Puerto Rican Default Shows How Big Government and Easy Money Destroy Economies

As the Wall Street Journal put it, the debt crisis in Puerto Rico entered a “more perilous phase” after the Government Development Bank defaulted on a $422 million payment Monday:

The missed principal payment, the largest so far by the island, is widely viewed on Wall Street as foreshadowing additional defaults this summer, when more than $2 billion in bills are due.”

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Congress is debating legislation to grant the territory new power to restructure its more than $70 billion in debt. If Congress fails to act, the US taxpayer could ultimately end up footing the bill for Puerto Rico’s debacle:

In a letter to Congress, Treasury Secretary Jacob Lew warned on Monday that a US ‘taxpayer-funded bailout may become the only legislative course available’ if the proposed restructuring legislation isn’t approved.”

In his podcast yesterday, Peter Schiff pointed out that what Congress is debating is not a bailout. (Scroll down to listen to the full podcast.) The legislation would simply give Puerto Rico the opportunity to restructure its debt. In the US, cities can declare bankruptcy and go through restructuring. Congress took that right away from Puerto Rico. Now, big hedge funds are running ads talking about “opposing the bailout.” But Peter says they don’t really mean what you think they do:

If [Puerto Rico] is not allowed to restructure their debts, then they will need a bailout…but these hedge funds who are paying for all these commercials, and they’re saying, ‘Oppose the bailout,’ the irony of it is they want the bailout because the bailout money will go to the hedge funds.  That’s what the bailout money will be used to do, is to repay the bonds. If Puerto Rico is allowed to be restructured, they won’t need a bailout because the hedge funds will be the ones to lose. They’re trying to make it out like it’s mom and pops who are going to be the losers. No, no. It will be these wealthy hedge funds that are going to lose out. But they need to lose out, because they never should have bought these bonds.”

This echos what Peter said earlier this year in an interview on CCTV America when he called a Puerto Rican bailout “immoral”and argued that the territory should be allowed to go bankrupt.

Even if Congress comes up with a fix, it will likely only kick the can down the road.

In fact, the same US government so eagerly trying to fix Puerto Rico’s problems continues to pursue the very same policies here at home that mired the island in an economic crisis to begin with.

As we reported last week, the federal minimum wage was a major factor in creating Puerto Rico’s malaise. And the laundry list of policies highlighted by the WSJ as factors in the crisis seems eerily familiar here in the states:

Puerto Rico, whose residents are US citizens, has been mired in recession for a decade and borrowed heavily to balance budgets. Despite the shaky economy, investors snapped up its debt for years thanks to generous tax incentives. The borrowing spree, however, did little to create economic opportunity on the island, and residents have steadily left for employment on the US mainland, eroding Puerto Rico’s tax base.”

The only difference is Americans generally can’t leave the country, so they make due working multiple part-time jobs as full-time jobs evaporate from the economy.

Peter summed it up perfectly in his podcast.

Puerto Rico is a perfect example of how big government and easy money can destroy an economy.”

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