Published on June 30 2017

Doug Casey on the Illinois Debt Crisis

Justin’s note: Illinois is dead broke.  

Every month, it spends $600 million more than it collects in taxes. The state is now $15 billion in debt. There’s no telling how much worse its financial situation will become, either.

After all, Illinois hasn’t had a budget in two years. If it can’t put one together by tomorrow, Standard & Poor’s will cut its credit rating to “junk.” It would become the first state ever with this distinction.

This would have serious implications for the 13 million people living in Illinois. It could trigger a nationwide debt crisis. Doug Casey and I discuss why in the interview below.


Justin Spittler: Doug, what do you make of Illinois’ debt crisis?

Doug Casey: It’s absolutely wonderful.

Perhaps this brings out a little bit of the quasi-Leninist in me, because Lenin said “the worse it gets, the better it gets.” I’d like to see all of the states go bankrupt for the same reasons I said the federal government should default on its debt.

Most of what all levels of government do is usurped from society. Assuming you even accept the principle of legal coercion—I don’t—there’s very little that a government should do.

Justin: What sort of things should the government not do?

Doug: Education, for one.

The numbers vary, but typically it costs about $12,000 per year to educate a grade school student. It’s a completely absurd amount. Most of it is wasted on administration, bureaucracy, compliance, and overhead. But that’s not the point.

The point is that the state shouldn’t be in charge of kids’ education, because inevitably it turns into indoctrination. Teachers work for their employer, the government. The interests of the government are not necessarily those of either the children or the parents. State education works on the premise that parents are in general too ignorant and irresponsible to care for their progeny. And maybe that’s true—the proof being that they’re willing to send kids off to be incarcerated and indoctrinated by government employees for eight hours a day.

The bankruptcy of Illinois might push things in the direction of privatization and localization of education. Local schools generally get State and Federal funds, and have to obey State and Federal rules. Education necessarily becomes rote, non-innovative, PC, and one-size-fits-all. Teachers, which are less and less necessary in the Internet world, are roboticized and disincentivized.

The roads are another big State function. And a huge source of featherbedding, incompetence, and corruption. All the roads should be privatized, quite frankly. Local roads should be the province of something like homeowners associations. Thoroughfares should be toll roads. And with today’s computer technology, it would be very easy to do that. 

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Justin: Don’t forget public pensions. In the case of Illinois, its public pension is underfunded to the tune of $126 billion.

Illinois isn’t the only state with pension problems, either. Credit rating agency Moody’s estimates that U.S. state pension plans are underfunded by nearly $1.8 trillion.

Doug: State employees are notorious, during their last year or two or three, depending on how their benefits are determined, for padding their salaries with lots of overtime. Their buddies give them promotions when possible, so they can check out with the largest possible pension.

This would be much less likely it was a private company. Why? Because everyone naturally views the state as a milk cow, but private companies are oriented strictly to make profits.  

What should be done with the pensioners who are relying on pensions which can’t be paid? Well, it’s a question for a bankruptcy court to answer. But in most bankruptcies, the debtor’s assets are sold off to pay for its obligations. In the case of Illinois—and other states that will soon find themselves in the same position—that means their assets should be auctioned off and privatized. And all of its responsibilities should be taken away as well. A genuine bankruptcy of the state government would prove a very good thing.

Very little that the state government does serves much useful purpose. The services they provide that are needed and wanted could be, and would be, provided much more efficiently by entrepreneurs. The DMV is typical of the way government works. We might first ask: Is a DMV actually needed in the first place?

But back to the pensions. If, after asset liquidations, the pensions have to be cut back or defaulted on? Tough. There’s no reason people who are employed by the state should have special privileges.

This isn’t a theoretical discussion. Most pensions are in serious jeopardy. Why? Because their assets are mostly in bonds and stocks. The stock market is in a bubble. The bond market is in a super bubble. A lot of the value of the assets could disappear. Most projections of asset gain have been set to high, in order to reduce current funding requirements. Furthermore, people are living longer today than most actuaries projected when the pensions were set up.

From a pensioner’s point of view, things are not going to improve. It’s going to get worse, not better. I don’t see any way out of this.

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Justin: I agree, Doug.

The pension system is not as safe as many people think. Thanks to the Federal Reserve, it’s more dangerous than ever.

That’s because eight years of easy money have made it nearly impossible for pension funds to make money in “safe” assets. So, they’ve loaded up on stocks, which are riskier than bonds. They’ve even piled into private equity investments. That used to be unheard of.

