Puerto Rico, a U.S. territory, has become completely bankrupt: it can no longer service its debts. Puerto Rico is barred technically from filing for bankruptcy due to its territory status. However, similar reorganization relief will be sought under PROMESA (the Puerto Rico Oversight, Management, and Economic Stability Act) that was passed by congress in 2016.
The magnitude of Puerto Rico’s “Bankruptcy” must first be put into perspective. Puerto Rico itself and many of its associated governmental and community based systems are now seeking bankruptcy-like relief. The debts associated with Puerto Rico’s bankruptcy alone reach over $70 billion. To put this in comparison, the infamous 2013 Detroit Chapter 9 bankruptcy was dealing with an estimated $19 billion debt load. Further back, the largest municipal bankruptcy had a debt load of approximately $4 billion during the Jefferson County, Alabama filing in 2011.
Municipal bankruptcies are rare – at least until now. The worrisome aspect that confronts the U.S. is that these municipal bankruptcies are growing. They are growing in size and debt load. Puerto Rico has a population of almost 3.5 million people. Detroit’s population was less than 20% of Puerto Rico at 680,000 people. This new Puerto Rico bankruptcy poses the question: will entire U.S. states be next?
Municipal bankruptcy is becoming a common concept. It is becoming normal and acceptable. As global debt systems begin to default on a wide scale, there may be no limits to what governments and states will fall into bankruptcy (or its equivalent). The dominoes of our overladen debt system will fall. It is not a question of if more will fall. It is a question of how many and in what manner.
The U.S. national debt is approximately $17 trillion. Much different than almost all other nations, the U.S. has only meager supplies of foreign exchange currency, gold, or other reserve methods. Although the U.S. currency is the primary world reserve currency, this arrangement to indefinitely perpetuate the unlimited spending of the U.S. cannot continue forever. Eventually, there must be some form of financial correction. Balance sheets can only be stretched so far even if everybody is playing on the same team. Eventually, it just deviates too far from reality.
Essentially, Puerto Rico’s bankruptcy may be the start of a long over due U.S. financial correction and reorganization. This reorganization may go from the bottom all the way to the top.