What happens when government officials spend with virtually no restraint and they don't have a printing press that can crank out more money?
Hartford, Connecticut.
Last week, both S&P Global Ratings and Moody’s Investors Service downgraded Hartford's credit rating deeper into junk status. According to a Reuters report, the downgrade puts Hartford near the bottom of the credit scale. This means the agencies view the city as essentially in default with little prospect for a full bondholder recovery.
According to S&P analysts, "A default, a distressed exchange, or redemption appears to be a virtual certainty.”Hartford’s budgetary performance has been weak for several years, and the management environment remains constrained due to a structurally imbalanced budget with no credible corrective plan.”Moody's said there is “increased likelihood of default as early as November” adding that its rating reflects its expectation that bondholders will recover just 65 to 80% of their principal investments.
In other words, if you invested in Hartford's future, you're probably about to get hosed.
How did this happen? Hartford's politicians have run up around $530 million in outstanding debt. Mainstream outlets such as the New York Times blame a lack of tax revenue. But this seems a little dubious considering Hartford sits in one of the highest taxed states in the US. The fact of the matter is, the city, and more broadly the state, has a spending problem. Democrats have run this city since the 1970s. Like most Democrats (and Republicans for that matter), they gave unions and other special interests everything they wanted. City workers got big salaries and fat pensions. Now the time has come to pay the piper.
Many struggling municipalities turn to their states for help. In Connecticut, that's like the beggar turning to the pauper for a handout. The state is also functionally bankrupt struggling under massive pension debt. It's running a $3.5 billion deficit. Its pension liabilities stand at around $68 billion. ranking it among the top-five underfunded pensions in the country. As Forbes put it earlier this summer:
With state pension obligations already consuming half of their state budget, the state is beyond a weak position to bail out any municipality.”In 2015, Connecticut Gov. Dan Malloy signed a budget that included $1.1 billion in tax hikes. More than $700 million of the new tax burden fell on businesses and the middle class.
It didn’t help.
A report by the Connecticut News Project put it starkly.
Simply, the bill is coming due in ever-increasing amounts for the 80-year failure of one of the richest states in the nation to adequately save for retirement benefits promised to teachers and state employees."In simplest terms, Hartford and the state of Connecticut are suffering the consequences of political malfeasance.
It's easy to look at the Hartfords of the world and write them off as a special cases - glaring examples of bad government. But in truth, Hartford is just a microcosm of America. It's business as usual. The fact is, the US federal government is actually in much worse fiscal shape than this functionally bankrupt city. The only difference is D.C. has a printing press and a central bank. That means it has a longer road along which it can kick the can. But like even the longest road, the pavement will eventually end.
The problem with governments is they simply can't stop spending money, whether they have it or not. When Pres. Trump signed a bill raising the debt ceiling limit for the next three months, it instantly added approximately $318 billion to the national debt, raising it to $20.16 trillion. And Trump wants to do away with the debt ceiling altogether. Inflation-adjusted tax revenue has risen slightly since the Second World War, but the spending level has soared through the roof.
This is not just an American phenomenon. Governments all over the world have piled up debt. Earlier this summer, US Global Investors CEO Frank Holmes called global debt “the mother of all bubbles.
And like every bubble - at some point it's going to burst - in Hartford, in Connecticut, in Washington D.C., and all over the world.
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