☆ Mike ter Maat: SV cities’ pensions at risk of cratering in a looming financial crisis (2/2)
A global run on the dollar could force SV cities into a state of “chaotic austerity” as inflation spikes and borrowing becomes nearly impossible. So says economist Mike ter Maat, in an Opp Now exclusive Q&A. He argues that financial officers should assume markets will only get worse from now on, and plan accordingly: frontload borrowing, fully fund the pensions, and insulate your town from swings in revenue.
Opportunity Now: You warn that soon the federal government won’t be able to pay interest on its debt. If this happens, cities in Silicon Valley won’t be able to borrow as easily, and at the same time there’s a risk of inflation. What other effects will a default like this have on the economy?
Mike ter Maat: The international effects become quite important as well. With the Fed pumping more money, and the American economy shrinking, a run on the dollar could be very large.
ON: How can cities in Silicon Valley that depend on borrowing prepare for this massive financial crisis?
MtM: I would say, frontload your borrowing, and don’t plan on credit markets being available to you in the distant future.
Rationalize your spending: reduce your financial footprint. In other words, insulate yourself from swings in revenue. Don't get caught in a position where, if your revenue went south all of a sudden, you had to go to credit markets just to survive.
ON: Does that include cutting down on OPEB (Other Post Employment Benefits) and trying to fund public employee pensions?
MtM: Pensions are an interesting example. Your pension should be fully funded.
ON: Why does that matter?
MtM: Because you don't want to be in a position where it’s 2033, and now you need to go out and raise $40 million because nobody paid any attention to your pension hole the past decade.
ON: And then you can’t borrow to fill the gap?
MtM: Yes, because ‘oh, look, the credit markets suck. Wish we had taken care of this problem back in 2027.’
ON: So, people just literally won’t be getting their pensions if that happens?
MtM: Could be. Not only are pension funds underfunded but they’re at significant risk to financial markets. The vast majority are in equity and bond markets. So, if interest rates go the wrong way, pension funds are going to decline in value, making your hole even bigger.
A prudent chief financial officer would have to say that whatever today is, this may be as good as the markets get in the US and around the world. Do not plan on them getting better. Plan on them getting worse. You don’t want to get stuck with a huge, unfunded pension liability, or a huge portfolio that is subject to substantial decline because of interest rate spikes.
ON: So, if the federal government doesn’t force some kind of austerity or sequestration to prevent the crisis, we’ll face austerity by other means?
MtM: Chaotic austerity. The effects of such a disaster would be extreme both in terms of depth of depression and worldwide breadth. None of this means the world would turn into Mad Max Beyond Thunderdome. But neither does it mean that blithely allowing oneself to be swept headlong into the disaster without a bit of forethought would be smart.
ON: Can’t we avoid the debt crisis through prosperity, by growing our way out of debt?
MtM: People say I’m too worried, because the economy is going to grow very fast. And so the revenue base that the federal government can tap into is going to be much larger in the future than it is now. We'll always be able to increase tax revenue if need be, to make ends meet.
That’s a happy thought, that'll let you sleep at night.
ON: Sounds nice.
MtM: One problem is that growth might not be as robust or quick as you wish. The other problem is that growth will be uneven. There will be winners and losers. And you should not assume it’s going to be evenly dispersed across geographies.
Municipalities are in the geography business. If your town is on the losing end because you have a concentration in a certain type of technology, all of a sudden you find out that your particular place in the world is incapable of producing that extra revenue.
ON: You mean Silicon Valley could look like the rust belt?
MtM: I want to doubt that, but stranger things have happened. What if it no longer mattered that you were located in Silicon Valley? What if you had spent $4 million for a piece of property in San Francisco that you could buy for $400,000 anywhere else in United States, and all of a sudden no one needed to be there anymore?
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