Solution page 4.1:
Losses in the Producer Credit System
In the current bank credit system, when businesses operating on bank credit take huge losses and fail, this can affect the bank that was financing them, all those who have money deposited at that bank, other banks, and even the world banking system itself. In the current system, almost all of those who would be adversely affected, had nothing to do with the failing business. They become innocent victims of circumstances beyond their control.
To prevent catastrophic losses to individuals and businesses, the banks have to backstop their bank credit with deposit insurance that ultimately comes from the fees customers pay. At the next level of emergency, the taxpayer goes on the hook for bailouts, which are simply added to the ever mounting public debt. The next level is the bail-in, in which the banks just declare they don't owe their depositors as much as the depositors put in.
In the Producer Credit System, if the Issuer goes bust, their Producer Credit will also. However, only those that have voluntarily accepted that Producer Credit will lose out. The loss ends there.
Imagine that a Producer Credit devalued to nothing over a period of a month. If it were designated to be the first spent, a “hot potato” (another feature that can be programmed in), it could change hands rapidly with each transactor experiencing only a small portion of the total loss - the difference between the value when accepted and the value when spent. The losses would be widely and possibly imperceptibly absorbed by large numbers of people, all of whom made the voluntary choice to accept that Producer Credit. This is an inherently stabilizing way of neutralizing inevitable losses.
Philosophically, losses to Producer Credit holders can be justified as a positive feature of the system.
People need and want things. Other people make the effort to fulfill those needs and wants and take the risk that their products will not be accepted due to quality, price, a superior competitive product, a change in taste or situation, unanticipated technological obsolescence or failed advertising.
Under the current system, our morality seems to assert that by taking the risk of such losses, successful businesses are entitled to all the profit they can make. And, if they make profits, they can spend these profits as they please without any obligations to anyone.
In the Producer Credit system the Issuer’s profits must be spent so that the Issuer’s customers can earn and spend them again. This is a symbiotic relationship that must be maintained for the business to work. Therefore, it can be argued that those who wanted the products the Issuer endeavored to supply are the other half of that relationship and should share in the risk as well as the benefits just as equity shareholders do. The ultimate customers, the public, do this by accepting and holding the Issuer’s Producer Credits, ie. equity in products, and sharing in any benefits or losses that may result.
Naturally, the customers holding Producer Credits want assurance that the system cannot be easily gamed to their disadvantage.