Central Falls RI, Yet Another City on the Edge of Bankruptcy

Photo Credit to Purpleslog via Flickr

Two years ago I began warning listeners of The Survival Podcast that round two of the current crisis would begin with a series of city level defaults, followed by state defaults.  This would eventually cause run away inflation as the federal government attempted the impossible task of fixing the mess with the end result being a re-basing of the currency.  In short money printing has its’ limits, the coming defaults by hundreds of cities and dozens of states will be what pushes us to said limit.

Over the past year at TRTAM, I have continued to sound this alarm.  In response I have been called a loon, an alarmist and a quack.  In spite of being called those names I am beginning to wish I was nuts and the naysayers were right.  Unfortunately this catastrophe is unfolding right in front of us and just about as on schedule as it could be.  Right down to me calling the Dow at 12,500 as part of the false recovery by mid 2011, it currently sits at 12,601 as I type this.

Just two days ago Boston.com reported that Central Falls Rhode Island is now standing on the “edge of financial abyss.”  Here is a excerpt from the article on Boston.com

Central Falls, one of New England’s most distressed cities, is on the cusp of filing for bankruptcy protection – a relatively rare step for municipalities even in tough financial times. Since 1980, only about 46 cities or towns in the United States have sought such protection, according to James Spiotto, an attorney in Chicago who is an expert in municipal bankruptcies.

Last year, the state took over Central Falls – a city of 19,000 residents with an unadjusted unemployment rate of 15 percent – stripping the mayor of his keys to City Hall and the rest of his authority. That move came after every teacher was fired at the under performing high school, with most of them rehired later.

Here we see a very predictable and all to familiar drama playing out yet again.

  1. The city over spends, over commits to workers and funds shortfalls with bonds (borrowing money)
  2. Borrowing money is a temporary solution to a permanent problem in the end it makes the problem worse
  3. The city goes into receivership and the receiver and state force some cost cutting, generally some of it is political theater like canning the mayor or elimination of city council salaries.  Salaries that are not even a drop in the bucket vs. the overall problem.
  4. There is no cost cutting that can fix the issue and even the places they do cut they end up spending the money in some future stupid decision, here for instance rehiring the teachers who were under-performing.  Please consider there is a cost when you “hire” and a cost when you “fire”, to fire someone and rehire them is expensive.
  5. Eventually the city goes to the state and says “fix it” or “we want bankruptcy protection” and if you don’t bail us out we will default on our bonds and that will screw you over too.
  6. The state then must either let the city die or try to bail them out.  Of course both choices suck and bailing out the city simply sets the stage for more failing cities to get in line.

So what’s next in this unfolding chain of misery?  Just like the bank failures in 2008, we will be told not to worry and that everything is just fine until the numbers exceed the ability of the media and government to sweep things under the rug.

The goal now isn’t to prevent this crisis, simply to hide it long enough to get through the election of 2012, after that this will be another “serious crisis the government won’t want to let go to waste“.  Trust me no matter who is in the White House the play will be the same, a currency re-basement.  If the dollar in its’ current form still exists by 2016 I will be totally shocked.

The winners will be the banks, the government and the financial elite.  What can we do about it?  Sadly very little!  Your only play right now is to hedge some of your money into gold and/or silver, eliminate debt and save some cash.  Sure your cash will be devalued during a debasement but it will pale in comparison to the beating stocks and equities are going to take.  Don’t think for one moment such a re-basement equals the total end of civilization, that is a lie designed to sell you gold and other items by playing on your fears.

If you want to get a feel for what this will be like, take a time trip back to 1933 when FDR took the nation off the gold standard, gold was worth about 33 dollars an ounce in the global market at the time.  Citizens though were forced to surrender it for just a hair over 20 dollars per ounce in the new money.  Folks that was a “currency collapse”, one day you owned 50,000 dollars in gold, the next day you owned about 30,000 new “US Dollars”.  This time around we may very well move back to a new glorious “gold standard”, when we do guess what, your “dollars” will have the same numbers on them but their value will decrease overnight in the global market place.

You can call me nuts if you want to but odds are I will bring you another city on the edge of the abyss before this week ends and I bet it won’t be long before the Fed once again fires up the printing presses.

