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Puerto Rico files for biggest ever U.S. local government bankruptcy

reuters.com

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Re: Puerto Rico files for biggest ever U.S. local government bankruptcy

#181

Post by grandalf »

When issues of local government financial problems come up, I think it's important to remember that local governments are typically not able to undertake deficit spending the way the Federal government is.

If the US Federal government were prevented from running a budget deficit, we'd likely see a lot more solvency issues and financial failures of many sub-organizations within government due to bad budgeting. It would also be a lot harder for our leaders to start wars or get away with sloppy cost estimates of their grandiose ideas.

My argument is not that government should be small, simply that its spending should reflect its income and the results of its spending should be easily correlated with their cost.

Since the Federal government takes the lion's share of income taxes, local governments are constrained in their ability to generate income. Yet for most people, local governments provide the vast majority of the useful government services they enjoy.

So while it may seem that the Federal government is comparatively stable and responsible, the reality is that it's simply far less accountable to anyone and is able to use that lack of accountability to launder its reputation. States (or local governments) do not have the same luxury.

Re: Puerto Rico files for biggest ever U.S. local government bankruptcy

#182

Post by nwatson »

vkou wrote: post #162
lf275 wrote: post #123

Earlier quoted context omitted.

It's not an ethical failure because most of the participants understand that it is high risk/reward. That is why most start-up firms offer equity to their employees, and it is almost impossible for a new startup to borrow debt from banks (unless its personally guaranteed, or extremely expensive) before it has gained traction with its business model. On the other hand, governments are perceived to be reliable borrower…

> this could aggravate the financial distress of many high indebted public entities that are already struggling to pay the bills. Governments don't make payments at adjustable-interest rates. If sovereign borrowing rates rise, because the financial markets decide that sovereigns have a higher rate of default then they thought before, this doesn't affect outstanding debt - only the ability to get more.

Governments can borrow in currency not their own. This becomes not only debt at adjustable rates, but debt at "adjustable principal" as well. Risky.

Re: Puerto Rico files for biggest ever U.S. local government bankruptcy

#183

Post by zeroer »

kchoudhu wrote: post #76
Animats wrote: post #25

Earlier quoted context omitted.

There's a statehood faction, an independence faction, and a big "don't upset the gravy train" faction that likes the status quo. If Puerto Rico became a state, US Federal personal income taxes would be imposed. If Puerto Rico became an independent country, immigration to the US would be stopped. There have been referendums on this. The next one is June 11, 2017.

I know a very wealthy hedge fund manager who just moved to PR in order to minimize (read: eliminate) his Federal tax burden. Of course, as the current situation demonstrates, not being under the Federal taxation umbrella has certain disadvantages.

Wait. I though Puerto Ricans were only exempt from federal income tax on Pueto Rican-sourced income.

Re: Puerto Rico files for biggest ever U.S. local government bankruptcy

#184

Post by dragonwriter »

grandalf wrote: post #181

When issues of local government financial problems come up, I think it's important to remember that local governments are typically not able to undertake deficit spending the way the Federal government is. If the US Federal government were prevented from running a budget deficit, we'd likely see a lot more solvency issues and financial failures of many sub-organizations within government due to bad budgeting. It woul…

> If the US Federal government were prevented from running a budget deficit, we'd likely see a lot more solvency issues and financial failures of many sub-organizations within government.

No, there's just be a lot more pressure to monetize government finances. We have some safeguards against that (e.g., the Fed being separated from Congress and outside of it's direct control), but the biggest constraint on that is that the government, so long as Congress is free to set fiscal policy within it's own preferences, has very little reason to choose the path of monetization.

Re: Puerto Rico files for biggest ever U.S. local government bankruptcy

#185

Post by vkou »

lf275 wrote: post #175
vkou wrote: post #162

Earlier quoted context omitted.

> this could aggravate the financial distress of many high indebted public entities that are already struggling to pay the bills. Governments don't make payments at adjustable-interest rates. If sovereign borrowing rates rise, because the financial markets decide that sovereigns have a higher rate of default then they thought before, this doesn't affect outstanding debt - only the ability to get more.

Most governments don't receive loans with adjustable rates, but they plan their budgets with the expectation that they can refinance their debt once their loans mature. Most governments have regular debt maturities that they must meet, and they would be in big trouble if they can't refinance those loans. It is also important to separate local governments from the sovereign federal government. The federal government i…

Thank you for this caveat.

Yes, that is true. Governments typically don't pay off the principal on their loan - more specifically, as soon as the loan matures, they take out another loan.

