☆ The US dollar could soon collapse. How can SV cities get ready? (1/2)
“We’ve crossed an important threshold,” says 2024 Libertarian VP nominee Mike ter Maat in an Opp Now exclusive Q&A. Even before the federal government misses its first interest payment, borrowing will become much costlier: he says cities in Silicon Valley that rely on credit should act now to avoid financial ruin in a crisis that’s as few as five years out.
Opportunity Now: When we last spoke about Californian voters’ borrowing habit, you warned that the federal government’s debt could become unsustainable by the middle of the century. What do you mean by unsustainable?
Mike ter Maat: We’ve crossed an important threshold, when private sector rating agencies say out loud that the debt issued by the federal government is no longer as trustworthy as it used to be.
If the government continues on its current path, it will absolutely reach a point at which it is utterly incapable of meeting its obligations. We don't know exactly when that point will be. I don't know whether it's in five or 10 or 15 years, but it is not 25 or 50 years away. It is a lot, lot closer than that.
ON: David Walker, former comptroller general, says more and more people are starting to treat this as a not-if-but-when scenario. How can cities in Silicon Valley prepare?
MtM: If you're a municipality at the time the federal government gets into financial trouble, you're not borrowing cheaply. Long before the federal government misses an interest payment, interest rates will come up because investors will demand a premium to compensate them for taking the risk.
And when government interest rates come up, the value of all of the securities being held by every human being on the planet will decrease because all interest rates either explicitly benchmark government rates or are at least affected by risks threatening the US government. If you're a bank and you're capitalized at 10 or 12%, and the value of your bond portfolio declines, that could represent a huge portion of your equity capital.
ON: Like a margin call?
MtM: Yes, like a margin call to an individual. You could have bank failures and financial institutions cutting back on the amount of credit they extend.
ON: So cities won’t be able to borrow as easily? At the same time, though, I imagine the loans they’ve already taken out will be unaffected?
MtM: But everyone who holds those securities is going to be pissed off, because the value of those securities might drop when interest rates go up. So, your books are okay, but the relationships with your investors may not be all that rosy.
ON: Meaning, you wouldn’t be able to borrow more or issue more bonds?
MtM: You don’t want to be caught in a situation where you need to refinance, or fund some giant project when the federal government is going through a financial crisis.
ON: This might sound unscrupulous but wouldn’t cities want to start issuing a bunch of bonds right now?
MtM: Most financing is project-based. You could imagine someone trying to frontload a project: ‘let’s not wait until credit markets get screwed up. Let's strike while the iron is hot.’
So, to the extent that you need credit, yes, frontload. But don’t get yourself caught in a situation where you're living on credit. Maybe conduct your life as though credit markets in the future may not be as healthy as they are today.
ON: That reminds me of Mark Moses’s admonition that cities plan for long-term financial health. Otherwise they exist in survival mode and have to sell off assets. It’s likely that it was only because of American Rescue Plan Act (ARPA) funding during COVID that Oakland could delay selling off the Coliseum for a few years.
I imagine the next crisis will feel like COVID or 2008, except this time cities won’t be getting bailouts because it affects the federal government directly?
MtM: I don’t think it would feel like 2008. It would feel more like the Great Depression.
ON: Wow.
MtM: In 2008 the federal government was still able to access capital markets, borrow, and put money in the hands of American citizens. Imagine a government that could not do that while financial institutions were contracting.
ON: Can’t the federal government just print more money?
MtM: In a financial crisis like that, I would almost certainly expect the Fed to step in and buy Treasury securities like crazy to try to keep the market from collapsing.
But with every dollar the Fed creates in order to acquire these Treasury securities, it is creating more inflation. And with inflation comes the expectation inflation, and it is the expectation of inflation that increases interest rates, which makes it harder for the government to meet its obligations. So that that's the downward spiral that comes from a central bank not being sufficiently independent from the government.
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