I know what is eventually going to happen, based on what happened in the Panic of 1837. The background to that disaster has some similarities to this part of our current economic trouble, at least at the State and local level.
It began with the Erie Canal. Paid for with a huge amount of State bonds, it was under construction from 1817 to 1825 and officially opened on October 26, 1825. Under time and under budget, it was a smashing success, causing a huge boom in trade. The bondholders became very wealthy. It was a brilliant idea.
The trouble began when five other States decided to repeat the success by building their own canals. But unlike the Erie canal, it used a very different theory, of connecting the Great Lakes to the Ohio River. A theory that could not work.
And here is where the parallel to our current national pension crisis begins. Because, the way the States figured on paying for their canals was to issue bonds. Vast amounts of bonds.
The way people could buy these bonds was with *State* money, or money authorized by the State, printed by private banks. Banks that only fractionally backed their paper money with specie, gold and silver.
So these States developed enormous debt, like the pension debt they have today.
Well, the light had just dawned that there was no way their canal projects could work, when right then, outgoing president Andrew Jackson issued an executive order, called the “specie circular”.
Simply put, it stated that the only money that was legal was fully backed with specie. If a bank didn’t have gold and silver to back its currency, it was instantly worthless.
Then Jackson did a double whammy, by refusing to renew the charter of the Second Bank of the United States, where the government did all its business. This meant that the government had to withdraw all its money from the bank, *in specie*.
So instantly three things happened. First, there was a artificial shortage of gold and silver. Second, hundreds of banks all went bankrupt because they could not back their accounts with gold and silver. And finally, the big one, all those State bonds suddenly had to be paid off.
And here’s the zinger, and the bottom line.
The States couldn’t pay off their bonds, so they *defaulted* on them.
See the parallel? Everyone who had their future tied to the trust that the State would pay off on its bonds, *had* to pay off on its bonds, and permanently lost their entire savings and any future income they hoped for from their investment.
And, of course, everybody else who had money in the banks lost it as well.
And this is the lesson for the pension bubble that exists today.
The States *will* default, because they have no other choice. All those pensions will instantly be worth nothing. No more checks. No more retirement.
After the Panic of 1837, the depression lasted for five years, and was the worst depression America had experienced until the Great Depression.
Anyway, Jackson only did what would of happened anyways. It's the boom that causes the bust, not the bust that busts the boom.