Lending and Borrowing

The practice of lending and borrowing money has been around for a very long time. There is a legitimate need to borrow money and hence lending money is a legitimate opportunity and practice.

Individuals have borrowing needs. Currently, these borrowing needs are collectively satisfied by the credit market, the small loans market and the housing loans market. Corresponding to the borrowing needs, individuals also have lending opportunities. Lending cannot earn money unless someone is borrowing from the lenders. Thus lending and borrowing needs to be discussed together.

Bonds represent the corporate form of borrowing. However, there is a vast difference between citizens and organizations regarding their borrowing needs. This difference needs to be accounted for and properly addressed.

This chapter introduces a significantly redesigned system of lending and borrowing. The following paragraphs outline what you will find in this chapter.

The section, Lending and Borrowing for Citizens, discusses why citizens have a need to borrow and at the same time have an opportunity to lend. This section introduces the three mechanisms for citizens to borrow. They are: Collective Credit, Utopian Mortgage and Social Credit. Each one of these is discussed in a separate section. This section also mentions the only two possible sources from whom citizens can borrow.

The next three sections are Collective Credit, Utopian Mortgage and Social Credit. Each one of these discusses its subject matter at length.

The section, Citizens Loans Liens Bankruptcies, discusses that as a consequence of the three new forms of borrowing for citizens, the current ideas of loans, liens and bankruptcies do not apply to citizens of a Utopian society.

The section, No CC UM and SC for Non-Citizens, discusses the fact that Collective Credit, Utopian Mortgage and Social Credit are all inapplicable to organizations and self-owning entities.

The section, Lending and Borrowing for Organizations, discusses that organizations can lend their money to only other organizations and that they can borrow from all kinds of entities. The risk of such lending is borne by the lenders.

Finally, the section, Lending and Borrowing for Self-Owning Entities, discusses that self-owning entities cannot borrow money, though they can lend to organizations.

Lending and Borrowing for Citizens

During the course of our lives, we buy various products and services and most of these purchases occur routinely. We may be intending to buy something that is essential or something that is our current desire (and hence a want). Individuals may have money in their money account and such money is the obvious choice to be used to support one's own needs and wants. In fact, supporting our own needs and wants is the primary reason for desiring money.

Since investing is a good idea, we may have invested most of our wealth. Thus at the time of buying something we may not have money in our money account but we may have enough wealth (in the form of investments) to cover the cost of what we intend to buy. While investments could be liquidated when we want to buy something, we may also be expecting a paycheck within a short time and that paycheck would also be sufficient to cover the cost of our intended purchases. Thus absence of money in the money account is not a big problem. Further, liquidating investments every time we want to buy things and buying investments immediately after we get our paycheck means that we are dealing too much with investments and that is not how investments are supposed to be used. If we could borrow money for a short-term, then we can pay back the borrowed money when we obtain liquid form of money either through a paycheck or by actually liquidating some investments.

The need for borrowing arises due to the timing difference between our need to pay (for our needs, wants and payment obligations) and the money flowing into our money account (paycheck or liquidating investments). Borrowing is intended to bridge the gaps between money flowing in and out of the individual's money account.

Borrowing money is usually not free. One has to pay interest on the borrowed money at some rate of interest for the duration of the time that we borrow the money.

When a citizen has money in a money account and when the citizen does not intend to use it immediately for any investments and has no immediate spending needs, then such money could be lent. That is, citizens have an opportunity to lend their money. Such an opportunity to lend should be easy, secure and it should fetch a good rate of interest.

For citizens, considering that our goal is a Utopia, the lending to citizens cannot continue to exist as it does in present times, because it has plenty of issues. Financial infrastructure changes the lending and borrowing models significantly to eliminate these issues.

A citizen can borrow from only two possible sources:

The collective of all other citizens.
The society

For citizens, there are only three ways in which they can borrow money:

Social Credit. In this way, society is the lender.
Collective Credit. In this way, all entities in the society are the lenders.
Utopian Mortgage. In this way, society is the lender.

There is nothing equivalent to a social credit in present day societies across the world.

Collective Credit is the replacement for the current practices of credit card debt and small loans. The borrower has to pay interest, but there is no possibility of getting an unfair rate of interest. Further, the terms of repayment can be configured by the borrower and the available choices cover a very wide spectrum of desires about how the repayment should be.

Utopian Mortgage is the replacement for the current forms of financing for primary residence. It is vastly different when compared to our current concept of a mortgage, which is a loan to buy the house and the loan is secured with a lien on the house which makes the house a collateral for the loan. As you will see in a separate section, Utopian Mortgage is a significant improvement over the current idea of a mortgage both qualitatively and quantitatively.

These two sources and three ways of borrowing for citizens cover all legitimate use-cases for almost all citizens' needs to borrow money. For citizens, there is no other kind of borrowing. The current practice of loans and liens is abolished. The reason for this is explained in a separate section.

Collective Credit

The primary purpose of collective credit is to enable citizens to buy the things that they want but do not have money in liquid form to pay for those things.

The secondary purpose of collective credit is to provide citizens a fully secured method to lend money and earn interest on such lent money.

The third purpose of collective credit is to provide both the borrowers and lenders a rate of interest that is fair for both.

It is called collective credit because all the citizens in the society collectively lend to those citizens who wish to borrow.

