Puerto Rico: Bankruptcy, Bailout or Bust

“Puerto Rico: Bankruptcy, Bailout or Bust”
Ty J. Young Editorial

Puerto Rico’s budgetary woes have been airing on TV commercials. Since 2008, the stress on municipalities, cities and states throughout the country have been evident; many teeter on the edge of bankruptcy. Of course, we all know that is the path Detroit has taken. Under U.S. law, municipalities file bankruptcy under Chapter 9 – a specific code that deals with government entities like cities and counties.

However, Puerto Rico is not a state nor a city, and therefore does not enjoy the protection of U.S. bankruptcy law.

Municipal bankruptcy is rare but does happen. U.S. territories going belly up would not be unprecedented, but the size and scope of the Puerto Rican collapse has been alarming. The commercials are causing fear with retirees who hold Puerto Rico bonds. Below are some of the history and facts regarding this very real financial crisis:

I. Past U.S. Municipal Defaults and Bankruptcies

1. New York City Default. Although Congress provided bankruptcy legislation which was essentially bailout legislation, President Ford vowed to veto any bankruptcy including bailout funds. The famous line attributed to him was largely untrue, but had the same effect: “New York, drop dead!” Mayor Beame had already drafted seizure notices to the banks, city lights were to be turned off, and bills would go unpaid. The public was aware of the problems the city was having, but no one knew how close they were to anarchy. Thankfully, unions and political leaders agreed on haircuts to debt and using union funds for loans to the city. While it was a technical default on the debt, there was a restructuring and the city survived – without a government bailout.

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2. Stockton, San Bernardino, and Orange County. California has seen some of the larger bankruptcies in U.S. history. While the vast majority of city or municipal failures have followed the Blue State liberal model of tax, borrow, spend and increase debt, the first large scale municipal failure occurred in 1994 in Orange County, CA.

3. Detroit, MI. The largest city bankruptcy in U.S. history occurred in Detroit, MI. Decades of one party rule had created the quintessential example of waste, graft, and corruption. Exorbitant salaries and pensions for politicians and government officials, combined with pension promises which could not be kept, drove the city into financial ruin. Ignoring the federal government’s instruction through a “Super Chapter 9” bankruptcy bill, Michigan has reformed its budget process, invited investment, and renegotiated with creditors. The state could be on its way back to fiscal health.

II. How did Puerto Rico get in this position?

1. Bad government. The unincorporated U.S. territory pays high government salaries and pensions exceeding the average salaries the pensioner received while working. Plus, over 20% of the population works for the government. That is not sustainable anywhere.

2. Tax base is shrinking. 33% of the island’s population receives food stamps, and most able-bodied Puerto Ricans leave the island to work in the U.S. Despite the obvious potential as a tourism destination – which it is – Puerto Rico is losing what little labor force it has to the mainland.

3. Reckless government spending and mismanagement. Sound familiar??? The only problem is Puerto Rico cannot print its own money (which, as we know, creates even more problems – but that is a story for another day). All energy usage is derived from government controlled agencies. Most of the tax collection process is corrupted. Nothing about Puerto Rican leadership shows fiscal restraint or budgetary balance … why would we expect that change?

III. What are Puerto Rico’s options?

1. Super Chapter 9 Bankruptcy. This has been proposed by the Obama Administration and even supported by some Republicans. If this legislation is passed, it would allow Puerto Rico to enjoy the same bankruptcy protections as states. However, unlike current Ch. 9 Bankruptcy law, this “Super Chapter 9” Obama proposal would include widespread public sector bailouts for unions and government employees, while forcing individual investors who purchased Puerto Rico bonds they thought were safe to forfeit their entire life savings, in many cases. How is that fair? This is “Dead-on-Arrival” for most conservatives.

2. Traditional Ch. 9 Bankruptcy. Unlike Super Chapter 9, EVERYONE takes a haircut. Puerto Rico has stated it wants Super Chapter 9 (obviously). In either case, bankruptcy will not solve all of its problems. The need for fiscal and monetary reform are needed soon if Puerto Rico is ever going to turn the tide of debt, deficits, and bankruptcy.

