ratio. These contracts normally involve lines of credit established by something Riegel was familiar with, the natural ebbs and flows of money through a business that is based on a predicted schedule of activities related to production, most notably in agricultural, dairy or livestock operations, but available to other legitimate business activities based on similar production schedules. 

Such contracts require the VEN financier to trust the business person to responsibly and faithfully run his business profitably. Should the business fail, the VEN financier loses whatever was not repaid. We do not condone the common practice of real assets used as collateral for loans of money. However, this may be required under circumstances involving the credit history of the lender with VEN finance businesses.

In this regard, it will be difficult for a bad risk to skip from one Independent Exchange (IE) to another because all credit histories within the VEN will be a matter of universal record. Recall that being essentially private, and bound by private agreements among its members, each IE has the responsibility of ensuing its protection against unwarranted losses and fraud. Within the entire VEN, we will already be spreading the costs of giving the “red inkers”; the poor, pensioners, the elderly and disabled the money they deserve as their sole right to create it under Riegel's visionary observations. But we will as far as possible, avoid being cheated by those who believe themselves entitled to cheat others for whatever whimsical reasons.

It should be noted that all the returns to the VEN finance business in this kind of contract come from money that was already created, there is no scrounging after that which was never created to pay any interest. Likewise the credit extended to the business must have already been created and paid into the VEN finance business as transaction fees over and above its own operating expenses.

Normal lines of credit are extended and paid back over regular time intervals. Sometimes the lines of credit may need to be greater and sometimes smaller based on fluctuations in business activity. Many of these kinds of contracts will require the advice of professionals familiar with various kinds of businesses. Where insurance may be required to offset the variations in prices, due to natural fluctuations in supply and demand, especially in agriculture, the VEN finance businesses may assist in establishing such insurance programs, as we will certainly want this function to operate in an honest manner, not subject to abuse as has happened notoriously in the present corrupt and dishonest system.

[19 March, 2014: Now, in addition to regular credit contract features, we have crowdfunding or crowdfinancing, where individuals in a community pledge small amounts of their money and together put forth enough to float some venture, cause, etc. Once this gets going, we anticipate participation of many people in the VEN who will have accrued sufficient “stores of liquidity” that they would be willing to place some of their money at risk in the service of finance; to earn a modest reward on their idle money.

What? I thought you were against capitalism. But let's back up a little bit. Let's say there are within the VEN a few chances to earn honest money through financing that imply:

1) The businesses engaged in financing understand their market, the risks involved, etc. They bear the brunt of any losses, etc.

2) There is some reasonable limit to a single finance business's appetite for sources of liquid capital outside of itself. We'd begin with a ration of no more than 50% of a business's funds for finance may be drawn from outside sources within the VEN. These would be in a form of credit contract between A members and the B member finance businesses in the form we'll call a bill, if it's paid off within a year, more likely a note, which can extend out to seven years.

3) Crowdfinancing would imply that posted somewhere at each IE office might be ads for short term notes, which would seem most like bank CD's to the average investor. In all cases the amounts paid would be small, but sufficient. All the money to pay for any finance comes form the buyer, so in effect the partners who run each VEN finance business would be sharing up to 50% of their profits with the crowd. Hence though competition for yield in this way would be intense, the rates would tend to be low.

4) This would not break the rules in that the partners running the finance business bear the responsibility for their judgement and that also goes for the crowd assessing the potential reliability of these notes. If the business fails, the results may be bad, but the system itself is secure from the kinds of potential domino effects that could cripple or disrupt the present monetary system.

[21 March, 2014: I have read your blog extensively and believe I understand where you're coming from. Your Valun proposal would provide the hardest money on the planet. It's the kind of thing that would provide price stability over many generations. You've built in enough opportunities for any member to have adequate credit. You don't want to ruin it by allowing finance organizations to float any excessive bond issues for which they may not have ready need for the funds. I understand you intend to operate under 100% reserve lending. You're going to assume that a finance organization would be set up as a partnership. Each partner would get a percentage of the profitability of the concern over expenses. With what would such an organization back any bond issue, except the credit contracts of its customers? Your suggestion amounts to hypothecation: the practice where a borrower pledges collateral to secure a debt or a borrower, as a condition precedent to a loan, has a third party (usually an affiliate) pledge collateral for the borrower. This invariably creates a chain of promises to clear debt that leads to the same problems afflicting the present system. You really don't want it. I trust that you recognize that most of your finance businesses, when and if they catch on, will be NVO's operating in the “public” money markets as well as the VEN. The only feasible way to make it work would be for interested parties to buy profit sharing partnerships. I trust that all of these would be private affairs. That would mean that while a company projects a certain face to the ”public” world, they would adopt a VEN favourable face for all VEN operations. That VEN face is the partnership arrangement between your B member finance business and the A members that own the partnerships. You'll need a separate kind of contract to handle them. I should think it would be similar to an S corporation. George, Nebraska

All duly noted George. Thank-you for your contribution.] ] 

David Burton

[22 March, 2014: I was just wondering, you said somewhere that you expected debt instruments to trade somehow within the VEN, but you are clearly hostile to corporations, so I suppose you'd be against equities trading. Could you elaborate? 

Partnerships are among the oldest forms of business organization. Depending on the kind of business it is, there might be many partners. I hadn't thought about any upward limit, but if we're to be strictly honest, a partner would have to bear a certain amount of meaningful responsibility for something the company actually does.

Debt instruments, the various “evidence of debt” determined by how long they take to pay off, are specific things with their repayment streams always attached. Equities as they are commonly understood are “evidence of absentee ownership” of the kind we want to eliminate, as we maintain that such schemes are actually fraudulent. Why? Because they attempt to defy natural law.

Specifically, they complicate ever being able to determine the true value of anything about a corporate business. The fiction is that at any time, the combined value of all the extant stock equals the value of the entire corporate enterprise. But then there is the “blue book value” which is what it would supposedly take, in today's dollars, to purchase the basic material, including these days everything included in intellectual copyrights, etc. to create the existing corporate structure. The stock value might be many times the blue book value. Who is telling the truth when it comes to stock values? Only their market knows, and of course they are all manipulated.

If one really wants to make money in the VEN, one would most likely be willing to purchase or work toward purchasing a partnership in a small or medium sized going concern. We do not expect corporatism or statism to last forever and it will ultimately be necessary to have some means of taking care of ourselves and each other without them. That was one of the motivations for this blog.]

[31 March, 2014: Mr. Burton. What do you call a company that takes in other people's money and makes loans with it? A bank! I know you'd like to consider various points of view but not everyone can be right. Some just think they're clever coming up with an idea like “crowdfunding.” If someone is going to lend someone else money so they can buy something, that person has to buy the item first and sell it back on time to the borrower. Anything extra the buyer pays is because he didn't have the money at the time of sale. Also if someone paid more than market for anything, and then sells it back for whatever they can get for it, all that extra money he paid for the item is destroyed. This happens quite often. I think it's one of the problems with this economy. People decided to buy something they couldn't really afford and they'll never get back what they paid for it. Selling to someone else causes anything they paid over what they sold it for to be removed from the circulating money supply. K. C. Indiana

Yes, we get the message. The connection in any finance organization between risk and actual cost of anything should be borne entirely by the partners. They make a percentage of any profit. How many people could really bear the risks of making certain kinds of loans? 5? 10? 50? 100? These are important questions that will need a lot more input from others. Thank-you for your contribution.]

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