By David Tulis
I have been trying to wrap my head around several facts that come from alternate universes. One is the tremendous asset base of commercial government, as indicated in city and state retirement systems financial reports. A second is the prospect of financial meltdown and crisis management that threatens to destroy these asset plateaus upon whose tops we can only squint. A third is the power of decentralization in the digital revolution that lets capital escape statist blockades to find its best return.
Will not the financial establishment that owns the assets revealed in comprehensive annual financial reports (CAFRs) do all in its power to maintain the value of the Federal Reserve dollar, in which denomination these trillions are held? For Chattanooga, the main question is: How do we account for local economy amid these three frameworks? Will Chattanooga gain or lose? What about your town?
Municipal bankruptcies
The first point arises from the shock value of the bankruptcy filing of Detroit. The F$18 billion in debt will prompt a liquidation of corporation assets, a 90 percent “haircut” for city pensioners, cuts in services, tax hikes and a loss of future borrowing prospects. The filing is a picture of how cities mimicking welfare states will fare as the latest financial bubble pops and interventionist remedies prevent a real cleansing (bloodbath). The Fed is pumping billions in credit into the economy that is reportedly being absorbed by the banking sector. It is buying the banks’ bad paper, about F$3 trillion of it. That inflation has poured into the financial sector partly explains why “inflation targets” at retail are below a 2 percent target. The Fed and the world’s central banks have put national economies worldwide on an expansionist program, an inflationary program to help rid the world of excess debt. In this process, low interest rates spur the banking sector to create its own bubbles so that the mountain of debt can be repaid more cheaply via depreciated dollars.
Bonds are denominated in Federal Reserve dollars; in inflation, their holders are being robbed of buying power. Wherever it operates, inflation is destructive, delusory, making men heedless of the future, encouraging of speculation. In inflations, service and production are thrown aside for gaming the seeming rising tide.
Debt repudiation will occur by one of two ways. Outright repudiation — not likely, though it would be the best for the world system, by some standards. Or hyperinflation, where a soaring dollar base allows all the system’s actors to settle their books, even though the currency is destroyed. Paper assets will reach phenomenal heights in nominal dollars while being almost worthless.
I am wandering from the point to which I am leading. What about dependents on municipal largesse, say, retirees? A meltdown ahead will be disastrous for these large numbers of people who counted on a city, county or government retirement. As the distress rises, the taxpayers will revolt, budgets will be cut, and expectations dampened.
Vast profit centers exist in government
If free market analyses of an economy propped up by paper money is correct, we have to ask about the vast wealth of governments. Let me throw a few numbers out without any sort of proper context, but they are the best numbers I came up with looking through CAFRs for the city, county and state. They are suggestive of how government is a profit center, but are not conclusive. In Hamilton County, government dominates employment. A third of employees in the top 10 employers work for government (local or federal). Four entities — county schools, TVA, county government and city government — comprise 7 percent of county employment. Chattanooga’s retirement system has F$429.24 million in assets (that’s about half a billion bucks). Half of that amount comprises the fire and police pension fund. Less than F$37 million was paid out last fiscal year. Wildly optimistic earnings projections undergird the city system. Governments run scores of pension systems across Tennessee.
Probably the biggest is Tennessee Consolidated Pension Retirement System, with assets of F$35.88 billion in 2012 and total liabilities of less than F$1 billion ($969.52 million). What are state government’s gross assets and gross revenues? Its CAFR doesn’t immediately yield this number. But total assets of state government are F$33.12 billion (notice, a little less than the retirement scheme), with total liabilities at F$5.13 billion. The asset to liability ratio is 6 to 1. Total revenues from “governmental activities” was F$27.3 billion and roughly F$2.1 billion from “business-type activities” for a total of F$29.37 billion. Revenues generated by governmental activities are ONLY 45 percent from taxation, the rest from “operating grants and contributions.”
