The once mighty city of Detroit filed for bankruptcy protection the other day, leaving creditors and bondholders holding the bag for years of financial mismanagement. Not to mention all the retired city workers wondering what is going to happen to their pensions. Does it matter?
Not to sound harsh, but no one should have been surprised. Detroit’s population has been in decline for years. The auto industry has moved much of their operations to places outside the Detroit city limits. These two things alone have had a tremendous impact on tax revenue. As revenues have dropped, services have suffered making Detroit a less desirable place to live and do business. Only 40% of Detroit’s street lights were operational! Because of a reduced police force Detroit has one of the highest murder rates in the U.S. This only served to exacerbate the exodus of people and industry from the city, which again reduces tax revenues. Detroit has been in a downward spiral for decades.
The economic impact to the nation will be insignificant. Sure some creditors will take losses as will bondholders. Retiree’s may have a reduction in pension benefits and current city employees may be laid off or have to accept reduced salaries in order to maintain their jobs, but the city of Detroit will be out from under their obligations and given a fresh start. The human impact will be much greater than the economic impact.
Where Detroit really matters is it serves as yet another wakeup call as to what can happen to our country if we don’t start living within our means. As a country, we are continuing to increase our obligations (Social Security, Medicare, Obamacare, food stamps, military and foreign aid, infrastructure, etc.), without thought to the revenue side of the equation. While there is thought to that side, no one wants to raise taxes to pay for any of this, so we choose to borrow money to pay for these things. Which serves to increase another obligation, interest on the debt and the debt itself. As with Detroit, sooner or later, it will all start to unravel. We’ve already seen it in a small form. The sequestration (across the board spending cuts) that began earlier this year started us down that path. We saw air travel clog up and slow down because air traffic controllers were required to take mandatory days off so fewer were working. We didn’t like it, so we cried out and money was found somewhere (likely borrowed) to bring the traffic controllers back up to full speed. Non-essential military personnel were required to take mandatory unpaid days off. The loss of services has been small so far, but if we proceed down this path, and as our obligations grow ever larger, service cut backs will become more noticeable. As our services and infrastructure deteriorate, our country becomes a less desirable place to live and do business and the downward spiral gets worse.
With the improving economy, the Congressional Budget Office is predicting smaller deficits for the next few years and so the budget deficit has been moved out of the political spotlight. But our total debt is still $17 trillion!!! Detroit matters, but only if we open our eyes and learn the hard lesson of why Detroit failed and make changes to our federal spending now!
Mike Berry is a Registered Representative offering securities through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Legacy Wealth Management, LLC and Cambridge are not affiliated. Cambridge does not offer tax advice.
Copyright ©2013 Mike Berry. All Rights reserved. Commercial copying, duplication or reproduction is prohibited.