3. Negotiate with creditors, implement fiscal reform. PREPA, the Puerto Rican Electric Power Authority (i.e. – government monopoly) had already renegotiated a deal with bond holders and were expecting another $2 billion line of credit, but the battle in Congress over the Super Ch. 9 legislation killed the deal. Puerto Rico already defaulted on most of its debt payments back in 2015, and has $72 billion in debt. The average U.S. state debt to personal income ratio is 3.4%. In Puerto Rico it is a staggering 89%. Get the Fed’s out of the way and Puerto Rico will be forced to reform. The territory will receive better deals, and everyone will share in the problem solving.

No doubt, bondholders and creditors are at risk of a significant loss, so the lady on the TV commercial has cause for concern. Many have already taken a hit to their 401k’s as the value of those Puerto Rican bonds have declined. Another bailout or Ch. 9 legislation, which only protects Puerto Rican government employees, will be a disastrous precedent, and a perfect storm of moral hazard. Bondholders are at risk, but do not put U.S. taxpayers on the hook as well. Any deal resulting in bailouts or bankruptcy could wipe out the redemption value of those bonds altogether.

You are not on the hook now, but the President and Congress are in the process of putting you on the hook – which equals greater, future taxation. There is no other logical conclusion … do not let them do it!

Look to put your money in places safe from market loss, with a reasonable rate of return, and with the least exposure to politicians and their actions. You can have that, call us to learn how! 877-912-1919


Our Tax Dollars Hard at Work … SERIOUSLY?!

“Our Tax Dollars Hard at Work … SERIOUSLY?!”
Ty J. Young Editorial

There are so many events happening in the news – price of oil, the Russians and Chinese on the move – it can be overwhelming.

One news item that did not receive much attention was the failure to enact a budget over the last few weeks. Unlike the budget wars of the early Obama years, you will most likely see one passed soon. But, this serves as a reminder of how much debt we are accumulating and how recklessly the politicians spend your money.
In discussing the “waste, fraud and abuse” in government, we are often focused on the big ticket items such as Solyndra – which cost $500 million-plus in taxpayer dollars. The company filed bankruptcy, and the Democratic donors running the company were bailed out. As horrific as those examples are, there are many, many more we pay for daily.

There are hundreds of thousands of programs that show how hard your tax dollars are at work, below are our TOP 10:

I. Our Top 10 Appalling Wasteful Government Programs in the Last Budget Cycle:

10. $10,000 – National Endowment for the Arts – Children’s musical “Zombie Symphony.” We are sure it is a modern-day Shakespearean classic.

9. $30,000 – University of Minnesota – Create predictive models on how the world will end. I do not think it dawned on them that we will not be around to appreciate their prediction.

8. $50,000 – Agricultural Department – To market and advertise the sale of Alpaca poop. Yes, it makes for great fertilizer; politicians are great at producing fertilizer.

7. $171,000 – National Science Foundation – To study the gambling habits of monkeys. Taxpayers will love to know this program will continue through 2018.

6. $307,000 – Office of Naval Research – Synchronized swimming for sea monkeys. Maybe they can get a spot on “Dancing with the Stars – Underwater Edition.”

5. $331,000 – National Science Foundation – Studying the habits of angry people stabbing voodoo dolls. We wish we were making that up.

4. $856,000 – National Science Foundation – Studying the habits of mountain lions running on a treadmill. Because you did not need that money, it is a Constitutional prerogative to have in shape, cross fit mountain lions.

3. $3 million – National Institute of Health – Study on how parents can get their children to eat vegetables. For most of us, despite not liking vegetables as a child, we were unaware that we had a choice in the matter.

2. $3 million – State Department – Tweeting at Terrorists. If your immediate reaction is embarrassment, then we shared your sentiment exactly.

