One of the more unfortunate delusions spawned by "cheap money" is the pernicious idea that money doesn't come from work and public funding does not come from tax-payers.
By "cheap money" I mean lenders chasing consumers attempting to induce them to take on more credit: One more credit card, buy on time with first-six-months free and so on.
Leverage (debt) can be a powerful enabler on the upside and is a grim reaper on the downside.
A city or state that is growing economically used to be able to borrow $20 for every $1 of anticipated increase in tax revenue. They sold bonds and use the proceeds to build durable infrastructure.
Somewhere along the line, a bright-boy in the back room figured out they could spend the $20 on social programs and as long as they recovered more than $1 on increased sales and income taxes they were ahead of the game.
This where/when government believed they were uncoupled from productive tax-payers and stopped fixing the streets.
Debt exploded. Government stopped living on "taxes" and now live on "debt" with the understanding that the original principal will be rolled-over into perpetuity. No debt will ever really be paid-down. This happens at EVERY level of government.
What could go wrong?
Death spiral
At the micro level, too many people decided they did not have to work. Or, if they were employed that they did not have to be productive.
Inflation is too much money chasing too few goods and services.
When people don't work but get compensated anyway, there are fewer widgets and cans of White Claw produced, fewer plumbers fixing stopped up toilets and hurried staff boxing up and shipping the wrong parts. BANG! Inflation.
The classic fix for inflation is to shrink the money supply via raising interest rates. Fewer people opt to borrow money (if they have a choice) and the fractional-multiplier effect from the telescoping of loans partially collapses. The decision makers monitor the economy and hopefully catch the cooling economy before it drops into a full-blown Depression.
"HOUSTON, WE HAVE A PROBLEM"
Remember that plan to never pay-off a loan but to keep rolling them over?
Every government entity has a "ladder" of loans coming due. Every year they have to refinance the ones that are scheduled to roll-over.
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Two year T-bill rates
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Suppose a city financed operations by issuing bonds at the 2-year T-bill rate + half a percent. Suppose the bonds were of two year duration. Please don't quibble that no city would ever do that...this is for the purpose of illustration.
In the depths of the collapse in the economy in response to Covid, suppose that they borrowed a brazian bucks in 2021 at 0.75% interest. In fact, money was so cheap they went whole hog and went on public works projects to provide money to their underemployed.
Very noble of them, no?
Now it is 2023 and they must refinance their 0.75% loans but their formula, two-year T-bill + 0.5% has them shelling out 5.25% which is 7 times more.
Even at 5.25% the loss of one tax dollar results in the loss of the ability to "service" $19 borrowed dollars. There is still a huge leverage but now it is whacking them about the ears on the downside as businesses and productive tax-payers flee the cities and blue-states. Every dollar that leaves California, for instance, reduces their ability to roll-over $19!
If they "limited out their credit card' based on their tax revenue, and if their tax revenue did not increase by a factor of seven then they are toast because they have very few options.
They could auction off public property to make up the difference. They can privatize the garbage collection and water/sewage services as a one-time stop-gap. It would end up costing many government jobs so that is extremely unpalatable.
They could become junk-yard dogs sniffing out tax revenue that somehow slipped through the cracks. Maybe they can tax prostitution and the illicit drug industry.
They could declare bankruptcy and tear-up the contracts with the employees and retirees and the people who owe them money.
Bet on the last alternative because even if the city dialed its expenses down to ZERO they still have an obligation to roll-over the debt. They already spent that money. They cannot un-spend it. The only way they can shake the bugger of that debt off of their finger is through bankruptcy.
At the Federal level
This problem impacts all levels of government. They have their sensitive body parts in a wringer.
The way the Federal government "declares bankruptcy" is to deliberately and grossly inflate the currency. Rather than becoming something to avoid, inflation is deliberately encouraged.
That results in the theft of savings that are denominated in dollars and distorts (in a positive direction) durable assets that will not need to be purchased with the debauched currency.
Ironically, the younger generation has been brain-washed to value "experiences" which are the polar opposite of durable assets. They have also been brain-washed into valuing rapidly-evolving-technology (smartphones, game systems) which retain value about as long as a bouquet of roses does. Boy, they will be in for a shock!
Me? I am investing in seeds, hand-tools, fence posts and human capital.