You may be watching a great Netflix show or even going to a wonderful movie, maybe reading a great book. I get to watch one of the truly great historical dramas playing out in our time.
The 2008 financial downturn created a monstrous problem for almost every government agency. The pension funds shrank 10 to 30%. Most have not recovered.
The consequence is that nearly every government agency has to put up more money to support the current pension fund and in order to support their current pensioners. Many cannot do this because their tax revenue, based on property tax, declined at the same time with the housing bubble collapse.
This happened in the small town in California, Vallejo, which fired nearly everyone but kept the remaining union people at their high levels of pay. They got out of bankruptcy but the problem will recur again soon. The town, which is heavily black, has created an out-of-control crime problem.
Then there is the California city of Modesto. The city has gone into bankruptcy. Modesto is suing everybody left and right to avoid paying the bondholders. They will get nowhere and everything will get worse while they waste their time suing. Fun drama as unions destroy a formerly healthy farm town.
The grandaddy of all municipal bond default stories is Detroit. Detroit has been on a downward slope for over 40 years starting when the black population burned its own neighborhoods in the late 1960s. Whites were already leaving Detroit because of busing. That combined with high union wages to drive the automobile companies into several successive bankruptcies.
The sum total of all these messes, and I have ignored a few other bankruptcy grandiose cases, is that bondholders are being very careful to avoid government issued bonds, mostly municipal bonds, where the certainty of repayment is less than 100%.
The consequence of this is that the interest rates on these carefully evaluated bonds is rising to the point where fewer and fewer municipalities, including the state of Puerto Rico, are finding it possible to sell bonds. When bond ratings go down and interest rates go up too much no conservative portfolio will buy the bonds. Most such portfolios are held for pensions, often by unions who are strangling the source of funds for their own pensions.
If you look around you, 360°, nearly every form of public construction, public building, streets, schools, water and other infrastructure was financed with a bond.
Now look at this 360° scene again and realize that no public buildings, no infrastructure will be possible if the political entity that built them cannot issue bonds. No future.
It isn't just that Detroit is a current disaster. It is that Detroit is a permanent disaster and there is no way out. That is the powerful drama we get to watch play out.
It is also fun to watch everybody squabble over the remaining assets of Detroit. The bondholders will always win. In Detroit they are asking for the art that is owned by the city art museum. Fun.
Some unions may win in bankruptcy in the short run, as they did in Vallejo, but they do not win in the long term because the agency, city, region or state is dead.