1. $5.2 million – Columbia University – Climate Change video game. Let us guess – the evil villain is a coal miner or a big American corporation.
There were also some honorable mentions
– The White House staff has over 150 employees who make over $100,000 per year
– The $939,000 to study the mating habits of fruit flies

Before accepting a tax increase on your hard-earned money, remember to only elect politicians who will honestly attempt to rein in Washington spending. Why should we pay for their “waste, fraud and abuse?” You should not be asked to sacrifice anymore if they cannot first cut the spending themselves. We will take in approximately $2.5 trillion dollars, and borrow another $1 trillion, and spend it on items like the ones listed above. It is very clear as a country we do not have a revenue problem, we have a spending problem.

Government debt will come due one day, and it will have a major impact on our economy, the stock market, and therefore your hard earned retirement savings. Make sure the money you have already earned is safe and protected from market loss when the bills come due. When voting on Election Day, make sure the politician securing your vote will waste less of your hard earned money.

If you’d like to take a step forward today in protecting your money and earning a reasonable rate of return, call 877-912-1919. We’ll explain how it works and you decide if it’s right for you!


Capitalism, Socialism/Communism… What’s the Difference?

“Capitalism, Socialism/Communism – What’s the Difference?”
Ty J. Young Editorial

During President Obama’s trip through Latin America, which included a stop in Cuba, he was quoted in Buenos Aires, Argentina saying there is no difference between capitalism and communism and “you should be practical and just choose from what works.” That statement is flatly false and wildly misleading.

That is not a paraphrase. That is a direct quote. He did confirm capitalism creates the most material goods – thank goodness – but Karl Marx and Vladimir Lenin believed that as well. To mistake the differences between one economic system (capitalism) and one political system (socialism/communism) is profoundly dangerous. It is a willful misrepresentation of facts and history. It also helps explain why so many voters have supported Bernie Sanders through the Democratic primaries – their leaders believe in these failed doctrines. The fact the President of the United States would make such a statement is an unnerving event.

Because Western democracies have enjoyed the fruits and wealth creation of capitalism for so long, and the world has been without a great power war since 1945, our relative peace and prosperity has allowed false teaching to take root. Wherever capitalism has flourished, namely in the United States, all people from poor to rich have benefitted. Where communism has existed, there has only been death, destruction and misery, except for the elites.

I. What is Capitalism?

1. An economic system governed by free individuals operating in a free market. The definition of capitalism according to Merriam-Webster’s Dictionary is “an economic system characterized by private or corporate ownership of capital goods, by investments that are determined by private decision, and by prices, production, and the distribution of goods that are determined mainly by competition in a free market.” The government does not own the production of goods and services – people or businesses do. That is called freedom.

2. Capitalism is the best system to eradicate poverty the world has ever known. In the history of the world, no economic system has ever raised the standard of living, and lowered the poverty rate, like capitalism. In fact, most citizens using hard work and motivation usually CAN exit poverty – if they make the right life decisions such as not breaking the law, when to marry, have kids, etc. The only people usually poor in truly capitalist societies are the young – who have not accumulated capital yet to invest or grow.

3. Capitalism is the American way of life. Although the word “capitalism” comes from the 19th century, the “free market” has been the American economic system since our founding. You decide how much labor you will do, how much you will spend on food and shelter, and what leisure items you can afford. It’s called being free!

II. What is Communism?

1. A political system where the state owns and runs the economy. The definition is: “…a political doctrine based on revolutionary Marxian socialism and Marxism-Leninism; a totalitarian system of government in which a single authoritarian party controls state-owned means of production.” That, of course, is the gentle definition. It leaves out the part where the state tells you how to live, where to live, who to marry, does not track and punish criminals – since the state does not believe crime exists in utopia. It enforces this system of collectivist living through violence. The elites at the top lead a nice life, but the masses are nothing more than a collective beneath them – There is no individual person or existence. You don’t matter. In fact, most refer to communism as “the violent implementation of socialism.” And wherever socialism has been tried, in the history of the world, it has failed.