The financial infrastructure does the following:

Arranges for the borrowing and lending under collective credit.
Serves as the intermediary for both the borrowers and lenders and isolates them from each other.
Assumes the counter-party risk on behalf of the lenders thereby giving 100% security to the lenders.
Provides the lenders with automation and immense flexibility to lend their money.
Provides the borrowers with automation in both acquiring and repaying collective credit.

Only adult citizens can borrow through collective credit. Using collective credit for borrowing is an option; it is disabled by default; it needs to be enabled by citizens in order to use collective credit for borrowing.

Collective credit is available for purchasing things that would be personal belongings. This includes consumer goods and services and excludes all kinds of investments. Collective credit does not give citizens any money directly which they can choose to use at their discretion; money is automatically borrowed through collective credit only when purchasing something and only to cover the shortfall in the money that citizens have and the money that is required to purchase. Collective credit replaces present day concepts like consumer credit card debt and short-term consumer loans (for things like purchasing cars).

Collective credit is fully secured using the citizen's standard investments as collateral. The amount that a citizen can borrow using collective credit is up to half the value of the citizen's standard investments. Citizens can configure a lower limit for themselves.

The rate of interest that the borrower has to pay for availing collective credit is the same as the tax rate (that is taxes for wealth redistribution plus taxes for government spending). Conceptually one can think about the rate of interest that one pays for borrowing money using collective credit as: borrowing money is similar to possessing additional wealth for the amount of time that the money is borrowed and the cost of possessing wealth is the taxes that one pays on it.

Interest on the money borrowed using collective credit is due every day. Daily interest if not paid is treated as additional collective credit. Both the interest and principal can be repaid automatically; it can also be repaid manually.

Automatic repayment is enabled by default and it can be disabled.

For automatic repayment, the amount of time that the borrower uses to repay the collective credit is configurable by the borrower with a minimum of 0 days and a maximum of 2000 days (that is about 5.5 years). This configuration parameter is called days-to-repay.

Automatic repaying with days-to-repay configured as 0 days means "pay back the money as soon as money is available to pay back". Setting days-to-repay to 0 days will result in the fastest automatic paying back of collective credit debt. When the configured days is greater than 0, then it is paid back gradually over the stipulated number of days.

Paying back gradually is not the same as paying back the same amount every day. If the collective credit is not increasing, then paying back gradually will pay back smaller and smaller amounts each day. This is because each day, it determines the amount to pay back "today" to gradually eliminate the debt in the specified number of days. The next day, it will compute the amount to be paid back "today" and it will be a smaller amount than what was paid back "yesterday".

The minimum amount paid back every day is 1 dollar or the remaining amount of collective credit, whichever is less. This minimum amount ensures that the repayment terminates instead of resulting in continuously diminishing balance. The minimum amount to pay back every day can also be configured.

When automatic repayment is enabled, it is implemented during the End-Of-Day Processing. Daily interest on the borrowed money is always repaid in full. Part of the principal as indicated by days-to-repay is also repaid.

Payment of interest and repayment of principal is done using the money in citizen's personal belongings or standard investments in that priority order. If there is no money, then assets within the standard investments are liquidated. When liquidation is necessary, the minimal amount of assets just enough to repay the daily amount are liquidated. Citizens can specify the priority order of automatic liquidation of assets within standard investments.

When automatic repayment is disabled, then during End-Of-Day Processing the interest on the borrowed amount is calculated and added to the principal amount of collective credit. Nothing is repaid automatically.

During the End-Of-Day processing, if the value of the citizen's standard investments is less than two times the amount of collective credit but more than the amount of the collective credit, then the financial infrastructure sends a message to the citizen informing about the situation. This can happen when the value of the assets in the standard investments account drops due to routine price fluctuations. Citizens can and should take suitable actions to ensure that there is sufficient collateral.

During the End-Of-Day processing, if the value of the citizen's standard investments is less than the amount of collective credit, then it means that the citizen does not have sufficient collateral for the collective credit. Note that only standard investments can serve as collateral for collective credit. In this situation the financial infrastructure liquidates all standard investments. That is, it takes over the ownership of the assets in the standard investment account at the liquidation price for each of the assets and credits the citizen with the resulting amount. Then, it uses this credited amount to pay off as much collective credit as can be paid off. After this, whatever collective credit remains is converted into social credit and that can be repaid as per the rules and schedule of social credit.

Essentially, when a citizen has insufficient collateral to cover collective credit, the financial infrastructure eliminates both the collateral and the collective credit.

Lending through collective credit is an option; it is enabled by default; it can be disabled. Thus, to lend through collective credit, a citizen has to at most enable it (if it was previously disabled). Everything else is managed by the financial infrastructure.

When enabled, all the money in the various account books of each citizen (who has it enabled) is made available for lending. The money is notionally made available for lending; not physically removed from the citizens' accounts. Thus citizens can use their money any time they desire. Whatever money the lenders don't use will earn interest.

When citizens borrow using collective credit, all that money is provided by freshly creating it. When the money is repaid, the repaid amount is destroyed. The daily interest paid is transferred to lenders in proportion to the daily minimum money in their account. All this is possible because the society being a monetary sovereign can digitally "create" and "destroy" money.