This summary is merely suggestive, and does not open a view as to how governments convert assets into liabilities in their annual reports. I don’t know exactly how this metamorphosis occurs, but have it on authority from Walter Burien, the national CAFR expert who exposed governments’ second set of books (the real ones) in the 1980s. Mr. Burien estimates government capital assets in the U.S. pass F$110 trillion. What financial crisis?
My question is, how does a projected meltdown affect this vast above-ground economic system that Mr. Burien says at CAFR1.com acts as a parasite upon you, me and other productive people?
The 3rd unpredictable: Digital destruction of centralized systems
A third dynamic seems much in favor of local economy. And that is the Internet, which destroys the prison of place, the tyranny of locale, the fixedness of geography. Odd thing for a provincialist like me to see anything good in the Internet. A good localist improves his usefulness if he can account for the Internet and see the advantage to particular locales in it. The Internet is global, but it can help sell castoffs in a given neighborhood. The Web destroys government classified secrets with anonymous publication, but opens windows on relationships among people in a given city.
Its power is keenly described in an editorial reprinted in Sunday’s Chattanooga Times Free Press by Drew Johnson. The text in the Washington Examiner gives a useful perspective on decentralization and the collapse of legacy systems such as Obamacare. Two paragraphs are compelling:
The Wall Street Journal’s Daniel Henninger captured it well with this observation last week: “Even if you are a liberal and support the goals of the Affordable Care Act, there has to be an emerging sense that maybe the law’s theorists missed a signal from life outside the castle walls. While they troweled brick after brick into a 2,000-page law, the rest of the world was reshaping itself into smaller, more nimble units whose defining metaphor is the 140-character Twitter message.” Simply put, the digitization of social interaction, economic transaction, the political process and everything in between is decentralizing the world, moving it in the opposite direction of the massive centralization of Obamacare.
But nobody needs a federal bureaucrat to tell him what health insurance to buy when anybody with an Internet connection can simultaneously solicit bids from dozens of competing providers, pay the winner via electronic fund transfer, manage the claims process with a laptop, consult with physicians and other medical specialists via email, and even be operated on remotely by surgeons on the other side of the globe. Rather than imposing a top-down, command-economy, welfare-state health care model with roots in Otto von Bismarck‘s Germany of 1881, a 21st century government would ask what is needed to apply to health care access the Internet’s boundless capacity to empower individual choice.
Obamacare, like Britain’s healthcare system, is designed to fail so that the default reform (ever greater centralization under a “single-payer system”) will be called for by political figureheads on both sides of the congressional aisle. But it is a legacy system in concept and execution, and will be sidelined by local economy and the digital marketplace. It will collapse from its own irrelevancy.
Obamacare is a government profit center. Commercial government in general is a profit center that feeds and supports an untold number of political, employment and business dependents. The national government will not cut expenses to reduce its open liabilities below its current level of 105 percent of gross domestic product. (Its other obligations put the national debt past F$200 trillion.)
Part of government wants to liquidate its debt by inflation; the profit center part of government disclosed by comprehensive annual financial reports want to maintain its places as king of the hill. The digital revolution is letting common people and local economy bypass government obstacles. Obamacare may destroy the 40-hour week. But the economy is already breaking apart structurally so that in the future people will work multiple jobs, some of them virtual, throwing out the window old labor standards. The economy bypasses centralized government.
This cover is for Chattanooga city corporation’s comprehensive annual financial report. Could you help me analyze the next one when it comes out?
Sources:“Examiner Editorial: Obamacare is a 19th-century answer to a 21st-century question,” Washingtonexaminer.com, July 19, 2013
Franklin Sanders, “Silver & gold, 22 July a.d. 2013,” daily Moneychanger newsletter commentary via email
Tennessee Consolidated Retirement System CAFR for the fiscal year ended June 30, 2012, 103 pp
City of Chattanooga, Tennessee, CAFR 2012, 201 pp
State of Tennessee CAFR, 2012, 228 pp
