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Tuesday, July 14, 2015

'Greek' Finance In America: Pensions, Medicaid, & Entitlements Will Bankrupt State And Local Governments

The template of over-indebtedness as a response to soaring obligations is scale-invariant, and it always ends the same way: default.

When you can't pay your bills, you can either cut expenses, borrow money or if you're extraordinarily privileged, print money. If you borrow money without cutting expenses, the interest on the borrowed money piles up and you can't pay that, either. Then not only do you have a spending crisis, you have a debt crisis, and so do those who lent you the money.

Because the funny thing about borrowed money is it's a debt to you but an asset to the lender.

Not only is your debt listed as an asset on the lender's books--it's collateral that supports whatever financial leverage the lender might engage in.

If you default on the debt, not only is the lender's assets impaired--all his leveraged bets built on the collateral of your debt are suddenly impaired, too.

The preferred solution nowadays to a spending/debt crisis is to borrow your way out of the crisis: if you can't pay the interest and debt that's due, just borrow more to cover the interest payments and roll the old debt into new loans.


1 comment:

Concerned Retiree said...

Obama wants me to pay my fair share but him and other Politians don't want to pay their fair share on these payouts . WHY?