Interesting Thoughts On The Local & State Gov’t Crisis
Local and state governments are in terrible terrible shape. States like California, Illinois, New York and even Florida where I live face serious challenges ahead.
The explanation is easy and is actually very simple. The states have spent way beyond their means for far too long. A “growing” economy for decades was able to mask the troublesome behavior, but once the growth stopped a few years ago, the crisis bubbled to the surface.
States are doing their best to combat the situation by doing some cuts – Illinois raised the income tax just yesterday I believe. The reality is though that there’s a slim slim chance that these states can cut enough and raise taxes enough to actually get on solid footing. I think the turn around point was years ago.
I was listening to Meredith Whitney on CNBC this morning who is a very sharp woman (famous for predicting the banking crisis of 2008). She’s made some news recently by providing thorough and detailed analysis on the state and local government financial crisis that is starting to appear.
One of the more very interesting points she made was just how impactful state governments making huge cuts will be to the overall economy. State governments employ hundreds of thousands of people. The impact to unemployment and GDP as a whole will be severe when these governments have to slash workforces.
I’m not sure the Federal government will allow this to happen as they continue to try and prop up the economy. With that said, a Federal bailout of specific states will be political suicide. Imagine a taxpayer in Texas having to fund a bailout of California! The solution then will probably be the Federal Reserve because Ben Bernanke isn’t impacted by the political will like, say, Barack Obama. The Fed will bail out the states and further devalue your currency in the process which is essentially the same as a taxpayer in Texas funding a Congress-led bailout of a state like California.
We’re all on the hook, and we’re all getting screwed.
At least those school administrators will get to keep their $200k annual pension though through retirement. That’s the priority of course.
On the investing side, you got to be nuts to be buying the stock market right here. It’s very, very high, and there is serious volatility ahead whether it’s Europe or California. When news of a potential state default hits the airwaves, stocks will drop like a rock. If you want to buy stocks, wait for a moment like that.