Monday, February 27, 2017

When The Debt Bubble Bursts Nothng Else Matters, Part 2

Americans are worried and upset about a lot of issues these days. Politicians, lousy job opportunities, stagnant household income growth, who is allowed in what bathrooms, terrorism, high taxes, bad schools, crumbling infrastructure, etc. But all of these issues, while seemingly important, are trivial vs. the only big issue that matters: a Federal government (and many local and state governments) that is hurtling towards fiscal disaster and insolvency. 

If and when the fiscal integrity of the United States crumbles, and that possibility grows larger and larger every day, no one is going to care what the local bathroom policy is, why little Johnny is not getting educated, etc. because it will be a matter of basic survival in a collapsed economy that is the only concern.

Given that the Obama administration and legacy has almost doubled the national Federal debt from about $10 TRILLION to almost $20 TRILLION, this is the current Federal debt burden in the United States:

  • Debt per household - just under $159,000
  • Debt per every man, woman and child - abut $62,500
  • In other words to wipe out just the Federal government debt, every household, on average, would have to write a check for about $159,000. 
  • Every person, including kids and infants.would have to pony up about $62,500 to wipe out just the Federal government debt. 
  • A family of four would have to write a check for about a quarter of a million dollars.
Given that we have previously written on studies that show over 40% of Americans would have a hardship paying off an unexpected household expense of $400, it is obvious that American households and individuals cannot pay out $159,000 or $62,500 to help bail out the incredibly deep spending hole that Washington has dug.

Now, some liberal readers I know are thinking, tax the rich, let them pay off the debt. Let me give one example why that is such an ignorant thing to say. Bill Gates has a net worth of $86.4 billion as of February 24, 2017 according to Forbes. 

For this example, rather than just raise Mr. Gates taxes on his annual income, let’s confiscate everything he owns, liquidate his assets, and apply that $86.4 billion to the national debt. In this case, his entire fortune would pay off .4% of the current national debt. Not 4%, only .4%. Since we are not going to confiscate his entire fortune, just having a higher tax on his income, in reality not even this paltry .4% would ever be attained.

Let’s take this theoretical example one step further. Since the government spends about $10.4 billion a DAY, Bill Gates entire fortune would operate the Federal government for a little over eight days, just over a week, never mind paying off a $20 TRILLION national debt.

Yesterday, we took this national debt theme deeper into analysis with other terrifying economic and fiscal numbers. Today, let’s look at some other government debt situations at the local and state government levels since the debt burden on Americans is not just the $20 TRILLION at the Federal level. Politicians across the country have gotten us even more debt holes, holes that are already causing government financial crises and bankruptcies. 

Many of these local and state debt situations have already been discussed here but we will repeat them, along with new debt crises,  to show the more complete picture of how bad things are:

  • The city of Detroit has already declared bankruptcy because of the mismanagement of that city’s finances over the past several decades.
  • The debt and financial situation is so bad in Illinois and the political class there is so dysfunctional that the state government has been unable to payout the winnings to citizens who played the state lottery and were winners, causing them to file lawsuits to force the state to pay what they won. However, the state continues to sell lottery tickets even though it knows that it currently cannot pay the winners.
  • In fact, Illinois is in such overall bad financial shape that in 2011, the state government doubled both the personal and corporate income tax rates to try and fill in the debt hole they they themselves had dug. 
  • But that backfired when employers and businesses left the state to get away from the onerous tax increases which reduced the business tax base and which increased unemployment which reduced the personal income tax base.
  • And since then things there debt-wise have not gotten any better as state comptroller Leslie Munger told the Chicago Business publication and Illinois politicians earlier this month: “…the state increasingly is doing what a cash-strapped family would do: letting the bills pile up. We can’t go bankrupt and we can’t print money. Taxpayers are going to have to pay this bill.”
  • Which means that the state will have to again hit up taxpayers, personal and corporate, with even higher rates which will cause more businesses to leave the state and cause more unemployment, both of which will decrease the tax base and the debt death spiral is now fully underway.
  • In addition to Detroit, Stockton, California has already had to declare bankruptcy and go to court to get relief from their financial obligations.
  • Scranton, Pennsylvania is teetering on the brink of bankruptcy.
  • Richmond, California is likely the next California city to go belly up financially, having already cut city jobs, reduced street repairs, and closed libraries: ”Richmond has cut about 200 jobs — roughly 20 percent of its workforce — since 2008. Its credit rating is at junk status. And in November, voters rejected a tax increase that city leaders had hoped would help close a chronic budget deficit. I don’t think there’s any chance we can avoid it,” said former City Councilman Vinay PimplĂ©, referring to bankruptcy. 
  • One possible contributing factor to the mess in Richmond is that the politicians have been focusing on and touting efforts and accomplishments that have nothing to do with running a fiscally sound city, as illustrated by quotes from former Mayor and current Council member Gayle McLaughlin’s page on the city’s website: “Gayle’s focus on environmental justice led the city to move forward as a leader on many environmental initiatives….Thanks to her efforts advancing solar installation, Richmond was noted as leading the Bay Area for solar installed per capita…Richmond also received countless awards for its model green job training program…”, all of which means nothing if the city goes bankrupt.
  • I do not think that the citizens of Richmond really care much about McLaughlin’s prideful “green” achievements and priorities if their libraries are closed, their roads are falling apart, and the city is bankrupt.

Many states (e.g. Hawaii, New Jersey, California) are also in deep financial troubles as are other cities, (e.g. Chicago). The debt problem in this country is not just the $20 TRILLION national debt. It is the trillions more in debt that local and state politicians have caused. So as we said yesterday, other issues that you may think are important really do not matter because when the government debt bubbles across this country burst, those other issues will pale in comparison.

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