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LTCI Watch: Sam's Creditors

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When a commercial company goes bankrupt, the bankruptcy judge and the bankruptcy lawyers use a somewhat complicated list of rules to decide who comes first when it comes to creditors and others who have claims on the bankrupt comanies’ assets.

Federal tax authorities come before bond holders; secured bond holders come before holders of unsecured debt. About $2,000 of a worker’s pay and benefits has a relatively high priority level, and the rest of the compensation a worker is owed has a relatively level of priority.

The U.S. government is unlikely to go bankrupt the same way a company would because, in a serious crisis, the government could make most of its obligations disappear by simply printing a lot more money. The government could, in effect wipe out all of its debt overnight by printing many trillions of funny money dollars and using those to pay off all of the government’s debts.

Chances are there would turn out to be legal and regulatory barriers to using that solution, but the real obstacle is that it would wipe out the value of the U.S. dollar and the U.S. government’s ability to borrow money or issue currency that others would trust. 

So, the government hasn’t and won’t erase the entire federal debt, or even the deficit, by printing money, but the Federal Reserve Board has been trying to keep the economy going by expanding the money supply at a more moderate pace, simply to give bankers, business managers and consumers the sense that money is easier to come by and that they can spend it more readily. 

It doesn’t seem as if that easing has had much immediate effect on inflation. Many economists continue to be more worried about the possibilty of lingering, activity-depression deflation than out-of-control inflation.

But low interest rates are hard on savers, and on insurance companies with large investments in bonds, and the Fed has, in effect, been putting the interests of young people who are still working, borrowing, buying homes and building businesses ahead of the interests of the members of the Silent Generation and the older members of the baby boomer generation, who are starting to retire in large numbers and depend on income from savings and interest-dependent income vehicles such as annuities and long-term care insurance (LTCI) contracts.

Over the short term: Maybe it’s reasonable for the Fed to say it had to do what it had to do. The nation can’t provide much support for the elderly if all of the young people are unemployed and desperate.

Over the long term: Is it fair for the Fed to let Congress off the hook and let Congress get away with shafting the elderly by silently agreeing with Fed policies that shaft the elderly? And who are these young home buyers and business builders getting these wonderful low-interest loans? As far as I can see, most of the borrowers who can get the low rates have sterling credit ratings, don’t need loans, and aren’t all that fond of borrowing, anyway. Why not just end the charade that the low rates are helping ordinary folks, give the banks cash outright, and let rates get back to their natural levels? Maybe ordinary folks will end up paying a little more for loans they can get rather than marveling on the low rates on loans they can’t actually get.


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