 Well, it finally happened. Looks like Puerto Rico has officially gone bankrupt. They are $123 billion in debt. They cannot pay their bills and so they've had to declare bankruptcy. This has been many years in the making. So I'm reading this New York Times article on the topic. It says this, while the court proceedings could eventually make the island solvent for the first time in decades, the immediate repercussions will likely be grim. Government workers will forgo pension money. Public health and infrastructure projects will go wanting and the brain drain. The island has been suffering as professionals moved to the mainland could intensify. Hmm. Grim. Well, what can we learn? First of all, those government programs, those government pensions are the reason, largely the reason that the government is defaulting in the first place. Same things happen in California. Ridiculous government pensions that these people feel entitled to rack up debt that people that said the citizenry can't pay for. I think it's revealing of the times political bias that they would use this kind of language. Oh, it's grim. It's grim to think of those public workers not having access to their grotesque level pensions. It's like the teachers unions in Illinois, you know, make an 80 grand a year or something. They're out in the streets as striking because their benefits aren't large enough. It's not grim that the citizens of Puerto Rico are not going to be fieved as much to pay for fat pensions for government workers. I don't think it's grim in the long run that the public health care system gets less funding because most likely that's going to be an impetus to privatize more of their system, which is of course going to bring costs down and bring quality up. I'm in Thailand right now. They have a relatively free market in health care here. The quality of services through the roof and the prices are unbearably cheap. That's not a coincidence. It's because they don't have a mountain of bureaucratic paperwork that they have to sort through like they do in the United States and surely in Puerto Rico. I want to talk about this because it illustrates one of the more difficult points in economics, which is this. Economic cycles take a long time to play out. If you had been predicting for years, decades that Puerto Rico was eventually going to go bankrupt, the creditors were eventually going to lose their money and the profligate government spending was eventually going to come to an end, you would have been correct. But it would be very hard to predict exactly when such a correction was going to take place because economic cycles take a long time to play out. Maybe they could have secured another loan to kick the can down the road that much farther. The bankruptcy of Puerto Rico illustrates a principle that you cannot indefinitely go into debt. Governments cannot indefinitely borrow money to pay for programs in the present. Eventually the bill comes due. It just seems to be impossible to predict exactly when that's going to be the case. Now abstract away, you've got the principle, you can't go into debt indefinitely and it doesn't just apply to Detroit, doesn't just apply to Puerto Rico, doesn't just apply to several Latin American countries, it applies universally, including to the United States. Right now we're 20 plus trillion dollars in debt and there are a bunch of fools out there who think that the principle somehow doesn't apply that the U.S. government because they control the money supply or because they're so big, U.S. government debt doesn't have to be paid back or won't ultimately be paid back. This is false. It is just a matter of time before all bills come due. Now this isn't that hard to understand when people are thinking about personal finances, right? If you go into debt and then to pay back your debt you take out a loan and then when that debt comes due you take out another loan to pay back that debt and so on, it doesn't take a genius to say, hey, you can't do that indefinitely. At some point people aren't going to lend you the money to pay back your bills and that would be true but it doesn't say exactly when the bankruptcy is going to catch up to that person. They might be 100 million dollars in debt and they might keep turning over their debt and getting loans to pay their debt. Yeah, but you can know at some point that's going to stop and there's going to be a very painful contraction both for the person who's going to have to stop spending their money in a profligate way and the creditors are going to take a hit by financing this individual's poor spending habits. And yet though people grasp this when they think about it at a micro scale somehow they think it doesn't apply when you're talking about really big governments like France or the United States or Portugal. Well, sorry, say folks, it does. The same exact principle that the United States has been borrowing insane amounts of money to pay for stupid programs in the present. Just like Puerto Rico paid for stupid government programs at the present couldn't afford it. The bill came due for them, they went bankrupt, the bill is going to come due for us. Now I will respond to this one objection that oh it's totally different because the United States we can print money, Puerto Rico can't print money legally. And that's technically true but inflation is just another form of default when you can print money out of thin air and devalue your currencies that you can nominally pay to pay back a huge amount of debt that makes the currency far less valuable and in many times it makes it completely worthless. This is what happens in Zimbabwe I think most recently to pay back their debt they just printed out 100 trillion dollar bills so they could formally pay back their debt. So yes I'll acknowledge the U.S. I think is definitely going to nominally pay back its debt it's just probably going to do so with worthless U.S. dollars at some point I don't know when but at some point. Now there is another option here which is that the trend of profligate government spending comes to a stop and somebody gets elected in an office and doesn't promise a bunch of free things to voters and they're fiscally responsible and they start paying down the debt. Technically that's possible maybe that could be a path to avoid default but I think it's highly unlikely given the state of public ignorance about economics and the corruption within the American political system. So my friends learn from the principles that you can distract from the default of Puerto Rico. $123 billion is a lot of money and the reason they went into debt is because they made a bunch of government programs that they couldn't pay for but they sounded nice so voters voted in politicians for these dumb government programs and now it's going to bite them in the butt. There are principles you can learn there that can be applied to your domestic country especially if you live in the States.