Bankrupt Detroit's Warning Message

Is it just the city of Detroit that is going bankrupt? Or is this a sickness infecting the entire Western way of life?

Never in the United States’ history has there been a municipal bankruptcy on a similar scale to Detroit’s at $18 billion worth of debt. But this is not some side-effect or after-shock of the 2008 housing and debt crises. Detroit’s troubles extend back much farther, as evidenced by a dwindling population from a peak of 1.85 million in the 1950s to just 700,000 today.

And it is not alone. As Alan Mallach, a senior fellow at the Brookings Institution, a public-policy research organization in Washington, warned to Bloomberg:

“Every other industrial city has problems that could send them down the same path [as Detroit’s]. None of the other cities are as far along, but there are dozens, if not hundreds of cities that have similar issues.”

Western societies are facing the monster of their own creation, decades in the rearing. This monster has been fed a steady diet of debt and has been raised without fiscal discipline by absentee parents and administrative guardians who cared more about themselves than of what they were leaving behind.

Welcome to the new normal: bankruptcy. Is there any way you can protect yourself from the increasing risk of corporate and municipal insolvency and collapse?

Decades in the Making

In Detroit’s case, the city had been in decline for decades going back to the 1960s. CNNMoney cites “repeated political and financial mismanagement, inappropriate financial engineering, and institutional failures”, which worsened not just the city’s financial position, but also eroded the quality of services, education, and living conditions in general.

Then came the city’s auto industry’s inability to compete with rising auto giants from Asia and Europe, resulting in job losses. This started a vicious circle that spiralled out of control, as job loss led to emigration, which lowered tax revenue, which worsened public services, driving more people away, and so on.

What did Detroit do to remedy the problem? It just kept borrowing. But it wasn’t using that borrowed money to plan for the future. It was simply trying to maintain its antiquated way of doing business. It remained industrial and didn’t evolve.

Beginning with the 1980s, there was a massive shift in America toward technology. With the explosive growth in computer technology in the 80s and in the Internet space in the 90s, jobs were modernizing. But Detroit was not.

With consumer demand shifting toward tech-products, youth were drawn to computer programming, not auto assembly. As youth all across America trekked their way to Seattle, San Francisco, and California’s Silicon Valley, Detroit was not able to convince its youth or young professionals to stay, thereby losing future citizens and future tax revenue.

To make matters worse, all throughout America, what little demand for manufacturing had remained was being outsourced to other countries that offered cheap labour and lower production costs.

These quick one-two punches delivered by the shift from manufactured products to tech products plus the outsourcing of jobs to cheaper markets meant that industrial centers in American were on the decline, and so were the cities whose only business was industrial manufacturing.

Detroit did not evolve with the times. And as the fossil record tells us, any entity that does not evolve when its environment changes gets left behind.

All this happened before the 2008 financial crisis. By the time Detroit’s auto industry fell to its knees in 2009, Detroit had already been knocked out while still standing. The financial crisis simply tipped the beaten-up boxer over.

As property values plummeted, so did property tax revenues. With the auto sector on life-support, Detroit’s financial problems finally became terminal.

Learning from Detroit

The primary contributor to Detroit’s collapse was ill-preparation. It was ill-prepared for a changing world in which consumer demands were evolving. And it was ill-prepared for the shift in job skills needed to satisfy that changing demand.

The out-sourcing of jobs was all the rage during the 80s, 90s and early 2000s. But the results of all those lost American jobs are now enraging the citizens of Detroit and other cities in a similar fate.

City planning involves more than just figuring out where to put a new road or new shopping mall. It involves keeping your finger on the pulse of consumer demand and future needs of labour. A city must then attract those companies that are the wave of the future and ensure its schools provide the programs needed to produce the workers these new companies need.

It all centers on jobs. Youth go where the jobs are and start their families there.

Protecting Ourselves from Municipal Bankruptcy

If you are worried your town might go the way of Detroit, you may wish to pass on those municipal bonds. Sure, they offer tax free interest – and at a relatively higher rate. But there is a reason why those rates are so high.

Have a good look around town. Are homes being built up or boarded up? Are people moving in or moving out? Attend town hall meetings. Pay attention to the balance sheet. Are tax revenues greater or less than the town’s debt servicing?

Above all things, pay attention to jobs. What is the town’s main labor market? Are its workers in a thriving industry or a failing one? Are new graduates staying or leaving? If a city cannot keep its youth, it loses its future families and its future taxpayers – not to mention the future payments on its debts.

Rather than let your savings ride on troubled municipalities, you might wish to invest in companies themselves. Just remember that companies can go bankrupt too. Perhaps an ETF tied to a certain sector or index might be a more protected way to go.

Bankruptcy – the New Trend

We owe it to ourselves and our families to keep a watchful eye not just on our own finances but also on those of the town in which we live. We must then be resolved to vote incompetence out.

This is becoming increasingly more necessary given the rise of a new trend: bankruptcy has become an acceptable means of clearing away debts and obligations.

Let’s take just one recent example: Hostess – the makers of America’s pride in desserts, the Twinkie. A few months ago, Americans everywhere were astonished to hear that an icon of American treats, the Twinkie, would be gone forever. The reason? Poor sales. The explanation was that people’s eating habits have changed, as they opt for more wholesome foods over sugar-filled desserts.

But why, then, is the Twinkie back? Have Americans’ eating habits changed back to sugar-filled desserts in just the last 3 or 4 months? The Twinkie is back because Hostess never intended to get rid of it in the first place. It was an all too common tactic to break unions, lower wages, cancel pensions, and clear away liabilities off their books.

Bankruptcy has become an acceptable means of cleaning house. Corporate America has been doing it for years and with greater frequency with each passing year. Now municipalities are going to start doing it. It’s just too easy for them to resist.

For decades since the Second World War, Western countries have been borrowing to the hilt. Living with debt has become not just acceptable, but is now the only way to move ahead. A new sports arena? Sure, sell some more bonds. Double-over-time for working on Saturdays? Sure, just borrow more money. Can’t afford the interest payments? There’s always bankruptcy.

The only way we will ever eliminate what used to be a tendency, which has now become a habit, and will soon become a repetitive obsessive-compulsive disorder not just across America but around the world, is to re-evaluate the way we are living. There is too much focus on today and not enough on tomorrow.

Protest groups would always warn us about selling our children and grandchildren into slavery as we pass our debts onto their shoulders. While those protest groups had the right idea, they didn’t have the right time-horizon. Our debt burdens are not waiting for future generations to claim as slaves. They are falling as yokes upon our own shoulders.

And so it should be. Now that it affects us in our own time, let’s see if this just doesn’t motivate us enough to take a good look at ourselves in the mirror and recognize the madness of our ways.

Joseph Cafariello

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