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Detroit: A Canary in the Coalmine….

Karl Denninger is very good at laying things out in way that most can understand, even if they don’t truly understand economics. Mathematics and those nasty little things called  exponents  have a way of creating rather huge problems if not kept in check and we’re starting to see it across the board both as a nation and on a global scale. Ignore it if you choose but it doesn’t change the eventual outcome.

Detroit: Nice Try Lefties

Detroit’s labor unions managed to pull a so-called “Judge” (state) who essentially issued a ruling that the State Government had “dissed” The President in running into Federal Bankruptcy Court while she was intending to issue a ruling on one of a host of lawsuits brought by said unions.

The problem?  Judges are not supposed to care who one “disses” — they’re supposed to rule on facts.

But the left never bothers with facts, just as it doesn’t bother with arithmetic.  This works great (guns to the head are great motivators) right up until the checking account is empty and the overdraft line declined.

Then you have a problem — one that the left usually tries to solve by attempting to find someone else with an open credit line (such as the Federal Government.)

It didn’t work this time.

Nor should it have.  Federal Bankruptcy law is not a “convenience.”  It’s actually written in the Constitution as one of the explicitly delegated Federal Powers (Article 1, Section 8, if you failed your US Government class.)

Bankruptcy was left at the Federal level for the explicit purpose of preventing what the unions — and hacks sometimes found on State benches — tried to do here.

It puts the jurisdiction and determination as to whether someone is in fact bankrupt and what to do when they are in exactly one place.  It takes the essential function of determining what assets and liabilities are and vests it in one place, cutting off all the BS and games of running to this place or that in attempting to gain an advantage.

In reality the unions and their pension plans forced this filing by refusing to negotiate against the realities of their own actions and demands for that which was impossible to provide.  This is entirely understandable given that they would have had to admit they were complicit in order to fix the problem and that was unacceptable to them.  So instead they tried to sue to get what was “promised” but which they knew damn well couldn’t have been provided at the time it was negotiated!

I started writing on this pretty-much when I started writing the Ticker — my articles on unions, pensions and related matters date to 2008.  I’ve talked about with various people since long before that — the trend was obvious in the 1980s and by the time I was running MCSNet in the 1990s the outcome was not in doubt — only the timing was open to debate.

The essence of a ponzi scheme is that it always looks great when you begin, and in fact it looks ok right up until you stop adding people at a rate sufficient to pay those who are demanding their money back out.  These schemes go broke slowly, then all at once as the rush for the door occurs when recognition happens that there is no money.

The numbers being thrown around for losses across-the-board in these funds — 50%, 70%, 80% — belie the outright lies that have been told to people in all areas related to these pensions — and bondholders.  Nobody loses 50%, 60% or 80% overnight — it happens because the truth has been constructively or intentionally concealed for months, years or decades.

“General Obligation” debt is an opportunity for fraud in the municipal and state space.  Remember that most State Constitutions forbid deficit spending.  That is, the use of debt to fund general operations of the government is per-se unlawful.

So who’s going to jail for this serial abuse — both in not funding pensions at an actuarially-sound level (which would have exposed the problem and forced it to be cut off decades ago) and using general obligation funds to evade a Constitutional prohibition on deficit spending?


That’s the problem in a nutshell.

This crap infests governments all over the nation.  Whether it is “borrowing” funds from one department to fund another (and then accounting for it as a “loan” — that is, deficit spending later on) or floating GO bonds that are allegedly only supposed to fund durable improvements such as roads but then shuffling the money around so the funds effectively wind up funding daily operations the fact of the matter is that this sort of hinky accounting is part and parcel of State, County and Municipal finance.

When that’s not enough then these government organs turn to even-more exotic crap such as interest rate swaps that are open-ended instruments of financial destruction and thus are effectively deficit spending in disguise as well.

Yet not only does nobody go to jail for this crap nobody is removed from office for doing it either.  Amazing, really.  Or is it?

Well, not really.

It’s the same sort of thing that infests politicians when they try to force above-market wages.

That went down in Chicago but in Washington DC it’s “on” again.  Go ahead and do it politicians.  It’s much “easier” than addressing why the cost of living is rising faster than wages are.

That’s simple — politicians are increasing the denominator in circulating money and credit.  They are doing it with deficit spending.  This is the same thing economically as a tax increase but it’s temporarily hidden from the public, which is why it’s one of the favored ways to lie, cheat and steal.

Then when the cost of living rises but wages do not the lawmakers try for force wages upward.

But even if they do pass such a law they can’t force people to pay above the market value of a given hour of work.  If the value is “$X” and the cost of providing that good or service including the imputed tax costs which includes the monetary dilution is greater than “$X” that job disappears.

The only actual solution to this problem is stop doing that.

But that means that the government agencies and organs must admit what they’ve done.

It means they must stop doing it.

It means they must cut off the ability of banksters to do the same thing by inflating the supply of money and credit, skimming off the “first cut” and leaving the scraps to the rest of people — scraps that are insufficient to balance the increase in the circulating money and credit and thus the inevitable destruction of purchasing power.

It means removing those distortions and allowing prices to contract and the economy to re-balance so that supply and demand come into balance — even though in the short term this will be very disruptive.

And it means that those who have extracted “promises” based on that lie must face the beneficiaries of those promises and tell them the truth: You’re not going to get what you were promised, you can’t because there’s no money, and here we stand before you hoping your sentence upon us will not be too harsh (a decent burial would be nice, in other words.)

And finally, if this path is not taken then the inevitable outcome is the collapse of the entities involved, whether they be businesses, cities, states or even nations.Jul 31, 2013 @ 19:16


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