Two weeks ago I spoke at the Harvard Law School Forum and, after my presentation, had a private meeting with some students and alumni who had a particular interest in urbanism. One student in particular — and I wish I remembered his name because he was a sharp guy — asked me a question I’ve been mulling over ever since: Where did all the money go?

I’ll elaborate on what I took him to mean: Americans have spent trillions of dollars on homes and commercial properties, and governments have spent trillions of dollars on infrastructure. You are telling us that wealth is not there. If it’s not, where did the money go?

My answer, and I apologized for going full Matrix on them, was this: What if the money was never there in the first place?

I want to unpack this a little bit because I think it’s important for understanding why the tragedy of the Suburban Experiment is not a problem we can solve, but a predicament with outcomes we can only manage.

A few years ago, I met with some people who do ratings on municipal bonds. I presented a modified version of the Curbside Chat to them and then we had a discussion. It didn’t surprise me that they hadn’t heard the stuff I’d presented before, but it did alarm me when, after acknowledging it —and agreeing that I made a compelling case that nearly all our municipalities are structurally insolvent — they all kind of simultaneously shrugged their shoulders.

I’ll summarize their collective analysis in one line: Cities historically have a very low default rate and so we’re confident that cities will continue to have a very low default rate.

Even though that seems crazy to me, I must acknowledge that there is a certain logic to it. As Nassim Taleb suggests in the Black Swan, the turkey is fed every day through the spring, summer and fall; there’s no reason to anticipate (at least from the turkey’s standpoint) that when they wake up on the fourth Thursday of November things should be any different. That might be true, even if some guy from a non-profit organization showed you the ax, chopping stone and guest list for Thanksgiving. Having a full tummy is a powerful motivating factor.

Back in 2013, I wrote a six-part series called Dumb Money in which I tried to explain how and why Wall Street banks take one dollar and turn it into a forty, fifty or even sixty dollar investment. Starting with a small bit of equity and then leveraging it many times over, banks are able to experience a massive return on a very small bit of real wealth. The fragile part of this, of course, happens when things don’t go well. A portfolio leveraged 50:1 is wiped out — all the equity is destroyed and the bank becomes insolvent — if the portfolio loses just 2% of its value.

I want you to hold onto that thought for a bit: that we can start with a small bit of wealth, leverage it up to grow the size of the portfolio, but when things go bad just a little, very quickly have our liabilities exceed our assets, wiping out our initial wealth and making us insolvent.

This map, created by Urban3, illustrates the tax value of each property in Lafayette. Green areas create a net profit and red areas are a net loss. The higher the block goes, the larger the amount of profit/loss.

This map, created by Urban3, illustrates the tax value of each property in Lafayette. Green areas create a net profit and red areas are a net loss. The higher the block goes, the larger the amount of profit/loss.

In last year's essay, The Real Reason Your City has No Money, I presented the tragic math of Lafayette, Louisiana — where it takes two dollars of public investment to induce one dollar of private wealth and where there is no way for the city to raise enough money to cover their long term costs. In the follow up piece, Poor Neighborhoods Make the Best Investments, I pointed out how the old and now poor neighborhoods were the only ones that were, from an accounting standpoint, profitable in the entire city. The old, poor neighborhoods were the only neighborhoods generating more revenue to the city than they cost to service and maintain.

This is true in 2016, but let’s turn back the clock to the 1950’s, before Lafayette ran highways out into the swamp and started to build out there as a way to experience growth. I don’t have a precise diagram, but we know the city was much, much smaller in size back then. We know from an analysis of the extent of their water system that the city is 10x to 20x larger today than it was at midcentury.

I think it’s safe to say that Lafayette — and most American cities of the post-War era — were financially stable. And to use an accounting term again, they were profitable. The revenues produced by what they built—the community's wealth—exceeded the expenses needed to maintain that built environment. If Lafayette is consistent with other cities I’ve examined, the private to public investment ratio would have been somewhere between 20:1 and 40:1. In other words, for every dollar of public investment in streets, pipe or buildings, there would be between $20 and $40 of private wealth to sustain it.

Think of this as the initial equity, the nest egg that was painstakingly created over decades and decades of incremental investments.

What happened is that we leveraged this equity to grow our portfolio, to expand the city in the name of growth. We took on a lot of  public debt and, even more importantly, we took on a lot of long term liabilities (promises to service, maintain and replace the stuff we built). Each increment of new growth, in an accelerating manner, added more liabilities than it created in new wealth. Each new investment made us poorer.

Now we look at our cities and see all of this investment. There are all the homes and commercial properties. There is all the infrastructure, the roads and streets and pipes and pumps and valves and meters. There are all these public buildings and parks and transit systems. There’s an unfathomable amount of investment there.

But just like Lehman Brothers, which had hundreds of billions of dollars in assets, our cities have even more liabilities than they have wealth. It’s all propped up by the Ponzi scheme of how it's all financed, along with a little bit of real wealth — equity that was wiped out on the real balance sheet long ago. The money is not there. It was never there.

Since cities historically have a very low default rate, we’ll just remain confident that cities will continue to have a very low default rate. Until they don’t. Or until their built environment completely falls apart.

There is no way to sustain a city over time without building wealth within it. That is why a Strong Towns approach is critical for every city and every neighborhood — rich or poor — that wants to be around to experience a chance at prosperity in the future.