Detroit Files for Bankruptcy, the Normalcy Bias, US$, & Argentina

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Today I found out for the first time that the city of Detroit had filed for bankruptcy — exactly one week after the petition was filed: [http://www.mieb.uscourts.gov/news/city-detroit-bankruptcy-filing].

It is interesting that after searching for this in Google, I actually did not find any results, besides from one or two blogs.  I went to the Eastern District of Michigan Bankrupty Court and there appeared the information on the front page.  Just to confirm that I had not done anything wrong, I went to FoxNews, CNN, and then to NBC News, just to see if the story was hidden anywhere.  I could not even find this story mentioned in a footnote.  I just found a whole bunch of stories about all of this “social tension” happening in the U.S. and wrecked planes and trains.

Most of what we know is maintained simply by perserving an image.  Over time, cracks begin to develop and more and more people see past the image.  Then, when the image dissipates, or when the floor drops, the floor drops quickly.  Most people do not believe in rapid change due to the Normalcy Bias.  This bias “causes people to underestimate both the possibility of a disaster occurring and its possible effects.  … People also tend to interpret warnings in the most optimistic way possible, seizing on any ambiguities to infer a less serious situation.” [http://en.wikipedia.org/wiki/Normalcy_bias].  There is probably something good to be said of the Normalcy Bias, it maintains social order.  However, it is bad when a situation needs to be acknowledged to prevent a worse one from developing.

The bankruptcy filing is important not because Detroit is in clear decline.  (Detroit is downsizing for the medium to long-term for a multitude of reasons, not just those pertaining to trade or even the invention of the air conditioner).  The filing is important because of the effects this decision will have on the pension funds of Detroit workers.  The city owes about $18.5 billion in debt, $9.2 of which is unfunded pension and retiree healthcare.  This is not surprising, since the majority of the expenses of any business (including governmental ones) should be comprised of wages which it pays out to its workers.

Earlier this week, the city’s two pension funds — which have claims to $9.2 billion in unfunded pension and retiree healthcare — filed suit in state court to prevent Orr from cutting benefits as part of a bankruptcy restructuring.

The pension funds and, in a separate lawsuit, employee groups, argue that Michigan Gov. Rick Snyder, who would have to sign off on a bankruptcy petition, cannot do so if the filings include plans to reduce pension benefits, because the state’s constitution explicitly protects public pensions.

Job security and luxurious job packages are a thing of the past.  The environment that our parents (generation 1945-75) grew up under is not the same as the one we face.  To put it figuratively, they had a whole pie to cut up and divide as they wanted to.  All major competitors were in ruins and the capitalistic west was at odds with a communist east.  However, this was a historic anomaly.  As countries develop, they need to protect their industries.  As they reach a clear peak of supremacy, they advocate free trade.  When they begin to feel threatened again, they once again blanket nationalistic measures and advocate for protectionism.  That is because they need to simulate certain industries to catch up to their foreign competitors (see p. 83-88 Chang, Ha-Joon from “Taking Away the Ladder” [Source 6]).  Is this happening again?  As U.S. policy changes, this will be an indirect and subtle admittance that things are changing.  I will be indirect on how this will effect those who do not understand the changes underway.
Previously, the whole world did not use the US$ as their standard currency.  Pairs of countries used the US$ as a means to facilitate commerce amongst themselves.  This is part of the reason why the dollar is so strong.  It is the default global currency based on trust.  As long as it is trusted as a reliable currency, it retains value.  However, its purchasing value also now depends not only on the value U.S. citizens place on American currency, but rather the value foreigners place on it.  When economic regions adopt other currencies with more “weight” and abandon the US$, this definitely effects us.  (noitalfni)
When Argentina uses the US$ to hedge against their own currency’s inflation, it is time to be nervious.  Since the 1930s, Argentina is countercyclical (behind the ball) in almost every economic strategy.
For anyone to not think that the standard of living in the U.S. cannot worsen, I would like to advise them to study the story of Argentina.  This country was once the 7th or 8th richest per capita in the world until the 1930s.  And then, a lot of bad things happened (way too detailed to summarize now).  It is still apart of the G-20, but really today its GDP is ranked about 22 globally.
Argentina’s troubled history in recent decades leads many to forget just how prosperous and advanced the country was a century ago. In fact, it was one of the ten richest countries in the world on a per capita basis until the 1930’s. Any analysis of the country’s stunning decline into inflation and dictatorship a few decades later must begin with the role of an entrenched economic elite who pursued their narrow interests regardless of the national cost. Rather than investment bankers, Argentina had a few thousand elite landowners who dominated the economy via agricultural exports. The pursuit of naked self-interest by these ‘oligarchs’ led to an increasingly unbalanced economy that underinvested in education and infrastructure and was dominated by inefficient monopolies protected by political patrons. That effort to protect the status quo at all costs via a captive political system led to the failure of attempts to modernize the economy and income inequalities growing to a destabilizing extreme.
If the currency is not a concern, just consider the pecuniary effects that crops like soybeans have on actual food staple items.  We don’t feel the effects of this yet, for several reasons.  I’ll discuss this in the future.  I’ll also be returning back to the Spanish/Portuguese blogging for awhile, (which is when I don’t synchronize updates to my Facebook.)
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