 

 

8 comments to Central Falls RI, Yet Another City on the Edge of Bankruptcy

  • Heard about Central Falls this morning and almost couldn’t believe the time lines they were discussing considering the story is just now “breaking”. From what I heard, it’s a very real possibility that they will default in the next couple weeks. Unbelievable.

    I too think that this will be largely swept under the rug until after the 2012 elections (if possible), and then watch out. The Mayans were right, in a manner of speaking, only the “end of the age” will be the end of the dollar, and U.S. dominance, as we know it.

  • Dave

    So if the dollar is re-based, how much value does it loose? 10%, 50% ??

    Is holding US Dollars in cash the least painfull option during a re-basement or are there safer options besides metals? e.g. other currencies, land etc?

  • ModernSurvival

    @Dave, no one knows, anyone that says they do lies. The best approach is hold some cash, hold some silver, hold some gold, if you own stocks, protect with a stop loss and be ready do convert at the drop of a hat.

    You can’t go all gold, because you need cash to function.

    Also I am guessing (it is a guess) that the inflation domestically will be moderate at first (relative currency strength). They are going to sell this to the sheep, to do that it has to be a nasty fender bender at first not the 80 car pile up it represents long term.

  • metaforge

    I think other currencies are a good idea – CAD, Swiss Franc, AUD maybe… Yuan if you can get some…. mix of all the above.

    I worry about too much land exposure as even if you have it free & clear, a municipality may try to save itself from bankruptcy by cranking up property taxes on “rich speculator landowners”.

    Just my (soon to be devalued) $0.02…

    • metaforge

      Oh the other thing of course is to invest some extra cash now in your 5 essentials, as Jack always says… Food, water, shelter, energy, security.

  • Richard Dow

    Just to put things in perspective regarding Central Falls: it occupies only one square mile in the greater Providence area and has been depressed for decades. Only in Rhode Island, perhaps, could a “city” so small have survived so long.

    • ModernSurvival

      That argument might matter if over 100 other cities were not also on the edge. By the way Providence itself is on that list.

  • @ModernSurvival, I think you are still underestimating how quickly the unfunded pensions are going to begin affecting municipal bonds and the market as a whole. When folks like me, (a former basketball coach, libertarian, rebellious backyard gardener, Idaho transplant to Rhode Island, redneck, and all around miscreant) can see this coming, I have to believe that there are more than a few hedge fund managers moving to protect their assets. This can do nothing but drive up borrowing costs on roads, buildings, etc. whose costs will be passed along to businesses and homeowners before they wake up and start running for office.

    Since moving to RI I’ve seen that the unions here in the northeast are unwilling to compromise at all on restructuring their retirements. The only alternative will be to finally void those contracts. Think about that impact on folks who put in 25-35 years and saved nothing extra because they “knew” that their pension was going to be there when they retired. Sure, they may own their home, but how in the world are they going to pay property taxes on it when their fixed income is cut in half and their food costs double?

    I saw a piece tonight on Central Falls that they offered the union’s average retiree who’s now receiving around $30k in yearly pension half that, $15k more or less, with no one receiving under $10k. The union flat out rejected it. When Central Falls goes into Chapter 9 protection (if it’s an honest trustee) they’ll most likely get scraps, in the $5k – $10k range. The union is in an untenable position, since every municipality in Rhode Island is in a similar position.

    I think the answer we’ll see eventually has already begun to take root in other states, defined benefit contributions. Utah went this route earlier this year, you can read more here: http://www.nytimes.com/2011/03/01/business/01pension.html As more and more municipalities and states fall into receivership and the collective bargaining union blocks lose their place in the hearts of folks not in unions, I believe this will become the norm. As a state your costs are up front, and when Joe the Policeman retires, the city has no further responsibility to his retirement fund. It’s not a sexy solution, but at the same time it puts Main Street on an equitable footing with state and local jobs.

    Personal accountability, looking to permaculture as part of their retirement plan and learning as a country to live within our means again is the only real solution. It’s going to hurt and affect every American, but nothing worth doing is ever easy. We can panic and fret, or we can get to work on killing our own debt, leaning how to garden and planting with an eye to the next 20 years.

    Thanks for all you do!

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