2. It is socialism on steroids. Socialism starts out rather benign. It usually starts with crony capitalism, then full-fledged corruption, until the business owners of the largest sectors of an economy cave in to government control. They keep their lifestyle, and in exchange, government dictates everyone else’s lifestyle through the control and ownership of the means of production. Society then grows less free and poorer. At the end of this path, it is simply easier for the government to “nationalize” these industries, and by then, you are a socialist country. (By the way, where do you think we are along this timeline?) At this point, as economically damaging as those events can be, we’re not even near the worst part of the story. Next comes communism – and it is the violent enforcement of socialism. Its leaders use the state to coerce people’s habits, beliefs, and actions.

3. It destroys lives. Consider – 94 million people died from the hands of the state under communism in the 20th century. That is more than homicide (58 million) and genocide (30 million; 101 million people died from famine and of those, 80 million occurred in communist countries. The state purged – simply killed masses of people who were political prisoners – over 40 million during the 20th century. No one could read these numbers and compare capitalism and communism as simply two sides of an economic debate. No one.

III. Why would anyone try to justify comparing the two?

1. The 2008 Financial Collapse. Sadly, the media has done a good job of framing the 2008 financial collapse, best known as a banking crisis, as a failing of Republicans and capitalism. However, the facts are quite different: the 2008 crisis was created by too much government intervention. Banks were required to loan into poor credit neighborhoods under laws passed by President Carter and reauthorized by President Clinton. The banks were also given an implicit belief they would be bailed out, since they also held much of the government’s housing debt. Lastly, capitalism was not allowed to clean up the mess by letting the banks fail and go through bankruptcy. In the end, government policy – the socialization of losses – was the primary driver of the financial collapse, NOT free market capitalism. With the belief in bailouts and government guarantee, the risk assessment that naturally exists in free market capitalism did not work its proper function….with government bailouts, there is no risk.

2. The Bernie Sanders crowd believes socialism works in Canada and Europe. It does not. Both Canada and Europe run deficits and debts, employment is stagnant, their medical systems have long waiting periods and cannot provide services the American system routinely offers, and the majority of the provinces, territories and countries have substantial tax evasion. The collapse of Greece, and Sweden, Ireland and other countries changing direction to become low-tax, supply-side economies, is more evidence socialism has failed. You can have some small socialist havens when you have a large monolithic capitalist society creating and inventing everything and paying for the common global defense – i.e. capitalist America.

3. Asia showed with different versions of capitalism, state control of society is still possible. Japan had state directed capitalism, but after a late 1980’s market collapse they have lost two decades and remain mired in stagnant growth. China also does not practice traditional capitalism, and its growth is fueled on unfair trade practices and stolen intellectual property. That is not free market capitalism, although Japan is a closer version than Communist China.

The late Rudolph Rummell, our most accomplished author on the subject of mass killing, stated in an article in 2004: “Of all religions, secular and otherwise, Marxism is by far the bloodiest – bloodier than the Catholic Inquisition, the various Catholic crusades, and the Thirty Years War between Catholics and Protestants. Bloodier than modern terrorism – although in practice it is much the same…authoritarian and brutal. In practice, Marxism has meant bloody terrorism, deadly purges, lethal prison camps and murderous forced labor, fatal deportations, man-made famines, extrajudicial executions and fraudulent show trials, outright mass murder and genocide.”

There is quite a difference between capitalism and communism, and communism’s precursor – socialism. American, free market capitalism has been the greatest force for good in human history … communism and socialism has been quite the opposite.

This matters for you. Your retirement lifestyle is at risk of not only market factors which can cause losses to your portfolio, but also indirect damage done to businesses in the marketplace where government is intruding into the free transactions of a free market. When a society cannot tell the difference between capitalism and communism, its future prosperity may hang in the balance.

If you want to protect what you’ve earned, call us! You decide if it’s right for you. 877-912-1919