Every level of government is broke. Period! That fact you must accept in order to understand the dire condition of this country.
The options for any creditor are simple:
- Pay down the debt
- Borrow new debt to service the old
- Default on the debt
At some point, option 2 ceases because the creditor is deemed too risky for additional loans.
Governments have some other options in addition to the three above:
- Raise taxes
- Print money
The government can either take resources directly from you to pay for its obligations or it can take them from you surreptitiously via the theft we know as inflation.
Or government can default. A default on promises can be as simple as declaring that obligations will only be honored in part (social security has already been reduced in this fashion on a few occasions). Debt obligations might arbitrarily be only paid a portion of their face value. Inflation itself is a form of slow-motion default because lenders are paid back in dollars that are worth less.
Sometimes a government default is total. That is, they wipe out completely all obligations. This is a complete sovereign bankruptcy.
The video below is by David Wessel of the WSJ. He focuses on the state and local government. They have one fewer option than the Federal Government because they cannot print money. Wessel begins by believing that states and localities will avoid bankruptcy because of the onerous legal maze. Yet he ends rather weakly, admitting there is no other known alternative.
If you are holding municipal bonds, be careful. There is no reason to be optimistic although Wessel tried within the limits of creditability.
It is said that municipalities can declare bankruptcy, but states, being sovereign, cannot. Nonetheless, a state that has no hope of paying its debts and is not bankrupt will quickly only become more hopeless, so we will see new law or new ways around the law, even if that is done with the help of creditors.
We are beginning to see, in bankrupt municipalities, the miracle of the bankruptcy judge.We are wiped clean of generations of accumulated nonsense. Garet Garrett pointed to bankruptcy as the engine of American progress until the New Deal ended that. In an era when railroads were of vital importance, two-thirds were always in bankruptcy.Bankruptcyt did not slow business, or railroads; it replaced bad capital with good capital. No more. Government has a hand in every end, and an interest in keeping it that way.
It is no wonder Government fears bankruptcy. What America needs is not another traditional two-party election, but an electoral choice between a continuation of the same, and a bankruptcy judge–a Cincinnatus, for a term of two years. No Congress, no Supreme Court, no re-election. I will contribute twenty dollars to your candidacy.