Detroit’s Money: Slim & Shady

It’s so sad to see one of America’s greatest cities fail so miserably—but that’s exactly what’s happened to Detroit. 

Believe it or not, 50 years ago, Detroit had the highest per-capita income in the country.  In other words, it was the “richest” city in America.  Today, around 30% of its citizens live in poverty, and even more sad, 60% of children do as well… 

What happened?

If a picture speaks a thousand words, then this next chart speaks a million…As in more than a million people have permanently moved out of Detroit since 1950.

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One estimate from Mediaite says that in 2011 alone, Detroit lost a citizen every 22 minutes! 

Detroit failed to develop other sectors of its economy relying instead on ever-shrinking manufacturing jobs.
Think about what happens to cities’ tax revenues when more than half of the population up and leaves.  Now imagine that of the people still remaining, over 30% are out of work. In fact, the Financial Times reports that only 1 in 3 adults living in Detroit pay any tax at all…It’s gotten so bad, people are actually selling homes for under $500!   (Not a typo…)

For more unbelievable but depressing facts about Detroit:  http://www.zerohedge.com/node/476669

But that’s only half the equation.  The other half is about spending—and Detroit has spent more than it takes in for decades.  Kevin Williamson reports that Detroit spends a quarter of its budget on pensions alone and in 3 years, that number will rise to 50%.

If that wasn’t enough to push the city towards insolvency, it certainly didn’t help that the city has been run by crooks, swindlers, and novices.  Former mayor, Kwame Kilpatrick, is sitting in jail as I type, awaiting sentencing for ripping off the city and managing it right into the ground.  To see just how shitty of a job Detroit has done managing and investing (mostly losing) the hard earned money of its citizens, read this recent story from Bloomberg:  Bad Real-Estate Deals Return to Haunt Detroit’s Pensions

Normally when governments run out of money they just borrow more.  Problem solved, right?

The problem with this approach is that debt needs to be repaid—with interest.

Today, the people that lent money to Detroit–the municipal bond holders–are about to get royally screwed. Although we don’t yet know all the details, it will not be surprising to see those bondholders lose much of their money. 

Why does that matter?  They’re rich so who cares?  It matters because the same people who lend money to cities like Detroit, also lend money to other cities, states, as well as our federal government.  If they feel that their investment is at risk, which it is, then they will demand a higher interest rate.  Higher interest rates mean higher government spending, and it also means that other borrowers will be hurt (like people with mortgages and student loans), putting downward pressure on the economy and hence, tax receipts.  So it keeps getting worse and worse…This is referred to as a negative feedback loop–and it’s really hard to get out of.

The most disturbing thing about Detroit is that it’s just the tip of the iceberg for great American cities going bust.

A ton of cities, states, and especially our federal government, are facing similar problems.  Check out what’s happened to the populations of these other great cities:

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It’s time for us to confront the reality that is staring us all in the face.  Don’t hold your breath waiting for politicians to do it for you—they will not.

Pensions are not safe…Promises will not be kept…Social Security and Medicare, don’t even get me started.

The only thing you can count on in this world is the truth.  Learn more about the truth regarding your own situation.  Learn more about the truth about money and how NOT to lose it.