The rate of interest that the lenders get for providing their money for collective credit depends on the demand for collective credit and the actual supply of money available to be lent. The rate is proportional to the amount of money that was actually borrowed through collective credit as compared to the actual amount that was available to be borrowed.

If collectively one trillion dollars were available for collective credit and only half a trillion dollars were borrowed through collective credit, then the rate of interest that all lenders get is half of the tax rate.

If collectively one trillion dollars were available for collective credit and one trillion dollars were borrowed through collective credit, then the rate of interest that all lenders get is the same as the tax rate.

If collectively one trillion dollars was available for collective credit and actual money borrowed through collective credit was two trillion dollars, then the rate of interest that all lenders get is twice the tax rate.

These three scenarios show that the lenders get a fair interest rate depending on the scarcity of lending resources.

In all these scenarios the borrower also pays a fair rate; in fact that rate is exactly the same interest rate and is unaffected by how much others are borrowing or not borrowing, since a citizen's limit on borrowing is based on the standard investments that the citizen has and that interest rate on this borrowing is exactly the same rate at which the citizen would have paid taxes had the citizen possessed the money that they had to borrow.

The three scenarios illustrate that lenders get an effective interest rate for lending. This rate can change daily. It is the daily risk-free rate of interest and it will be published by the financial infrastructure. This risk-free rate can be easily used to evaluate alternative means of earning money by using money like lending to organizations, investing in organizations, trading stocks, trading commodities, trading other financial instruments, etc.

Citizens may not be sufficiently comfortable with investing. However, citizens still need to plan for their retirement (and possibly emergencies) and hence it is a good idea for citizens to save some money. Further, it is a good idea that such savings can earn some money without risking the savings itself.

Thus, citizens need a secure way to lend their money, if they cannot take investing decisions or are risk-averse. Newborn citizens cannot take any investing decisions and hence lending their money (which they will get through wealth redistribution) through collective credit is the only safe choice (which is enabled by default).

Lending money through collective credit is trivial and fully secure. Anyone can be a lender; it requires no skill and it has no risk. All other forms of earning money using money require some kind of knowledge and skills. Hence, lending through collective credit is available for citizens only; it is not available for organizations and self-owning entities.

The reason that organizations do not get to lend through collective credit is because organizations should do something useful with the capital that they have; if they cannot use their capital then there is no reason for them to have the capital. If organizations cannot fruitfully utilize the capital they possess, then they should just return that capital to the investors and investors can choose to do something else with the returned capital (and that includes lending it through collective credit).

A Self-owning entity is almost like an organization because it has to be managed like an organization and a key part of that management is the fruitful utilization of the money owned by the self-owning entity. Hence self-owning entities are also excluded from lending through collective credit.

Organizations and self-owning entities engage in earning money using money. They ought to produce a higher rate of return compared to lending through collective credit, unless the person(s) managing these organizations and self-owning entities and their activities lacks that knowledge and skills and then the rate of return could be lower than that of lending through collective credit.

Utopian Mortgage

Once we have implemented monetary policy, we will have managed to keep the wealth of our society at an almost constant value. This implies that all non-productive and depreciating assets will have no chance of rising in value as they have nothing intrinsic about them that increases in value. This includes houses. In present times, we find that house prices continuously rise and this makes houses appear to some people as "investment". However, houses have a few decades of useful life during which time they require constant repair and maintenance and finally after a few decades they require to be demolished and rebuilt. Thus houses will stop seeming as "investment".

In any society, there will be some individuals who would rather live in a rented home. Housing is essential to all humans and when citizens rent their home, that rent would be considered as an essential expense and the Utopian Payment Model will assist those who need assistance in paying for this essential. This enables these citizens to use the rest of their wealth on other things and that includes investments. Those who make owning and renting out houses as their business, invest in houses and charge enough rent to cover all expenses and make a profit for themselves; this is fine.

Similarly, in any society, there will be some individuals who would rather live in a home that they own. All houses do not just depreciate at some constant pace. Their value fluctuates and those fluctuations depend on the neighborhood, employment opportunities, social amenities and environmental factors. Unlike tenants, owners take on the risk of losing the value of the home that they own. Some of this risk is the price that they should pay, but not all, because the reasons that cause the value of any home to change are not entirely under the control of the owner of the house.

Owning one's home is not purely a choice; it is significantly influenced by social norms, dreams and compulsions. Currently houses are priced comparable to the average wealth of citizens. If a citizen of average wealth "invested" almost all their wealth in a house, which is a non-productive asset, then they will not have much left to actually invest in productive endeavors. Citizens with much less than average wealth face a worse situation (compared to citizens who have about average wealth) if they desire to live in a house that they own, because houses are not necessarily available for low enough a price that is commensurate with the citizen's wealth. All this is counterproductive to citizens of a thriving society; and in a Utopia, this is far from ideal.

Just like citizens who desire to live in a rented home can use the Utopian Payment Model to assist in the payment of the rent, citizens who desire to own their home can use the assistance of the Utopian Mortgage to be able to own it.

Utopian Mortgage is intended to enable citizens to own their home without needing to allocate a large proportion of their wealth or without needing to commit to making payments for decades and yet still have sufficient monetary stake in the home (colloquially known as "skin in the game") so that they make a reasonable purchase decision.

