You may or may not have noticed, Detroit, the cradle of America’s automobile industry and once the nation’s fourth-most-populous city, filed for bankruptcy last Thursday. This is the largest American city ever to take such a course.
Detroit expanded at a stunning rate in the first half of the 20th century with the arrival of the automobile industry, and then shrank away in recent decades at a similarly remarkable pace. A city of 1.8 million in 1950, it is now home to 700,000 people, as well as to tens of thousands of abandoned buildings, vacant lots and unlit streets.
If you think Detroit has no connection with you, an ordinary man in Singapore, think about General Motor, Ford, Chrysler. The Renaissance Center below (also known as the GM Renaissance Center) is a group of seven interconnected skyscrapers in Downtown Detroit, owned by General Motors as its world headquarters.
OK, enough introduction. So what if a city in America defaults? Remember the rising interest rate and crash of the bond market recently? People do not seem to be worried. After all, “the default rate is low”.
So when a city defaults, her debt defaults. How about the citizen’s pension? How about your fixed-income fund who invests into the municipal bond? How about those companies who are waiting for the government to pay their invoices?
There is an age-old but almost universally true statement nearly no one can accept: ‘Bull markets die with a whimper, not with a bang.’
We haven’t talked about Greece for long, it seems to be forgotten. Nobody paid much attention when the government of Cyprus tried to levy on the poor depositors.
When interest rates go up, the increasing difficulty for everybody to pay the debt will surface. Not just the government, but everybody!
Today’s top news is “One in 10 borrowers overstretched, warns MAS – Hike in rates and fall in property prices may pose risks to financial stability“. Isn’t this a good time for you to re-evaluate if you have been prudent? The crisis never comes in one day. It always accumulates until it blows up.