Why Federal Deficits May Not Be the Ones That Matter Most to You

Yesterday we pointed out that lending money to national governments may not be the best use of one’s money.

Concerning national government debt, Detlev Schlechter said, “Wouldn’t touch it with a bargepole.” And who could blame him?

Just a couple of days ago, the debt of the U.S. government reached a symbolic level. This week we read in USA Today [emphasis ours]…

“The amount of money the federal government owes to its creditors, combined with IOUs to government retirement and other programs, now tops $15.23 trillion.

“That’s roughly equal to the value of all goods and services the U.S. economy produces in one year: $15.17 trillion as of September, the latest estimate. Private projections show the economy likely grew to about $15.3 trillion by December — a level the debt is likely to surpass this month.

“‘The 100% mark means that your entire debt is as big as everything you’re producing in your country,’ says Steve Bell of the Bipartisan Policy Center, which has proposed cutting nearly $6 trillion in red ink over 10 years. “‘Clearly, that can’t continue.'”

Now there are those who say that the U.S. doesn’t really owe that much money. The article continues…

Many economists, such as the Brookings Institution’s William Gale, say a better measure of the nation’s debt is how much the government owes creditors, not counting $4.7 trillion owed to future Social Security recipients and other government beneficiaries. By that measure, the debt is roughly a third less: $10.5 trillion, or nearly 70% the size of the economy.

Of course many economists also insist that the road to economic utopia is paved with money printing and war…so you have to take the opinions of these professionals with a handful or two of salt.

In this case they’re asking you not to consider the debt as all that high simply by ignoring some of the debt. That’s like a doctor not considering a morbidly obese patient not quite so morbidly obese by ignoring some of the fat.

We’ll continue counting all the fat if it’s okay Mr. Gale of the Brookings Institute. The fact is the U.S. government owes as much as its subjects can produce in a year. How would you feel if you owed as much as your pre-tax yearly income?

Or even better, how do you think your creditors would feel? And would you expect anyone to lend you more money at anything resembling a favorable rate of interest?

What’s more, nation state governments tend to spend their “income” — a polite term to describe the tax money they take from their subjects at gunpoint — on things that either do nothing to increase future income or entirely disrupt the productivity of their populations. We simply cannot look at lending these governments money as a good investment.

But it’s not just federal debt you may want to avoid. In the U.S., the states and their local municipalities are facing the same problems. They, too, are debtors who’ve made too many promises and written too many checks they won’t be able to cash.

Like overextended government everywhere, U.S. cities are having trouble making income match expenses. The case of Central Falls, Rhode Island, is the example that’s been making the news. The municipal bond market has been following the bankruptcy case closely for the last year since the tiny city of 19,000 souls may set the precedent for other struggling areas.

Today comes news that a federal bankruptcy court has allowed Central Falls not to pay its retired police and firemen as much as promised. This is so that the people who’d lent the city money in the first place can get paid in full.

Some precedent. Simply break the too-large promises made to one group to make good on the promises to another. Luckily for Central Falls, the pensioners are playing nice. According to the Financial Times:

“Rather than challenging the new law, a majority of retired police and firefighters in December accepted a deal that will cut their annual pay-outs by up to 55 per cent. However, the deal is contingent on the state setting aside at least $2m to reduce the annual pension reduction of any retiree to 25 per cent for five years to help ease the financial blow.”

You see, unlike the federal government, municipalities actually have to worry about deficits that increase to unpayable levels.

We’ve often pointed out that the federal government has a couple of benefits that state and local governments don’t. The federal government has a chummy central bank that will manipulate interest rates downward to make borrowing easier…and then buy up federal government debt — that is, lend it money — when no one else will.

States and municipalities have to worry about default and the resulting rises in interest rates for future borrowing. And they actually have to worry about not being able to afford basic services if there’s simply not enough money.

Those basic services are something that everyone living in a U.S. state or municipality (and that’s pretty much everyone in the U.S.) needs to worry about.

We’re not yet at the point where the general populace accepts that “basic services” like infrastructure, education and safety can be effectively, economically provided by the free market. So by and large local governments still have a monopoly on those things. And the people living in these jurisdictions rely almost exclusively on their state and local governments to provide these basic services.

So what happens when states and municipalities can’t find the money to pay for all these things?

Well, we’re nothing if not hopeful here in the Whiskey Bar. We see every retreat of the state toward bankruptcy as ultimately a good thing. It leaves room for the market to advance and show the world how private interests provide goods and services of increasing quality at lower costs.

In the case of the “basics” like roads, education, policing and fire protection, you need a good collapse to shake people from their rabid faith in the government’s ability to provide.

But there’s a lot of pain between here and there. The markets won’t just magically pick up the slack overnight.

In the meantime, trash could stop being picked up, police may not bother responding to “minor” crimes like burglary, and fires may not be put out before they cause massive amounts of damage.

And don’t think that desperately indebted states and municipalities will go down without swinging…and trying to find new ways to pick your pockets.

This is something we’ve been looking at for a while here at the Whiskey Bar. And it’s why we’ve been directing readers to this special report…

From Addison Wiggin’s Apogee Advisory:

“Can you imagine being the victim of a robbery… and knowing the police won’t be there to answer your 911 call?

“That’s the reality more and more Americans will be facing… because America as you know it is an illusion — built during an era of easy credit.

“Without that credit card, certain states are already trying every money-grabbing scheme they can dream of…

“According to U.S. News & World Report, ‘Over the last two years, 36 out of 50 states have raised taxes or fees.’ Aside from already collecting property, sales and income taxes, they’ve also put in place separate streetlight fees… fire hydrant fees… and new booze taxes. Nevada is even considering a new $5 surcharge on its legalized prostitution.

“A deadly combination — low tax revenue and massive pension and retirement promises — has forced certain states into a “lose-lose” situation. They’ll be the first to cut police… try desperate money grabs… and break promises.

“It’s a process that’s already under way. That’s why the first thing you need to do to prepare is to find someplace safe for your family to work and live.

“We’ve spent several months researching which states are best equipped to ride out the storm… and which you want to do everything to avoid.

“If you’re considering a retirement location, or if you have the flexibility to move your workplace and family out of harm’s way, we’ve assembled a list of five states — American Oases — where you’d be best situated.”

As long-suffering Whiskey Bar patrons know, your Whiskey Bar editor has been on the lookout for a while for a place to call home.

We are weary of the news of how the U.S. slouches into a dreary combination of economically declining paranoid police state and has-been empire. We thought seriously about setting up shop somewhere freer, cheaper, friendlier to business and less antagonist toward nuclear powers in the East…

But despite what the U.S. government does, America itself remains home.

We cannot ever forget, however, that America is also in for a rough time. if we’re going to stay, we want to do it someplace least prone to disruption.

There are the big things you can’t control and which will affect us all. We speak specifically of military actions overseas and central bank shenanigans…

But then there are the things that affect your everyday life. We speak specifically of the goings-on in the town you choose to call home…and how much you end up paying your local governments for your immediate quality of life.

We suspect that many of you Whiskey Shooters are in the same boat we find ourselves in. You either can’t or won’t run too far. The costs of expatriation may outweigh the benefits. It may simply not really be an option for you.

You simply may want to find a place to find a place in the country you know (and love despite its faults) where you can ride out the coming storm.

This doesn’t mean you shouldn’t internationalize your financial exposure. But while you shelter some of your labor’s fruits elsewhere, you yourself may want to remain here.

We certainly wouldn’t blame you. In fact, we mean to join you.

Just be sure you have the tools to pick the best possible place. Odds are very good that you won’t have to travel too far.


Gary Gibson

The Daily Reckoning