Utopian Mortgage is a loan to buy a house. Any citizen can buy and own at most one house using the Utopian Mortgage. The purchaser must contribute exactly 10% of the purchase price of the house and the remaining 90% is an interest-free loan given by the society to the individual.

The purchase price of the house should be less than the average wealth of all citizens. Utopian Mortgage is not intended to satisfy the desire to own an expensive home.

The purchaser's current and typical wealth at the time of purchasing the house must be at least 30% of the purchase price of the house. The typical wealth requirement ensures that the citizen has sufficient wealth for at least a year before the purchase desire can be fulfilled. The current wealth requirement ensures that after the purchase, the citizen is still left with twice the wealth that they used to purchase the house; this wealth can be used by the citizen for other things, like investments. This ensures that citizens do not have to "lock up" a significant proportion of their wealth in their home; a large proportion of their wealth is still available for investing.

The purchaser must not have any outstanding debt (social or collective credit) at the time of purchasing the house. Before taking help from the society to purchase one's home, one should get rid of all outstanding debt. This helps citizens appreciate their total wealth and its allocation to personal belongings, standard investments, non-standard investments and money. The house to be purchased will add to the personal belongings and will reduce the money.

Once the purchaser becomes the owner, they can live in the house as long as they wish to. There are no monthly payments to be made to continue to own the house. Since it is an interest-free loan, there are no periodic interest payments. The principal amount of the loan does not need to be repaid as long as the purchaser lives (not necessarily in that house) and until such time that they decide to sell the house. Thus, the purchase of the house does not adversely impact the citizen's cash flow.

Purchasing a house merely changes the composition of the wealth of the citizens; less money and more personal belongings. They now own an asset that costs a lot and 90% of that asset is also a liability in the form of debt. Purchasing a house does not alter the taxes that citizens have to pay as the amount of their wealth does not change.

The 10% of the purchase price paid by the citizen is the citizen's equity in the house. It is locked up in the house. It cannot be liquidated partially or fully while the citizen owns the house.

When the owner of such a house sells the house, first all the original amount that society loaned to the individual must be paid back from the proceeds of the sale and any remaining amount goes to the owner.

If the selling price is less than the loan amount, then it will mean that the 10% amount that the owner originally paid will not be recovered from the sale. It is possible that none of the amount can be recovered if the house sells for much less than 10% short of the original purchase price. If the house sells for much less than 10% below the original purchase price, then the owner gets nothing and owes nothing further. The society and the owner both incur a loss.

Let us compare renting vs owning houses.

A renter does not have to lock up any part of their wealth in order to have a home; an owner has to lock up some part of their wealth. A renter has to make monthly payments to rent the home; an owner has no monthly payments. A renter does not care about changes in the value of the home and the profit or loss due to these fluctuations; an owner will get impacted by the changing value of their home.

Society provides the 90% of the purchase price of the house as a loan. This money is "created" as and when citizens desire to purchase houses using the Utopian Mortgage.

When citizens sell a house purchased using the Utopian Mortgage, the original loan amount is paid back (perhaps with some shortfall). All the money that is paid back is "destroyed".

Some houses, when sold, may not pay back all the money they borrowed from the society. This means that the society will incur a loss. However the money was "created", and hence in the reverse operation less money will be "destroyed". The difference will be with some other members of the society and monetary policy will eventually recover it. As such, this kind of loss is of no adverse long-term consequence to society.

Since the society can incur a loss in supporting Utopian Mortgage, society needs a mechanism to ensure that the loss is fair and is based on current market conditions and the state of the house being sold. To ensure that houses are sold at a fair market price, selling houses cannot be done arbitrarily.

Financial Infrastructure creates and maintains a market (the Housing Market) for buying and selling houses. All houses must be put up for sale on this market and sold through this market. This includes newly built houses and old houses. This excludes custom built houses as these are made to order by the builder for the buyer and hence are not available to be purchased using Utopian Mortgage. However, custom built houses must still abide by all the regulations for building a house as such a house will potentially need to be sold by its original buyer and this can only be done on the housing market.

When any house is put up for sale, the financial infrastructure conducts an official inspection of the house and reports all the findings. It then publishes a schedule for viewing the house, the schedule for potential buyers to place their bids, and the vacate-date and closing date if a bid is accepted by the seller. Based on this information and viewing of the house, potential buyers can bid on the house. The seller can reject all such bids or the seller must accept the highest bid.

If the highest bid is accepted, the current owner must vacate the property before the vacate-date and hand over the keys to the office of "coordinator of house sales" which is located in the local branch office of financial infrastructure.

After the property is vacated, financial infrastructure conducts another inspection and it is expected that there is no material change to the condition of the house from the previous inspection.

If indeed the house is in the same or better condition, then the sale can conclude on the closing date. This involves the buyer and seller both visiting the local branch office, confirming their identity and authorizing the sale. The monetary aspects are automatically dealt with upon authorization and it includes the transfer of ownership, transferring money from buyer's account, acquiring of loan using Utopian Mortgage on behalf of the buyer, repayment of any loan associated with Utopian Mortgage on behalf of the seller, and finally depositing any left over money into sellers account.

If the house is in worse condition at the time of the second inspection, then the sale of the house is canceled and the owner can take back the keys and the possession of the house.

