Nostalgia for a lost but better world is what one feels when following the growing state-pension scandal. The San Diego, California, case is the most famous, but the details are the same in every state: whistle blowers, broken promises, mismanagement, graft, and corruption, followed by toppled politicos, lawsuits, a clamor to raise cash, and ruined credit ratings of major cities.
It’s all so delightfully 19th-century: those days of yore when governments had to collect real money from our pockets in order to meet their obligations. These governments are acting as all governments have acted since the beginning of recorded history. They overpromise and mismanage other people’s money. They lose credibility. It leads to a political smashup.
As paradoxical as it may seem, these are the bright lights on the American political landscape. The reason: the governments in question do not posses the power to create money out of thin air. Cities and states still have to balance their accounts by taxing or borrowing, and neither is an endless process. They have nothing like a marketable debt instrument that is guaranteed against failure. They can’t paper over their debts.
Estimates on how much of a shortfall exists in state pension plans are huge. One estimate says there is a total deficit of $375 billion in money promised over money available. Barclays Global Investments says that the real deficit might be closer to $800 billion. Eyes pop out at such figures!
In San Diego, bad finance led to lawsuits and a dethroned mayor, followed by a fiscal crisis that has lasted four years. The same issue faces New Jersey and Colorado. They are attempting a series of goofy financial tricks to keep the bill collectors at bay, such as stretching out funding schedules to 40 and 50 years — all will be well in the year 2057, don’t ya’ know — and counting the investment gains of existing funds as contributions.
What do you expect from funds counted in the billions that are managed by public-sector unions in league with politicians? We aren’t talking about your local financial management professional here. These birds make Enron seem like a model of financial transparency and responsibility.
Now, here’s an idea that we can only hope will not catch on: give every state and every city that wants one a central bank. All worries will immediately evaporate, the same as your financial worries would go away if you had a counterfeiting machine in the basement that everyone agreed was necessary to provide you with “liquidity.”
What happens then? The risk that one’s obligations will not be met vanishes. Investors face an idealized world (until they find out the true cost). They earn interest by holding your debts but run no risk at all. You can make all the promises you want and no one will ever doubt that you will pay. There is no limit to the debt that you can rack up. In fact, the idea of debt itself is rather fictional, and everyone knows it. If there is no scarcity of cash, thanks to the limitless supply of ink and paper, then all worries vanish.
This is the position of the federal government, thanks to the advent of central banking and the Federal Reserve, which was created in 1913. The claim was to smooth out the business cycle and put an end to the worries of depositors that banks had overextended their loans.
So the Fed came to the rescue to bring heaven on earth to those in power. But what’s the excuse for this fancy finance? Hmm, someone think of something quick. How about the biggest lie possible? Let’s say that the Fed is there to protect against inflation! People will surely believe that, especially if only respectable people are running it with the “full faith and credit” of the nation-state itself.
Yes, it is true that all this monetary finagling can only result in more inflation and more financial instability. Every new dollar created out of thin air reduces the value of existing dollars — a stealth tax. If the process takes place through the interest-rate mechanism, the production structure is distorted to create booms and busts. But this kind of corruption is not called that. It is modern and progressive, a product of a scientific age.
If the liabilities of state pension funds is a scandal, what can we say about federal debt obligations? The Social Security system is perhaps $11 trillion in the red. For the overall federal government, unfunded future obligations are even higher: $36 trillion or more. We hear those numbers and we are amazed, but note how this pathetic mismanagement does not reflect on the credit worthiness of the federal government. No one hears these figures and flees the money market.
Why? There is, again, only one reason: the Fed is there to print all the money the federal government will need. There is no limit on its power to do so. We aren’t taxed. For that reason, people are not scandalized by the numbers or the corruption. We don’t even call it that. There is nothing about the numbers that seems real.
But that doesn’t mean there is no cost. When states and cities go belly up, there are victims. But at least there is a restraint on what they can get away with. There is no restraint on the federal government.
And when the day of victimization comes — and it surely will — people will be thoroughly confused about the cause. There will be no mayors or city managers to jail. There will only be a Fed chairman to assure us that there is nothing to worry about, because, after all, we can print all the money we need, even if its value is driven to near zero.
In an ideal world, we should love to see the Feds on the hot seat the same way the state-level politicos are. Abolish the Fed and we would see this dream come true.
