The nation’s $3.7 trillion municipal-bond market unwinding can significantly impact the timing and severity of a Robert Wiedemer type Aftershock economy. For details about what an Aftershock may be please read – https://economics501.wordpress.com/2011/11/25/aftershock-economy-book-review/
Restructuring due bonds with new ones on different terms may exacerbate the municipal debt recovery. The link below details how Detroit has rattled municipal bond investors with exactly such a policy addressing city water and sewer debt:
This battle pits Detroit’s emergency manager, Kevyn Orr, against bond fund companies, insurers and individuals that hold more than $5 billion of Detroit water and sewer bonds, over a plan to restructure the debt.
Mr. Orr wants bondholders to sign off on a plan to tear up some outstanding bonds and replace them with new ones that could have different terms. Tearing up the bonds could set a dangerous precedent that may shock buyers of supposedly safe municipal debt and impair financing for other U.S. states and cities.
Detroit’s bankruptcy already has rippled through Michigan’s muni-bond market, potentially saddling taxpayers far from the Motor City with more expensive debt. Last week, Genesee County, Mich., pulled a $53 million bond sale after investors wanted higher interest rates. And Battle Creek, Mich., said it would postpone a $16 million deal until the markets calmed.
Higher interest rates were an expected immediate scenario following Detroit’s bankruptcy. However, rash actions addressing muni-debt will cause even higher rates, weaken more cities and states and thus the national economy, increasing the odds of an Aftershock economy by end of this year. Since Detroit filed the biggest municipal bankruptcy ever on July 18, the S&P Municipal Bond Index—a proxy for the broader municipal-bond market—has dropped 0.97%, as of Aug. 7. The index tracks about $1.4 trillion worth of bonds, so the nearly 1% in negative return represents lost value of about $13.8 billion.
The true lost value is likely larger, given that the index tracks only a portion of the $3.7 trillion muni market.
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Longer term, the US must also get a grip on how older age demographics threaten public finance. In 2025, there will be an estimated 106 million Americans 55 and over, nearly a third of the total population, up from a fifth in 2000.
Thus, a major question is: How should we serve the elderly and then everyone else?
At the national level, Social Security and Medicare are crowding out other programs. Similar conflicts affecting states and localities are less recognized. Spending for the aged is rising rapidly, while revenue growth is slowing.
Swelling pensions: They’re increasing as baby boomers retire and are vastly underfunded. In 2012, promised benefits for state and local pensions exceeded fund assets by $1 trillion, according to Boston College’s Center for Retirement Research.
This estimate may be too low, because it assumes an average 8% annual return on pension assets. A 6% return, closer to recent experience, would double the unfunded liability to $2 trillion.
As the population ages, this burden will grow. Their medical care is simply more expensive. In 2011, spending for Medicaid’s average-age recipient totaled $15,931, more than five times the average cost for children.
One can argue that we have a battle of schools versus nursing homes. We need a better balance between workers’ legitimate desire for a comfortable retirement and society’s larger interests. Instead, our current system favors the past over the future. It is first necessary to acknowledge this bias; then we should discuss this openly to determine the best compromises and most fair solution.
*** Any solution, however, must address the great probability of an inevitable Aftershock economy. Failure to consider this now may catapult us into a severe Aftershock economy. At that point then our alternatives will be limited; foreign creditors may then be dictating our finances and budgets.
*** The key point is that we still have an opportunity to address serious debt problems at local, state, and national levels. In the latter our $17 Trillion Federal Government debt has been growing 5% to 10% a year for few years while our GDP growth barely reached 2%. This is unsustainable and can lead to domestic and foreign creditors balking at financing our debt. This could lead to a severe Aftershock economy.
In conclusion …
What to do? At all levels of Government – local, state, Federal – demand that our elected politicians reduce the size of our public sector to allow our private economic sector to increase. It is only the private sector that creates jobs that self sustain them and create ancillary jobs, new products, services, and even more new jobs and thus revenues to state, local, and Federal treasuries. Start by fairly restructuring municipal debt for creditors and unions. At the Federal level, allow more natural gas and oil drilling and fracking on public land. Energy improves economic productivity which is the prime factor in long term sustained economic growth. This will increase jobs, Treasury revenues, and decrease our foreign trade deficit this support our $.