All the work that the office of "coordinator of house sales" does, would normally not cost citizens anything. Only citizens with significantly above normal number of transactions will have to pay for the cost of the few transactions that occur when buying or selling a house. Note that all monetary transactions, when they are charged, cost the same.

Utopian Mortgage is a privilege of living in Utopia. The intent of Utopian Mortgage is to assist all citizens in being able to own their primary residence without having to commit their entire wealth or a large proportion of it. There will be several regulations related to Utopian Mortgage to ensure that the intent of Utopian Mortgage is not violated. Here are the more important of these rules.

While an individual owns a house purchased using Utopian Mortgage, the owner is responsible for maintaining the house as per the local and officially published house maintenance standards. This is because the society has loaned 90% of the price of the house to the owner and hence society is interested in ensuring that the house is maintained properly so that it can fetch the best possible price when it gets sold. That the house is being maintained properly will be determined annually or more frequently by means of a house inspection. These inspections are of the same kind as those conducted for the sale of the house.

If a person already owns a residence, either outright or using Utopian Mortgage, then the person cannot buy another residence using Utopian Mortgage. However the person can inherit a residence that was originally bought using a Utopian Mortgage; in this case, the residence can continue to be owned using Utopian Mortgage.

If a person already owns a residence using Utopian Mortgage, then the individual cannot buy any other residence. This is because, if the person has money to buy a residence and is willing to spend the money to buy a residence, then they do not need Utopian Mortgage for their currently owned residence. Citizens have the option of converting their residence from a Utopian Mortgage residence to a fully owned residence by paying the society the amount that they had borrowed at the time of purchasing the residence using Utopian Mortgage.

A person who is renting a residence and paying for it using the Utopian Payment Model cannot buy a residence using Utopian Mortgage. A person owning a residence using a Utopian Mortgage cannot rent a residence and pay for it using the Utopian Payment Model.

A residence owned using Utopian Mortgage cannot be rented out. It is for the use of the owners. It is definitely not to be used as a rental property in any way.

A residence owned using Utopian Mortgage is only intended to be used as a residence. It cannot be used for conducting any sort of business where a customer physically visits. It cannot be used for any sort of business which is locally unacceptable as a work-from-home business. The regulations in this area could get fuzzy and in these cases, to objectively assess the validity of a regulation, one needs to consider whether the activity that is the cause of objection is indeed objectionable for other normal residents in the neighborhood.

The primary purpose of social credit is to allow citizens to purchase essentials. When purchasing essentials, if citizens do not have money in their money account to pay for their share of the essentials then society offers social credit to these citizens to pay for their share of those essentials. With the presence of social credit, no one has to avoid buying essentials due to lack of money.

Social Credit is a short-term interest-free loan given by the society to its citizens under special circumstances and it needs to be repaid in a short amount of time at the highest priority.

The money required to give social credit to citizens is "created" by the society as and when needed and when the given social credit is recovered (that is automatically paid back) by the society, these money repayments of social credit are "destroyed". Thus society uses its monetary sovereignty to implement social credit. In this regard, society acts as the ultimate liquidity provider to its citizens.

The repayment of social credit is accomplished automatically and gradually in 30 days using the money in citizen's personal belongings or standard investments in that priority order. If there is no money, then assets within the standard investments are liquidated. Citizens can specify the priority order of automatic liquidation of assets within standard investments.

If after accumulating social credit, the financial situation of the citizen improves, then the citizen is likely to have money or other liquid assets (standard investments or liquid non-standard investments), and these will be used to repay the social credit. Thus for any citizen, whose financial situation is not bad, the amount of unpaid social credit will reduce to an insignificant amount in 30 days. The daily minimum repayment of social credit is one dollar and then the social credit will be repaid eventually; rather than getting ever so infinitesimal.

This automatic repayment of social credit is done during the End-Of-Day Processing, just after crediting the citizen's money account with money from wealth redistribution. Thus every day, every citizen will have some money to repay the social credit. Any daily repayment amount of social credit that cannot be repaid, is the unpaid amount and it remains as social credit. Perhaps the next day the citizen will have enough money to repay the daily repayment amount.

If on any given day, for a citizen, there aren't enough liquid assets to repay the full daily repayment amount of social credit, then on that day, at least some of that day's worth of social credit dues cannot be automatically repaid. If this situation continues for some time, then the citizen may be facing increasing or prolonged financial difficulties and hence repaying of social credit is proving to be a challenge for this citizen.

We can have some criteria to objectively determine if a citizen is indeed facing prolonged and significant financial difficulties and if so then each day part of the debt associated with social credit is forgiven.

The objective criteria is based on the amount of typical wealth of the citizens. When citizens face increasing and prolonged financial difficulties, their typical wealth reduces. When citizens choose to hold all their wealth in non-depreciating or slowly depreciating assets (like physical gold or real estate), their typical wealth reduces at a very slow pace. Thus rapid decline in typical wealth is a good indicator that a citizen's wealth is reducing. Comparing the typical wealth of a single citizen to the average wealth of citizens can help us determine if the citizen is facing financial hardship (that is lack of wealth). When for a citizen, the financial infrastructure observes that the citizen is unable to repay social credit because the citizen does not possess liquid or liquidate-able assets, and if citizen's current typical wealth is much below the average wealth, then all that indicates that the citizen is in need of help for repaying the social credit.

