In 1861, eleven southern states with Democratic Party majorities attempted to withdraw from the United States after Republican Abraham Lincoln defeated their candidate, and became President. The “Confederate” government they formed printed paper money to pay its bills. This “Confederate money” quickly became worthless because it was not backed by gold, silver, or anything else of value.
On May 13, New Jersey’s Democratic Governor Phil Murphy publicly admitted that New Jersey state government was “basically out of money”.
That came as no surprise. New Jersey’s budget planned to spend $38.5 billion this year. Governor Murphy projected that the state would collect that much in income, sales, and business taxes, together with tolls and other fees. However, since Governor Murphy shut down almost every business in the state, New Jersey is now expected to collect less than half of that money.
In spite of that, it appears that Murphy did nothing to cut spending. All state government employees seem to be collecting their full salaries and pay, even though very few of them worked their full hours after the shutdown started last March 16.
Murphy said the state needs “upward of $20 billion” from the federal government.
Even the state got that money, New Jersey government would still be hopelessly in debt. Long before the coronavirus arrived, New Jersey government owed roughly $252 billion, or more than six times its yearly income. Our state government was like a family earning $38,500 a year that had $252,000 in credit card balances! That debt came to an average of more than $65,000 for each New Jersey taxpayer — before the coronavirus crisis started.
New Jersey’s $252 billion debt included roughly $61 billion in state bonds that need to be paid back with interest. It also includeds $99 billion in unfunded pension benefits and $92 billion in unfunded retiree health care benefits. That is money state government promised to pay its retired employees in future years, without setting aside and investing that money so it will be available when needed. Instead, politicians must raise taxes in the future to make those payments. Any private business owner or even the board of a condominium association would prosecuted for fraud or embezzlement if he or she did that!
Last year, TruthInAccounting.org reported that New Jersey ranks dead last of 50 states with the “worst finances in the nation”. It gave New Jersey a financial grade of “F”.
Meanwhile, in Washington, D.C. the Democrat majority in the House of Representatives approved a $3 trillion coronavirus spending bill which it calls the “HEROES Act”. Three trillion dollars is three thousand billion dollars or $3,000,000,000,000.
That $3 trillion is on top of the $2.4 trillion “Coronavirus Relief Fund” borrowed and spent less than two months ago. Both measures would total $5.4 trillion. That is more than, and addition to the total of $4.8 trillion originally budgeted to run the federal government for the entire year.
Some of the extra $3 trillion would bail out New Jersey government, and other state governments run by Democrats that have not re-opened their economies. The Democratic bill would also require the release of thousands of prisoners, forgive student loans, award “environmental justice grants”, extend federal unemployment benefits that pay many people more than what they earned when they were working. Finally, the Democratic bill would require “Vote By Mail” in all elections.
Where will that money come from? How will it be paid back? The federal government is broke and also hopelessly in debt. It is far worse financial shape than the states it would be bailing out.
The actual “Debt Clock” is posted at TruthInAccounting.org. Its numbers change every second. These numbers were posted on May 18, 2020 at 11pm. They are far higher now. “The Truth” includes unfunded Social Security, Medicare, and federal pension obligations in addition to the official “National Debt”.
The United States government is now more than $25 trillion in debt. However, that does not include another $100 trillion for unfunded Social Security promises, Medicare benefits, and military and other pensions. The total comes to $125 trillion, or $737,000 for each U.S. taxpayer.
What will happen when another $3 trillion to this?
It could end in super-inflation. At some point, people will not accept paper money from the United States at its full face value. This will probably begin when we try to buy things from other countries. That will make prices go up. Eventually, few people in this country will work, produce, or sell anything if all they get are pieces of paper that are not backed up by anything of value. If they do accept paper money, they will raise their prices. This is what happened in Venezuela.
Or it could end up in super-deflation. If the federal government stops printing more paper money to pay its debts, it will stop paying principal and interest on its bonds and treasury notes. It may even be unable to make full social security, Medicare, or pension payments. If that happens, people who depend on that money for their income won’t have enough money to pay their bills. With almost everybody too broke to pay their bills prices and property values will fall like they did during the Great Depression.
Only a bankruptcy or something like this can stop this.
When an ordinary person does not have enough property or income to pay his or her debts in full, the law allows that person to declare bankruptcy. When that happens, people are allowed to pay a portion of their debts, based on what they have. Sometimes that comes to pennies on the dollar. Sometimes it is nothing. Once a bankrupt person pays what he or she can, the unpaid balances are “discharged” or wiped out. The bankrupt person is now debt free and gets a “fresh start”.
New Jersey state government, like a private person facing bankruptcy, does not have nearly enough property or income to pay its debts. A bankruptcy for state government would work the same way as a personal bankruptcy. Much of the state’s property would be paid to its creditors — the bond holders and pension funds. Everyone would get less than what they were promised. Then all remaining debts would get “discharged” or wiped out, and New Jersey taxpayers would get a “fresh start”.
Years ago, we at Libertyandprosperity.com agreed that it would not be fair to cut all pensions by the same percentage. That is because a small number of people are getting pension payouts far higher than what they paid into the system. In New Jersey, most pension payouts are based on the highest salaries paid just before retirement. People with political influence are able to “juice up” their pensions by getting big pay hikes or multiple government jobs just before they retire. If New Jersey government goes through a bankruptcy, pensions for those people should get bigger reductions, so that what they are paid is based on what they contributed to the system during their entire career–not just the highest few years.
New Jersey government could also do a “Constitutional Debt Reduction” without going through bankruptcy. New Jersey’s State Constitution does not permit state government to borrow money without the approval of voters to a ballot question. Only about 20% of New Jersey’s debt was approved by voters in a ballot question. That means New Jersey government has the moral and legal right to “repudiate” or refuse to pay any debts not approved voters. That would achieve the same result and “fresh start” for taxpayers as a bankruptcy.
The Federal government can also do the same thing. Article I, Section 8 of the U.S. Constitution states that the Congress can only spend money for certain limited purposes. Most of the federal government debt was incurred to pay for purposes not permitted by the Constitution. Can future members of Congress argue that debts incurred for unconstitutional purposes don’t have to be paid back? Can Congress include the federal government in bankruptcy laws?
Whatever happens, this will not end well.
Seth Grossman, Executive Director
Personal Email: SethGrossman49@gmail.com