This is not a problem if you've got some 30-year bonds maturing (As a dollar borrowed 30 years ago is trivial to pay off today), but this is a big problem if most of your debt is in the form of rolling, 1-year, or 3-year bonds.

This is still quite different from a mortgage you need to renegotiate every 5 years, or where the interest rate is pegged to prime + X%.

Re: Puerto Rico files for biggest ever U.S. local government bankruptcy

#186

Post by anigbrowl »

thaumasiotes wrote: post #167
anigbrowl wrote: post #157

Earlier quoted context omitted.

Shell companies are your friend. You can move a lot of money around faster than the authorities can follow the paper trail in many cases. That's why some people refer to delaware as the world's biggest tax haven - Delaware is extremely friendly to corporations and it's trivially easy to set one up. So if you are skilled in the technicalities of company formation and business administration, you can make your audit tr…

OK, but a shell company in Delaware sounds pretty useless as a means of sourcing your income from Puerto Rico.

How about I have three shell companies, and you guess which one has the real source of my income underneath it? $5 to to win $10.

Re: Puerto Rico files for biggest ever U.S. local government bankruptcy

#187

Post by enraged_camel »

InitialLastName wrote: post #107
altstar wrote: post #98

Earlier quoted context omitted.

They have tried in Venezuela. Did not work.

Venezuela tried petro-socialism, backing their welfare state with a single resource that they happened to be swimming in. Price of that resource false -> no more monetary value -> money is worthless and welfare state fails.

I'm not sure why you are being downvoted (probably for ideological reasons). You are totally correct. Socialism hasn't really been tried in countries with diverse, abundant resources and powerful economies.

Re: Puerto Rico files for biggest ever U.S. local government bankruptcy

#189

Post by FullMtlAlcoholc »

savanaly wrote: post #23
vkou wrote: post #10

Earlier quoted context omitted.

> We owe money to the creditors... and what you do with a debt is to you pay it off. That's not the case. Sometimes, you pay your debt off. Sometimes, you default, and file for bankruptcy. For lenders, it's the cost of doing business. If they don't want to deal with the possibility of bankruptcy, they shouldn't lend out money. Lenders charge creditors a premium, because of the risk of default. It's as much on them to…

That's true in any individual case. But if we make it our social norm that bankruptcy is nothing to be ashamed of and to be taken lightly, won't it change the equilibrium for future generations of lenders and borrowers such that an inefficiently low amount of lending goes on? If everyone has the expectation that the lenders and borrowers will try their best to live up to the contract they made in good faith, wouldn't…

Limited liability, along with joint stock ownership, was possibly the greatest financial invention of all time. In terms of big history, I would mark the inception of this form of human social organization as the beginning of "The Great Acceleration." To a great degree, this is also why the West became so dominant until recent times, allowing for the building of then state of the art ships to undergo risky trade and exploration missions. Without it, no one besides monarchs would invest for fear of being financially ruined for the rest of their lives.

Conflating personal morality with economics... is very bad. It leads to things like debtor's prisons (which, unfortunately, exists more or less in America) and heavily prejudices against poorer people. It's an easy to understand system... you borrow money, you pay it back with interest. Its the lender's responsibility to ascertain your credit worthiness. If you default, it becomes harder for you to get credit and you pay higher interest. There is no need to also attach negative behavioral characteristics. Lets face it, we all know someone who is bad with money, but that doesnt make them a bad person, it just means they need an accountant.

How many times has the President declared bankruptcy? I have many issues with Trump but this is not one of them. in fact, I commend him for being able to reinvent himself by learning how to create an effective brand and sell his name.

You wouldn't bat an eye if a company made a controversial decision, like laying off a number of workers for the benefit of shareholders. Yet too often, we judge people if they cannot pay back.

They should just default. Youll have a higher interest rate for future loans, but youll have something to invest for growth and not stifled by austerity. Ask Greece how austerity is going for their economy.

Re: Puerto Rico files for biggest ever U.S. local government bankruptcy

#190

Post by coddingtonbear »

vkou wrote: post #170
eagletusk wrote: post #111

Earlier quoted context omitted.

Why would USA want PR as 51? What benefit is there? PR has more debt that California, and zero industry except for Bacardi rum. Name one thing made in PR?

> Why would USA want PR as 51? What benefit is there? Wasn't the USA founded on the principle of no taxation without representation? On a principle of enfranchisement? On a principle of self-determination?

Although Puerto Ricans do pay certain local and federal taxes, they do not pay income taxes like citizens of US States do.
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