Here is a simple social credit forgiveness strategy: If the typical wealth is 90% of the average wealth, then on each day that daily repayment amount of social credit that cannot be paid, we forgive 10% of the unpaid amount. If the typical wealth is 10% of the average wealth, then on each day that daily repayment amount of social credit that cannot be paid, we forgive 90% of the unpaid amount. Thus poorer citizens get larger forgiveness and not so poor citizens get proportionately smaller forgiveness.

In this strategy, for citizens with typical wealth which is slightly less than the average wealth, if forgiveness is required, it will only be a small percentage. In this strategy, for citizens with above average typical wealth and unpaid social credit, the social credit is never forgiven.

Once we agree that social credit is good to have and it is also good to partially forgive the repayment of social credit for those who are financially challenged, we can discuss the details of the forgiveness strategy.

When a citizen dies and if that citizen had unpaid social credit, then before the heirs can get their inheritance, the unpaid social credit needs to be repaid. This repayment will be implemented by financial infrastructure by liquidating some of the assets in consultation with the heirs. The liquidation will be done by selling some of the assets on whatever market is appropriate for the assets being liquidated; the goal of such liquidation is to fetch a fair price for the asset.

The intent behind social credit is expanded to the payment of taxes as well.

When citizens need to pay taxes as and when they get due and if they do not have money in their money account, then society lends these citizens the necessary money as social credit. This is to ensure that all citizens perform their duty of paying taxes. In effect, the society swaps the citizen’s tax responsibility with a social debt. There will never be a case that citizens fail in this basic duty towards society.

The working of the forgiveness of social credit will ensure that the taxes are eventually recovered from all non-poor citizens and forgiven for the poor citizens; and the forgiveness is in proportion to the citizen's poverty.

Converting a “social duty” to a “social debt” converts what earlier could have been a crime (not fulfilling the duty of paying taxes or accounting for them incorrectly) into merely an incompetence or inability in paying off one’s debts (which in the worst case requires debt forgiveness). This is the second purpose of social credit. It decriminalizes bad behavior of citizens associated with their duty of paying taxes.

The intent behind social credit is further expanded to the repayment of collective credit in emergency situations.

In collective credit, a citizen borrows from the rest of citizens and pays them some interest for the borrowing. This borrowing uses the standard investments as collateral. As long as the value of the standard investments is larger than the amount of money borrowed using collective credit, the borrowed money can be paid back. The amount of money that can be borrowed using collective credit is limited to half the value of standard investments; that is the value of standard investments is at least 2 times the value of collective credit. Thus repaying collective credit is usually not in danger of default.

Since investments can fluctuate in value, their value may drop and this may raise the danger of default. Since society guarantees that collective credit and interest on it will be paid back to the lenders, society liquidates all standard investments if their value falls below 1.5 times the amount of collective credit and repays the collective credit and deposits the remaining money in the citizen's money account. That fulfills the citizen's duty of repaying the collective credit and the citizen has not defaulted on payment obligations.

However, there can be a situation where the value of the investments suddenly drops below the amount borrowed by the citizen using collective credit. In this case, the investments are no longer sufficient as a collateral for the borrowed money. In this situation too, the standard investments are liquidated and using that money a part of the collective credit is repaid. Whatever collective credit amount remains now has absolutely no collateral left and hence such citizens cannot have any collective credit. This is the emergency situation for the citizens regarding their borrowing using collective credit.

Society eliminates the emergency situation for such a citizen by converting the amount of remaining collective credit to social credit. After this, there is no more collective credit to be repaid and there is a correspondingly higher social credit that needs to be repaid. The repayment of social credit can happen as per its rules and schedule.

Citizens Loans Liens Bankruptcies

Utopian society abolishes the current practice of loans and liens. In short, the reason is as follows: with the presence of loans and liens, the risk to the lender is significantly reduced and the risk to the borrower is increased. The increased risk to the borrower can be financially catastrophic when the individual is already facing a financially challenging time. With the introduction of Collective Credit, Utopian Mortgage and Social Credit, citizens do not need to have loans and hence there is no place for liens. There is more to it than this short explanation. We will expand on this short explanation in the following paragraphs.

The lender's desire to have security can be easily accomplished by the individual buying high valued items and renting them to individuals who cannot afford to buy them. In this situation, a lender never gives up ownership and hence a lien is not required.

In case of residence (or any other rented item), an inability to pay the agreed rent is sufficient reason for the land-lord to ask the society's help and assistance to repossess the property from the tenant and hand it back to the land-lord. Unlike today, society will respect this nature of renting. Besides, if a citizen has to live in a rented house, such a thing is an essential need and paying for it should be covered using the Utopian Payment Model and hence there is no possibility that a tenant cannot pay their rent.

For a citizen who does not have enough money to buy something, from a monetary perspective, the interest and the rent are both equivalent. However, from an emotional attachment perspective, when a citizen borrows money to own their home, then the citizen could get emotionally attached to something that they will have to give up in financially adverse times. This is not a good situation for a borrower. For a renter, there could be an emotional attachment, but this attachment will be significantly weaker as compared to an attachment to something that one owns.

