If resources were still free, PR would get bailed out, but not now:
Congress is expected to begin consideration of federal legislation to grant Puerto Rico extraordinary powers to escape a looming debt crisis. The island territory, home to just 3 million people, is faced with a massive $70 billion debt burden.
Since 1996, there has been virtually no economic growth in Puerto Rico. At first, people thought there was a recession, but it was not. It has been two decades of stagnation with falling population and no measurable increase in real per capita incomes.
Attempts to “offset the recession” with expansionary fiscal policy financed by borrowing have been made for the past two decades. Since Puerto Rican bonds were triple tax exempt, the Commonwealth was able to borrow at favorable terms for a long period of time.
But fiscal expansion failed to renew growth, and debt mounted. Solving Puerto Rico’s problems through fiscal expansion has not worked, and will not work.
Last week, the island’s Governor, Alejandro Padilla, signed into law emergency legislation that lets him unilaterally suspend the territory’s debt repayments. The island is due to pay bondholders $422 million on May 1. The emergency law lets the governor stop that payment, no doubt in anticipation of Congressional action.
The money spigot is just beginning to sputter and drip in little corners of the world here and there. As it begins to run dry, it will no longer facilitate the repayment of money loaned to states, which will discourage such lending and further dry up the resource pool. People will become protectionist with respect to their own resources, and that will signal a return of competitiveness.
More ominously Puerto Rico is passing emergency measures overriding their Constitutional freedoms and granting the government expansive powers. Clearly they intend to appropriate free services from the private sector in the future to try and keep the free resources flowing as best they can.
We may see that here, though by the time the collapse reaches the US and the first world, things may have moved so quickly it will just be a Soviet-style collapse of the federal infrastructure.
It is just astonishing. Inch by inch, the collapse approaches. We can see every subtle detail as if it were a slow-motion train wreck, and yet so far nobody has any will to intervene to stop it by implementing responsible financial practices.
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