Resource Credits: a Sustainable Bankruptcy Solution

July 5, 2020

Last week, we were invited to join the SIS hackathon, wherein the organizers were looking for a tech solution for B2B cash management. The Covid pandemic has wreaked havoc on cash and many customers are unable to pay their suppliers.

Fortunately, our proposed economic system, called Social Resource Allocation  or SORA, derived from Adam Smith, is purpose-built to predict and solve such problems. In fact, we have been warning of a huge global economic crisis as early as 2015. The current problem came as predicted because of the false idea that money is wealth*. This idea makes people focus on the tool of trade and not in the actual goods and services that money circulates. This wrong focus then manifests as speculation which has caused every major crisis from the 1929 Great Crash to the 1997 Asian Crisis and 2008 Financial Crisis.

Mr. Locke distinguished money from other movable goods. He says that all other movable goods are consumable in nature, that the wealth in them are not dependable. On the contrary, money is a steady friend which is not wasted and consumed. He thinks the great object of its political economy should be to multiply that money. (Simple Wealth of Nations, Book 4, Chapter 1)

We use our Hume-approach  to chase down the origin of this problem into the metaphysical fact that money is a particle while value is a wave, creating a wave-particle duality which manifests as a money-value duality or a duality between objective exchangable value and subjective useful value.

Domino Effect

The Covid pandemic caused travel and tourism to stop, which then created a domino-effect, affecting the industries that rely on travel such as transportation, events, food service, and hospitality, which then affected the retail and other service industries. These forced many businesses to close permanently and liquidate their assets to pay back their debt. One of the most famous Covid bankruptcy was that of Virgin Airlines Australia, made insolvent by a massive $7b debt. It was later rescued by Bain Capital  after failing to ask for a bailout from the Australian government. Bain will likely cut jobs, lower wages, and raise prices in order to recover its risky investment -- to the detriment of Australian citizens.

Clearly, the current solution is not a win-win: the company loses control and the people lose benefits. Is there any better solution to insolvency? Adam Smith asked the same question over 200 years ago:

It has been said that the Americans have no gold or silver money. Without gold and silver it is impossible to pay taxes. How can we draw from them what they do not have?

A More Sustainable Solution -- Resource Credits

The rescue of big companies might be feasible in the early stages of the pandemic, but not in later years when more bankruptcies emerge, especially for smaller companies. Additional business closures will strain capital which, at that point, can only choose to save the most viable companies. For those that cannot be bailed out by their governments or by private capital, we propose that those companies help each other through resource credits.

A resource credit is a right to a product or service of the issuer or beneficiary for a certain time period. It is a version of Adam Smith's solution to the lack of money:

It might be unnecessary to remit any part of the American revenue in gold and silver. It might be remitted in bills drawn on and accepted by particular merchants or companies in Great Britain to whom some of America's surplus produce was consigned. Those merchants and companies would pay into the treasury the American revenue in money after receiving the value of those goods. The whole business might frequently be transacted without exporting a single ounce of gold or silver from America.

A resource credit can be offered in lieu of a money payment when cash is short. The receiver, called a benefactor,  then can sell such a right for cash or other resource credits from other customers or suppliers. In this way, the economy can continue even without cash.

Benefactor-companies can use their own flight-credits themselves for their employees

Benefactor-companies can sell their flight credits for cash.

In our airline example, the airline can agree to pay its suppliers partly in money and partly in flights. Those suppliers will then offer to pay their own employees' wages partly in money and partly in flights, which the employees can either use themselves or liquidate in the future for cash. The flights will be given at cost to offset the inconvenience and time-value-of-money to the benefactors.

In theory, the resource credit system can reduce a firm's cash needs by nearly half

The monitoring and administration of resource credits will then be an industry in itself, which we shall call resource banking, which can be run by normal banks. Unlike regular banking where the bank merely accepts payments and checks balances, resource banking requires the resource banker to audit or estimate the productive capacity or inventory of the beneficiaries. This will most likely entail physical checks on the company's production facilities or offices, or viewing a person's actual work.

Although the operations might sound easy, the actual IT system for facilitating such credits is quite complicated. The resource credit data must be very detailed and specificy the time frame for the product or service. The value of a resource credit for a new 2020 automobile will decline greatly by 2025. The value of a resource credit for a direct labor can change rapidly as well. For example, the pay for a coder of some programming languages can decline quickly as the software industry changes. The IT system should therefore also account for the risk for such fluctuations, on top of the usual risk of non-fulfillment of credit redemption or transfer. Fortunately, the advances in data science and machine learning can help us make this complexity more manageable.

Timely Solutions

Now that the economic crises years  are here, the solutions laid out by Adam Smith are more important than ever. Without them, the economic advances since World War II will likely be undone gradually through inflation, conflict, and other man-made disasters. We only have to look at the the Roman Empire which seemed so refined and civilized during its pax romana , only to revert to barbarity 200 years afterwards.

We have systematized his solutions into our science called SORAnomics  and our online-offline system called SORA as our contribution to prevent such a future disaster, which our model predicts for a certain year, espcially since our advocacy is that prevention is better (and cheaper) than a cure. Please subscribe  to get updates about these solutions as we make them.