With the presence of Utopian Mortgage, a citizen can buy a house, which is easily the most valued thing that most citizens currently own. This purchase is final as long as the citizen wants to continue to own the property and has the financial resources to maintain it properly. The borrowed money for the purchase of the house does not need to be repaid while the citizen continues to own the house. This borrowed money is interest-free; the citizen does not incur an interest burden on buying a financially non-productive asset. Thus there is no possibility of losing the house due to an inability to pay the monthly payments. Moreover, the citizen does not spend any more than 10% of their wealth on such "purchases". This leaves the citizen plenty of their wealth to use for purchase of personal belongings of lesser value or for investments. All these aspects leave the citizen in a financially safer situation.

The thought behind abolishing the concept and practice of loans and liens is that a citizen's personal belongings are not subject to any kind of ownership claim by anyone else. A home, whose primary classification is "real estate", is still classified as a personal belonging for citizens. Investments are not personal belongings, they are merely assets and hence serve as a collateral for collective credit.

Thus, in a Utopian society, there is no concept of loans and liens.

In a Utopian society a citizen cannot get bankrupt. The following paragraphs provide the explanation.

Citizens have no other means of borrowing other than Utopian Mortgage, Collective Credit and Social Credit. There is also no concept of a lien.

A citizen never has to pay back a Utopian Mortgage as long as they continue to own the home. Thus one can never default on paying home loans.

Since collective credit uses standard investments as collateral and if they prove to be insufficient, then the collective credit is converted to social credit. Thus one can never default on paying off collective credit.

With the use of social credit in the Utopian Payment Model, paying for taxes and repaying collective credit in emergency situations, society becomes the short-term liquidity provider to its citizens. The "short-term" is always the next 30 days and it can be a much longer term for those citizens who face severe financial challenges.

If the citizen dies before paying back the social credit, then the citizen's personal belongings are sold off to repay the social credit; that too in the minimal amount necessary and in consultation with the heirs.

Thus a citizen's personal belongings are always theirs and can never be used as a collateral for any of their borrowings during their lifetime.

During their lifetime, citizens cannot ever default on any of their borrowing. Thus, unlike in current times and current societies, in a Utopian society, a citizen cannot go bankrupt in their lifetime.

No CC UM and SC for Non-Citizens

In this context, by non-citizens, we mean organizations and self-owning entities.

We already discussed the reasons for not allowing anyone other than citizens the privilege to lend through collective credit. Thus organizations and self-owning entities cannot lend through collective credit.

We definitely should not allow organizations and self-owning entities the privilege of Utopian Mortgage. This is because they are not humans. These kinds of entities can buy a house with their money if it is needed in fulfilling their purpose.

Social credit is truly for citizens. There is no reason for organizations and self-owning entities to desire social credit. So, it is not for them.

Borrowing using collective credit is intended to help people buy things that they would eventually call their "personal belongings". Organizations and self-owning entities can buy these same things and these things would be their "belongings". However these kinds of entities are not persons and if they do not have the money to buy these things, then their management has failed to manage their money well, but that does not mean society should step in and help these entities. Thus, organizations and self-owning entities cannot borrow using collective credit.

Moreover, collective credit relies on social credit when the collateral drops in value below the amount of money borrowed using collective credit. Hence in the absence of social credit, we cannot give collective credit to organizations and self-owning entities.

Lending and Borrowing for Organizations

An organization is a kind of entity that is owned by others; i.e. it is not a self-owning entity. Most of the owners of organizations are citizens either directly or indirectly; some owners are self-owning entities. Such a normal organization can borrow money since it is acting on behalf of its owners, and just like a citizen they may have a need to borrow money.

The financial infrastructure supports borrowing needs of organizations in pretty much the same way as it exists in present times. That is, organizations can issue (that is create and sell) the financial instrument called bonds. Bonds can be standardized with just a few parameters. Bonds are tradable financial instruments and hence they can be traded on the stock exchange (the more general term is the financial market).

Organizations have limited liabilities; their liabilities are limited to the wealth owned by the organization. This wealth includes the original capital that the owners collectively raised in order to form the organization and also any and all retained profits.

Bonds are secured against the wealth owned by the organization. Lenders (that is purchasers of the bonds) have a higher claim over the assets owned by the organization as compared to the claim of the owners of the organization. Thus if an organization cannot meet its obligations and if it has to be liquidated, then from the proceeds of the liquidation, the bond holders are repaid the money that they lent to the organization in full; owners can have what is left after that. This is because the owners indirectly borrowed, and hence they are liable to repay those debts from the assets owned by the organization.

That said, when an organization gets into financial difficulties, it may not have sufficient wealth to repay all the money that it borrowed. In such a situation, even when the lenders to the organization have a higher claim to the wealth of the organization, they may not recover all the money that they lent to the organization. Hence, lending to organizations is riskier than lending to individuals.

As a consequence of the higher risk, the interest rate will be higher than what it would have been in the absence of those risks; specifically the nominal rate of interest will be higher than the effective rate of interest that lenders get when lending their money through collective credit.

There are two primary use cases why people may want to lend their money to organizations:

The desire to earn at a higher rate of interest than fully secure lending.
The desire to lend money to specific organizations; this is a very special case of "brand loyalty".

Depending on one's desires, people can purchase these bonds and take the risks and rewards associated with those bonds.

Organizations are created when people pool together their money and provide it to the organization as capital to do something useful. This useful activity generally is expected to take some physical form (create some products or provide some service). Generally, it is not expected to be "just lending" of such pooled money.

