Promises To Pay

A Nest Egg made of Empty Promises
[courtesy of Google Images]

CNN Money

“A federal judge has given a green light for Detroit to proceed with its bankruptcy, the largest municipal bankruptcy in history.

“The ruling opens the door for the city to cut billions of dollars in payments that are owed to city employees, retirees, investors and other creditors.

“Unions and pension funds had argued that the city should not be eligible to use bankruptcy court protections. They said that regardless of the Detroit’s financial troubles, city and state officials did not negotiate with creditors in good faith in an effort to reach a deal on its liabilities.”

“Good faith” is important in most bankruptcies, in that the person or institution filing for bankruptcy is expected to make a “good faith” (honest) effort to reveal all of his assets so as to make them all available to his creditors.

However, in the instance of Detroit, I doubt that good faith will be particularly relevant.

Why?  Because What can’t be paid, won’t be paid.

It’s been common knowledge for several years that Detroit is not merely penniless, but so deep in debt that its debts can never be paid in full.  Any errors in good faith will be insignificant when weighed against Detroit’s enormous debt.

No man-made law or federal court can overcome reality.  Detroit is broke; too broke to ever repay all of its debts.  No judge can wave a magic wand that makes a bankrupt pay all of his (or its) bills.  Broke is broke.  That’s why we have bankruptcy law.

Bankruptcy law is simply a legalized recognition of the fundamental idea that What can’t be paid won’t be paid.  There’s no sense in trying to squeeze money out of a bankrupt.  There’s no point to tossing the bankrupts into a debtor’s prison.  Why assume the cost of $25,000 to $50,000 per year to incarcerate a debtor for the offense of going broke?

You might just as well jail all of the creditors who were foolish enough to enable the debtor to go deeper and deeper into debt and finally into bankruptcy.

You can’t fix stupid.  When you run into a man, a city or a nation that’s behaved stupidly, you might just as well let him or them go.  There’s nothing to be done but ascertain that the debtor is really bankrupt, and if so, write off all of his debts and get on with life.

“In his ruling, Judge Steven Rhodes found the city did not meet that [good faith] threshold, yet he ruled that such negotiations were impractical because of the huge number of creditors, which total more than 100,000. So, ultimately, he concluded that the city filed its petition properly.”

Apparently, there were defects in Detroit’s bankruptcy petition and/or procedure.

Nevertheless the judge let Detroit proceed into bankruptcy because reality had overcome the legal technicalities.  Detroit is broke.  Big time.  What can’t be paid, won’t be paid.  Why waste more of time and money trying to squeeze currency out of an absolute bankrupt?

“One major union, the American Federation of State, County & Municipal Employees, has already said it plans to appeal the decision.”

Good luck with that.

I’ll be surprised if any creditor’s appeal succeeds against Detroit’s bankruptcy.  At most, the union might force Detroit to refile its technically defective bankruptcy petition and postpone the inevitable.  But, in the end, Detroit is not the Federal Reserve.  Therefore, no appellate court can make bankrupt Detroit spin currency out of thin air to repay its debts.

Detroit’s creditors are largely screwed.

•  There’s an important lesson in Detroit’s plight.

The Detroit employees accepted Detroit’s “promise to pay” them their pensions—someday.   The city employees worked today in return for a pension that would be paid “someday”.  But Detroit’s promise to pay that pension is proving false.

Why did the Detroit employees trust in the promises of a future pension?  Because they knew that Detroit–being a governmental entity–couldn’t possibly fail to make good on its promises to pay.

Surprise, surprise!  The government of Detroit failed and its promises became worthless.

How many people still believe that the debts rung up by our national government are sure to be paid?  How many creditors will discover (as have the employees of Detroit) that even our national government’s promises are unreliable?

In retrospect, Detroit’s former city employees can probably see that they would’ve been better off to take an actual “payment” (higher wages) at the time when they worked rather than a “promise to pay” a pension as some later date.  If they’d taken the full payment at the time they worked—and—if they also had sufficient discipline to be responsible for saving for their own retirement, their retirement might’ve been successful.  But, because they trusted their government to keep its promises and distrusted themselves to take responsibility for their own retirement, many are going to suffer the unpleasant price of old age and poverty.  

That same lesson is going to be learned by most Americans when it’s finally understood that fiat dollars and all other paper debt instruments (stocks, bonds, bank accounts, pension funds, 401k’s, etc.)  are mere “promises to pay”—not payments.  Payments are tangible and include land, buildings, machinery, goods, products, gold and silver.  All paper debt instruments are merely IOUs—promises to pay.

But we live at a time when there are too many promises, too many debts, for all or even most to be kept.  The promises/debts can’t be paid and therefore won’t be paid. No amount of new governmental promises will overcome this fundamental reality: the existing promises/debt can’t possibly be paid.

Because our national and private debts are even greater than Detroit’s, those debts are also too great to ever be repaid in full.  Therefore, most of the paper debt instruments (promises to pay) that memorialize those debts will one day be openly repudiated or stealthily devalued by inflation.  When that day comes, those Americans who’ve stored their wealth in the form or paper debt instruments will be every bit as angry, frightened and helpless as are today’s former employees of Detroit.

What can be done?

If you have wealth stored in the form of paper promises to pay, think seriously about converting some or all of those promises into payments.  Trade your paper debt instrument for tangible products like land, machines, tools, buildings, and gold or silver.

I’m sure that recommendation seems unnecessary to most people just now.  But I’m convinced that the day is fast-approaching when most will see that recommendation’s common sense.