One of the great tragedies increasingly experienced by governments around the world occurs when political wishes impact economic realities. Without taking political sides, it is a fact that most people wish they had a high-paying job, great benefits, and low taxes. On the other hand, simply mandating that governments make this happen is the source of these tragedies on the local, state, and global level.
Puerto Rico Mismanaged Debt and Now Wants a Bailout
Puerto Rico serves as a case study: when governments are empowered to spend at will based on paper currency backed only by their “faith and credit,” the results are totally predictable, and inevitably negative. Governor Garcia Padilla of Puerto Rico has announced that their “debt is not payable” and is petitioning for Puerto Rico to be able to declare bankruptcy. Currently, there is a bill in the U.S. House of Representatives that would essentially cut down Puerto Rico’s $72 billion debt to half, as long as the commonwealth surrenders fiscal control to an independent review board. This would be, essentially, another bailout.
In Puerto Rico well-intended policies invoked a minimum wage in the 1970s that eliminated roughly 10 percent of the jobs on the island. Other jobs were lost when U.S. military bases closed, while favorable tax policies for companies were eliminated and taxes increased for individuals. The government’s response was to try and remove the pain by issuing more than $100 billion in debt. The government hired more people, issued more entitlements, and incurred more debt to cover the costs. 1
Puerto Rico Is Not the First and Won’t Be the Last
For those concerned about long-term economic conditions, the probability of a Puerto Rico bailout raises the same issues voiced in the Greek crisis. They are concerned that such actions encourage more fiscal irresponsibility, reaching a point where there is no global refuge. The world has recently dealt with the drama of Greece facing ultimate bankruptcy, and its failure to take steps to deal with its growing financial crisis.
Similar situations continue to lurk in numerous nations, including Portugal, Ireland, Italy and Spain. 2 Detroit in the United Sates has actually filed bankruptcy and several others are exploring their options. A number of state governments face nearly insurmountable obligations, including the most seriously challenged states of New York, Connecticut, Massachusetts, New Jersey, and Illinois.
All of these governments, large and small, share a series of common problems, mostly related to irresponsible and excessive spending. The cycle is common. They:
- Make commitments during times of growth or under pressure from certain groups, such as unions.
- Fail to fund those obligations when made, and print money or issue debt when they start accruing.
- Refuse to take preventative steps to head off the ultimate crisis.
- Default on the debts and leave investors and citizens holding the bag.
Why Certain Assets Always Remain a Refuge
The great concern isn’t specifically over Greece, Detroit, or Puerto Rico. The issue is the growing, widespread reality of such situations and the fact that the world’s economic systems fail to acknowledge the growing danger or change the way things are being done.
Those who fear the ultimate consequences of such economic woes know what will happen to the value of paper currency and the assets they back. Individuals and traders increasingly see a haven in buying gold and silver as a way to protect the purchasing power of their portfolio.
Additional Sources:
1 – http://www.heritage.org/research/reports/2015/07/puerto-rico-needs-economic-freedom-not-bailouts
2 – http://www.moneyandmarkets.com/19-countries-in-fiscal-trouble-10-in-good-shape-49960