Monday, July 29, 2013

What does Detroit's bakruptcy filing really mean?

The Motor City's bankruptcy (Detroit) filing should set off alarm bells for the other US states mainly because of the reason of the bankruptcy. It's the cost of paying retirement benefits.

There were always rumours that the United States will not be able to sustain the generous retirement benefits for their workers and looks like Detroit is the first one to throw in the towel. The changing demographics of developed countries will soon be forcing a re-think of the concept of retirement because companies nowadays are too fixated on productivity.

Why do I link it to productivity? Long time ago, you go to work at 8am, and leave by 5pm. That leaves plenty of time for yourself, your spouse, and your family. Now, you're expected to go home later, and yet still check your email after that. Yes, on paper, it looks great because you're getting more output per worker but what's the cost? There is always a cost to productivity and it's whether you choose to recognise it or not. That's ain't no such thing as a free lunch.

Coming back to Detroit, the worry is that this will set off a wave of bankruptcy because Detroit is not the only city in the world facing this problem. The more pressing problem at hand is that municipal bonds, once touted as one of the safest in the world, will no longer be safe. That would pose problems to other cities that raises money via these bonds. If all the mutual funds start to take flight from these bonds, it will trigger a chain effect throughout the US.

My guess is the US will step in to save the day. That is if their government is still functioning.

1 comment:

Anonymous said...

It means that unions have to go.

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