Similar to individuals, organizations may end up with money in their account that they have no immediate use for. The reasons could be various like cash flow imbalances, infrastructure project delays, etc.

Just like individuals can lend to other individuals using collective credit, similarly organizations can lend to other organizations using the financial instrument of bonds.

As an alternative to lending, the organizations could return the capital to their shareholders, but that choice is up to the management of the organization.

Lending and Borrowing for Self-Owning Entities

Before we can discuss whether we should allow self-owning entities to lend and borrow, we need to discuss the nature of self-owning entities and it is only in that context that we can decide whether such entities can be allowed to lend and borrow.

A Self-owning entity is a truly special case among all entities. Their purpose in owning themselves is so that they can do something using the wealth that they own and yet not be owned by any other entity. Usually someone creates such entities with some purpose and cause, establishes a management for this entity and transfers their wealth to such an entity to manage the wealth and use the wealth to fulfill that purpose.

The first kind of examples of such entities are trust funds and philanthropic foundations. Both these kinds imply that there is plenty of money to do something with. In the case of a trust fund, the purpose is to gradually provide money to some specific set of people (the heirs of the person founding the trust fund). In the case of a philanthropic foundation, the purpose is to provide money to some specific causes or a general group of people, using the money of the philanthropist for this purpose; the philanthropist may not want to or cannot manage the implementation of the purpose. Hence, these kinds of entities should be entirely self funded.

The second kind of example of such entities are charitable foundations. These entities have a purpose (or a cause) of doing "charity" (whatever the word charity may mean; and that meaning is of no consequence) and they are managed and yet may not possess much wealth. These entities obtain their money from donations and this money is used for their charitable cause. Charities take donations and do charitable work (and that implies that they do not take money from citizens whom they help). These do not need any help from collective credit, Utopian Mortgage or social credit.

The third kind of examples of such entities are "foundations" and "not-for-profit organizations". Typically, these entities do not describe their cause as a "charity"; they describe it as a "public service". As is the case with charitable foundations, these entities can accept donations to fund their cause or purpose. But, these kinds of entities are more like for-profit organizations in the sense that they interact with citizens and may ask money from these citizens in forms other than "donations" for the "service" that they render. Some of these forms are subscriptions, membership fees, per-use fee, fines, etc.

A self-owning entity starts with a net worth of zero when it is created. Soon after that, it gets an infusion of money either by someone transferring the money to it for accomplishing its purpose or someone donating to it as an aid to its cause. A trust fund may get a few such infusions; a charity may keep getting such infusions very frequently. Thus soon after its creation, its net worth is greater than zero.

It is possible that the net worth of such entities may get back to zero due to some sort of mismanagement or misfortune. But such a situation of zero net worth is indistinguishable from the situation when it was just created.

However, if the net worth of such a self-owning entity ever gets below zero, then this entity cannot serve its purpose any longer (unless in a short amount of time it gets an infusion of money that gets its net worth above zero). Thus when a self-owning entity has its net worth below zero for a non-trivial amount of time, then this self-owning entity must cease to operate. Society declares such an entity as "bankrupt" and disposes off its assets and liabilities.

Self-owning entities either accomplish their purpose by using their own money or they accomplish it by obtaining money from citizens as donations (and possibly other charges and fees). Considering this fact, these kinds of entities should not be borrowing money.

Here are a few different ways of presenting the argument that supports the thought of "self-owning entities should not borrow money".

Imagine a charity saying "I would like to borrow some money to be able to continue to do my work. Trust me, I will return your money with some interest to you at the end of one year". Imagine further that if we entertain such a notion of "a charity borrowing money", then its future donors will be donating money and some of those donations will be given to the previous borrowers as interest. Why would donors be interested in aiding someone else in making a profit by lending their money? Donors are trying to donate to a charitable cause; donors are not trying to help someone who is trying to earn some money by using their money for lending.

Most self-owning entities are not out there to earn money using money. Only trust funds are trying to preserve and safely grow the capital for its beneficiaries. Thus, most self-owning entities are not engaging in risky business. Borrowing implies acquiring some kind of monetary leverage to accomplish something; this is more risky than just using the capital one has. Thus in general, the managers of self-owning entities should be risk averse and should not adopt practices that will jeopardize their purpose which could lead to bankruptcy. If society were to allow such self-owning entities to borrow money, then society would unwittingly cause at least some of these entities to get into negative net worth territory (because incompetent or inexperienced or imprudent managers used the freedom) and would have played a hand in subverting the purpose of these entities.

Thus, it is the responsibility of whoever creates such entities to adequately fund them so that they do not need to borrow.

Borrowing money is equivalent to creating a product (a standardized financial instrument called bond) and selling it and this product is a promise of giving some money to the owner of the product in the future. Self-owning entities, by their very nature and purpose, are not in this kind of business.

Thus, self-owning entities cannot borrow money.

Considering that the self-owning entities cannot borrow, the liability of paying back borrowed money with interest burden would definitely not be a cause for the net worth of such entities getting below zero and causing their bankruptcy.

Just like citizens and organizations, self-owning entities may find themselves owning money with which they have nothing better to do than lending. For the same reasons that we allow citizens and organizations to lend to organizations, we should allow self-owning entities to lend to organizations.

Thus, self-owning entities can lend to organizations.