Doug: Yeah, absolutely. Pension payments aren’t “guaranteed” by the cosmos, or the laws of physics. Especially when you’re living in a financial bubble, like the one that’s been created by the Fed and other central banks.

And here’s a revelation: I like living in a financial bubble. It’s pleasant. You have a higher standard of living than you might otherwise, because you’re living out of other people’s capital that they’ve saved in the past. And you’re borrowing from the future. An artificially high standard of living may be stupid and artificial—but it still feels good.

It’s a fool’s paradise, sure. But most people don’t realize that because they don’t study either economics or history—they don’t make the time, or have the interest, and have more pressing concerns. I hope the bubble goes on longer because I’m in a couple private deals. I’m anxious for them to go public because I’ll make a lot of money if they IPO before the bubble breaks. If they don’t, I’ll probably get a goose egg.

So, I find myself cheering on the Fed—like everyone else with a lot of financial assets. At the same time, I’m well known as a bear. It’s not that I’m cheering for the bubble to burst—that would be against my interests. I’m a bear because I know burst it will.

Anyway, back to the subject at hand. I have no sympathy at all for these state employees who will lose their pensions, and maybe their jobs. Most of whom haven’t spent their lives “protecting and serving” the public—that’s a PR fiction. But acting as parasites, although in many cases unknowingly.

So, I look forward to the bankruptcy of Illinois. It’s absolutely inevitable. I hope that the US government doesn’t step in and bail them out somehow, because there are other states that are going to be lining up behind them.

Justin: Could Illinois’ debt problems spread to other states? If so, how do you see that shaking out?
                                                                                      
Doug: It’s got to spread because the markets are at an all-time high. When stocks and bonds go down, the pensions are going to have fewer assets to service their liabilities.

The silver lining of this—and I always like to look at the bright side of things—is that these states are going to have to fire 25% or 50% or 75% of their employees, and privatize most of the things that should have been in private hands to start with. You never really get a change in any system, unless there’s a crisis. 

Now the problem is: what will they do when a crisis comes? Will they do the intelligent thing—fire employees, default on a lot of these pensions, and sell assets? Or what’s more likely I’m afraid, is that they’ll double down, and try to raise taxes even further, get funding through the federal government, and make it even worse. But we’re gonna have a crisis for sure. The only question is, how stupidly they’ll react—really stupidly, or with a modicum of intelligence? Chances are it’ll be the former.

It’s like that fool who’s the current mayor of Chicago said: “Never let a good crisis go to waste.” The problem is that he, and people like him, see the crisis as an opportunity to devolve even more power to the state, not less. Exactly the opposite of what I’m proposing.

Justin: How would the federal government respond to this sort of crisis?

Doug: Well, the federal government is already running a $1 trillion deficit every year. I guess they can borrow even more money with interest rates as low as they are. But they can’t sell paper to the Chinese anymore so they’ll have to borrow it from the Federal Reserve, which means that they have to print more money.

What they’ll likely do, therefore, is take a local problem in states like Illinois, and make it a national problem. It’s not a solution at all, of course, but it’s what they’re going to do. It’s called “kicking the can down the road,” where it will be somebody else’s problem.

Justin: If the government can’t fix this, what is the solution? What can people in states like Illinois do to protect themselves?

Doug: I grew up in Illinois, I have a lot of friends that still live in Illinois, and it’s a funny thing. It’s that most people, even intelligent people, act like potted plants. They’re born in one place, and they just don’t like to move. Including my friends that grew up in Illinois. Most of them are still in Illinois—not because it’s the best place, but because of inertia. So, what they should do is get the hell out of Illinois, and move to a state that’s more fiscally responsible, that has no income taxes, like Nevada for instance. Or Washington, or Tennessee, or Florida. But most of them stay in Illinois.

Most people don’t do what they “should” do. Most people just don’t like to move. They’re like the proverbial deer in the headlights.

Justin: And if it turns into a national crisis…what should people do then?

Doug: Well, I’ve been advocating that people internationalize themselves for years.  Because your biggest risk today is not financial. Your financial risks are huge, with the markets and the economy the way they are. Your biggest risk is political. What is your government going to do to you, if it’s to survive?

You’ve got to remember that the prime directive of any organism, whether it’s an amoeba or a person or a corporation or a government, is to survive. So these governments are going to fight to survive. And the only way that they can survive is to tax more. And that’s exactly what they’re going to do.  


Justin’s note: You can hear more from Doug at the Sprott Natural Resource Symposium in Vancouver next month. Click here for more info.