When the States Go Bankrupt

Friday, July 16, 2010
By Paul Martin

By Chris Mayer
The DailyReckoning.com
07/15/10

While the private economy has done a good job adjusting during the recession and paving the way for the growth we see now, we can’t say the same holds true for the government. In fact, as fiscally irresponsible as the US government has been, the next big shoe to drop for the US may be the revealed insolvency of some of its big states.

Already, we hear the “B” word being tossed around. A San Diego County panel – faced with $2.2 billion in unfunded pension liabilities and $1.3 billion in unfunded health care liabilities – recommended, among a number of other possible actions, filing for bankruptcy. According to Grant’s Interest Rate Observer, four major American cities (Miami, Detroit, Los Angeles and Harrisburg) have all hinted at the same this year.

The big states are even worse. The Economist reports on Illinois: “By 2018, Illinois will be paying $14 billion a year in benefits, equal to more than a third of the state’s revenue, compared with $6.5 billion now.”

Plugging those kinds of gaps means getting creative with new forms of skullduggery. For instance, the State of New York, with its $9 billion budget deficit, is looking at a proposal to borrow $6 billion from its state pension fund in order to make a $6 billion payment due to that same pension fund. Yeah, you read that right.

The trials of Illinois and New York are not isolated incidences, either. Grant’s quotes from the Center on Budget and Policy Priorities: “At least 46 states face or have faced shortfalls for the upcoming fiscal year (FY 2011, which will begin on July 1 in most states). These come on top of the large shortfalls that 48 states faced in their current budgets (FY 2010).”

Yet incredibly – or maybe not – Moody’s maintains that “the credit profile of the US state and local government is very strong.” Huh? What are they looking at? That’s ridiculous. Why anyone should take what these ratings agencies say seriously is beyond me.

In any event, what I see happening is a great big bailout from Uncle Sam, which itself is broke – bleeding astronomical deficits and in hock for record amounts.

In order to do that, the government will simply print what money it needs. We all know what happens then. The value of the dollar goes south.

To protect your wealth, stay with things, as opposed to paper, like bonds. Own hard assets, things like gold and oil. Own the stocks of companies growing fast enough to beat inflation. And don’t be afraid to put your money outside of the US.

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