End of a City

The Scenario

The City of Detroit in Michigan has declared Chapter 9 bankruptcy on 18 July this year (Chapter 9, Title 11 of the United States Code is a chapter of the United States Bankruptcy Code, available exclusively to municipalities that assists them in the restructuring of debts). America’s 18^th largest city- Motor City, Mocity has gone flat broke. It is now the largest American city to ever file for bankruptcy protection.

Gripped by $17 billion of piled up debt, the city can no longer sustain itself. Detroit’s population has declined from a peak of 1.8 million in 1950, and recently the New York Times called the city as “home to 700,000 people, as well as to tens of thousands of abandoned buildings, vacant lots and unlit streets.”

 

The Crisis

“Can we help Detroit? We don’t know.”

--- U.S. Vice President Joe Biden

Apart from the piling debt burden, the city owes $9 billion in unfunded retiree benefits.

The city’s lawyer is seeking to have the judge invalidate its pension contracts- so they can deny the pensions they promised to tens of thousands of workers.

As part of the bankruptcy petition, the city may be legally permitted to default on the promised pensions from those unlucky retirees in a futile attempt to “revive” the city. If those retires are lucky, they may get ten cents on the dollar. Even if the judge says it’s illegal for the city to confiscate the promised pensions- who has the better clouts?

For 60 years, Detroit has survived by the skin in the midst of serious mismanagement while spending non-existing money (i.e. paper borrowing on trust) in all the wrong places.

Now it can bear no more. Bailing out Chrysler and GM with taxpayer money (during 2008 recessionary bailouts) was apparently a politically attractive move. Bailing out the city is a different story. Which was echoed by the U.S. Vice President’s statement.

More Detroits to come

The problem is not quite unique to Detroit.  Listen to what is said by Michigan State Economist Eric Scorsone:

“ …Detroit is not unique. It’s the same in Chicago and New York and San Diego and San Jose. It’s a lot major cities in this country. They may not be as extreme as Detroit, but a lot of them face  the same problems.”

The credit based economy, with unlimited paper and debt creation power, is wobbling on its own hills. The same scenario is emerging everywhere. From Detroit to Greece.

Chaos at the Glacial Pace

The problems are fomenting slowly. Like a glacier which is moving slowly without making any sign of great fall, problems are piling. Even the Pope- is saying the path we’re on isn’t sustainable. His visit to Brazil came at a time when thousands of people were rioting because of the government’s failure to provide basic necessities while spending billions to host the World Cup. Taking the side of the protesters, Pope Francis notes that globally “we risk having a generation that hasn’t held a job. Personal dignity comes from working, from earning your bread.”

This may look extraneous that the city government of Detroit is seeking to deny its pension obligations, but is it really? If the trust is broken from the top level, what might happen next? The recent drama that is going on in Washington D.C. over possible U.S. debt default and government shut-down, who knows what happens.