Monday, June 29, 2015

Puerto Rico Is Bankrupt

Puerto Rico, a territory of the United States, is bankrupt.  The current Debt of Puerto Rico, a series of islands, with 3.6 million residents, is $70 Billion.  Officials have reported that within three months there will be a government shut down in Puerto Rico because they cannot meet their Debt Payments.  The government in Puerto Rico, with about 150,000 employees is the largest employer.  Their bonds, the means they have been using to fund operating expenses, are rated as junk by the Hedge Funds that have been financing their government. 

The balloon has burst.   The credit markets will soon say NO MORE.  Puerto Rico will request that the US Congress provide a bail out, which is impossible.  Even though the US can print money, which it has already been doing to fund the US National Debt at $18 Trillion, with no end in sight,  the Congress and the President can't say Yes to a bail out of Puerto Rico because there are numerous US states and cities also facing bankruptcy, watching to see what happens and waiting in line. 

Ultimately, Puerto Rico will either default on its debt and or its creditors, including government employees on pensions, will have to take a huge hair cut and we are talking pennies on the dollar, in order for Puerto Rico to maintain any level of government services.   Of course, thousands of government employees will have to be laid off.  There is no way the 3.6 million people of Puerto Rico can pay off this Debt.  Neither can they raise taxes on their citizens, many of whom are poor, or on Tourists, their primary industry, sufficiently to make a dent in this Debt.  

So shortly, we will see the economic collapse of Puerto Rico, which means runs on the banks, bankruptcies since Puerto Rico cannot pay its suppliers, civil strife on their streets and probably many Puerto Ricans leaving Puerto Rico to come to the United States, which they can do as US citizens.  These episodes, as is happening in Greece, are showing us what will happen to the United States if we don't get our fiscal house in order.  

It is true that the United States government can and will print money to deal with our National Debt and promises made for government pensions and Entitlements; but all that will do is lead to very high inflation and interest rates.  Either way, we face fiscal calamity if local, state and federal governments don't stop all the wasteful spending and  borrowing to fund current operating expenses.  It is what it is.   The day of reckoning is coming. 

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