Posted Jul 24, 2014 by Martin Armstrong
Working for the government was always pitched as somehow being better guaranteed than risky corporations. However, he who makes the laws never goes to jail for breaking them – a plain fact of life. The problem with government pensions has been they promised whatever sounded nice, with zero accountability. The presumption that tax revenue was an endless pit is one of those fallacies that nobody ever investigates.
It was the city of Mainz where the Gutenberg printing press was invented. This created an economic boom and everyone wanted to be in Mainz. The politicians saw the boom and presumed the potential tax revenue was linear and would be endless – judging tomorrow by today’s trend. They began to borrow against what they anticipated would be there forever. As they needed interest to pay for borrowing and they became addicted to debt, they raised taxes. The taxes kept rising so they killed the economic boom and people began to leave. Mainz followed the typical path as we are doing today. They were no longer paying off debt, they entered the Ponzi scheme – issued new debt to pay off the old in a revolving bond auction. Taxes kept rising and people migrated. The printing press was no longer unique to Mainz. The rich left town taking their capital and entrepreneurship with them. When Mainz lost confidence of the bond buyers and could no longer sell new debt to pay for the old, the collapse unfolded. Mainz, like Detroit, defaulted. The creditors sacked the city and it was burned to the ground.
The same precise pattern unfolds every time – WITHOUT EXCEPTION. Why? Human nature never changes. Create career politicians and they will always seek to expand government for that is their power-base. I do not know who is more brain-dead be it the government workers who believed this pensions were endless, or the really insane insurance companies who insured any government debt. For now, the companies that insure Detroit bonds and stand to lose millions will have to pay out on insurance to bond-holders who will get less as government tried to pay its workers over the pension crisis that will not possibly work anyhow.
Syncora and Financial Guaranty Insurance company are now poised to challenge the city’s bankruptcy plan, after retirees endorsed pension cuts and qualified for a bailout led by the state, another group of taxpayers going to be screwed. The deal agreed upon by the Detroit pensioners gives them special treatment that’s unfair to other creditors in a court of law if law really mattered. In general retirees would get a 4.5 percent pension cut and lose annual inflation adjustments. Some also have to repay a portion of generous annuity earnings from the last decade – the minority oppressed by the majority of union retired pensioners. Retired police officers and firefighters would lose only a portion of their annual cost-of-living raise. The state of Michigan is chipping in $816 million in aid from the foundations and the Detroit Institute of Arts. Money from the so-called grand bargain would prevent the sale of city-owned art and avoid deeper pension reductions.
The legal problem comes from the fact that no other creditors qualify for the money. Judge Steven Rhodes presides over this issue and we will see how law really works – the self-interest of always the stronger as Thraymachus warned Socrates. In bankruptcy, ALL creditors are legally supposed to be treated fairly. This is obviously not the case here. We have the illegal diversion of highly valuable assets going to the very creditors who voted yes, and are part of the entire reason Detroit has collapsed. We will see how law survives or is Thrasymachus simply always correct.
Either the court distributes the assets fairly, or the court cannot legally confirm this plan under such discrimination against all other financial creditors. The point is that other creditors are getting zero recovery at the benefit and unfair advantage of Detroit’s pensioners. It is not a question of make the bankers pay. The bond holders are not bankers – they sold it to guess who – other pension funds.
The ramifications of what happens in Detroit will ripple through the entire debt structure nationally for if this will be the new game plan to follow, WHY SHOULD PEOPLE BUY any government debt whatsoever if not even bankruptcy laws apply? Insurers will stop insuring municipal debt without a rule of law and the entire debt structure will be undermined. This of course is a good thing, but the state workers who thought they were getting guaranteed pensions – sorry, its called fraud. As I said – he who makes the laws never goes to jail for breaking them.