If we were to just look casually over the past couple of months we would notice several rather disturbing developments taking place…not that the MSM hasn’t done an excellent job of downplaying/dismissing the implications of these events.
While, alternately, doing their damnedest to whip the public into a frenzy over a largely ‘uninspired’ health care reform bill that nobody particularly likes.
But, backtracking a few steps into yesterday’s post, the fact that excessive profit taking by the investor class has shrunk our economy to something that could be blotted up with an eyedropper. (This is what is meant by my statement that they have ‘sucked up all of the money’ from our society. Instead of re-distributing the profits, they pocketed them!)
The question is whether or not we are ready to take a swan dive off of a high cliff into an extremely polluted river…or if we have already jumped?
I guess we will have to examine the evidence and draw our own conclusions.
State Debt Woes Grow Too Big to Camouflage
By MARY WILLIAMS WALSH
Published: March 29, 2010
California, New York and other states are showing many of the same signs of debt overload that recently took Greece to the brink — budgets that will not balance, accounting that masks debt, the use of derivatives to plug holes, and armies of retired public workers who are counting on benefits that are proving harder and harder to pay.
And states are responding in sometimes desperate ways, raising concerns that they, too, could face a debt crisis. [Considering the entire capitalist world adopted ‘creative accounting’ back in the 1990’s to disguise the economic degradation caused by globalization, is this really ‘news’? Well, it is to Tea Partiers…but what do you expect from a crew that thinks Reagan was a ‘Great President’?]
New Hampshire was recently ordered by its State Supreme Court to put back $110 million that it took from a medical malpractice insurance pool to balance its budget. Colorado tried, so far unsuccessfully, to grab a $500 million surplus from Pinnacol Assurance, a state workers’ compensation insurer that was privatized in 2002. It wanted the money for its university system and seems likely to get a lesser amount, perhaps $200 million. [You can only rob Peter to pay Paul for just so long because the day will eventually come when Peter doesn’t have anything left to steal.]
Connecticut has tried to issue its own accounting rules. Hawaii has inaugurated a four-day school week. California accelerated its corporate income tax this year, making companies pay 70 percent of their 2010 taxes by June 15. And many states have balanced their budgets with federal health care dollars that Congress has not yet appropriated.
Some economists fear the states have a potentially bigger problem than their recession-induced budget woes. If investors become reluctant to buy the states’ debt, the result could be a credit squeeze, not entirely different from the financial strains in Europe, where markets were reluctant to refinance billions in Greek debt. [Technically good citizen, if the country is ‘broke’, where are investors getting the funds to buy municipal debt? The Fed perhaps?]
“If we ran into a situation where one state got into trouble, they’d be bailed out six ways from Tuesday,” said Kenneth S. Rogoff, an economics professor at Harvard and a former research director of the International Monetary Fund. “But if we have a situation where there’s slow growth, and a bunch of cities and states are on the edge, like in Europe, we will have trouble.” [Um, where do you suppose Mr. Rogoff has been for the past thirty years? How is it even possible that a qualified economist can pretend to be ignorant of the ‘economic desert’ that ‘their ilk’ has created? (Academic economists don’t actually ‘create’ policy; they merely act as ‘advisors’.)]
California’s stated debt — the value of all its bonds outstanding — looks manageable, at just 8 percent of its total economy. But California has big unstated debts, too. If the fair value of the shortfall in California’s big pension fund is counted, for instance, the state’s debt burden more than quadruples, to 37 percent of its economic output, according to one calculation. [This is more conservative ‘jiggery pokery’ as not all contributors to CALpers are currently eligible to draw these funds. They play this same ‘game’ with Social Security by including people who have not even paid anything in never mind being old enough to draw benefits! This is the downside of requiring parents to obtain Social Security numbers for their children at birth!]
The state’s economy will also be weighed down by the ballooning federal debt, though California does not have to worry about those payments as much as its taxpaying citizens and businesses do. [Um, what do you suppose ‘Scary Mary’s’ political leanings are?]
Unstated debts pose a bigger problem to states with smaller economies. If Rhode Island were a country, the fair value of its pension debt would push it outside the maximum permitted by the euro zone, which tries to limit government debt to 60 percent of gross domestic product, according to Andrew Biggs, an economist with the American Enterprise Institute who has been analyzing state debt. Alaska would not qualify either. [Um, good thing Rhode Island ISN’T a member of the ‘Euro-Zone’, eh? Not that this matters to anyone inside the American Enterprise Institute. Oh, and another thing, while I have you here, the word ‘institute’ can be used by anyone, anyone at all.]
State officials say a Greece-style financial crisis is a complete nonissue for them, and the bond markets so far seem to agree. All 50 states have investment-grade credit ratings, with California the lowest, and even California is still considered “average,” according to Moody’s Investors Service. The last state that defaulted on its bonds, Arkansas, did so during the [First] Great Depression.
Goldman Sachs, in a research report last week, acknowledged the pension issue but concluded the states were very unlikely to default on their debt and noted the states had 30 years to close pension shortfalls. [There’s a bit of candor you don’t often encounter!]
Even though about $5 billion of municipal bonds are in default today, the vast majority were issued by small local authorities in boom-and-bust locations like Florida, said Matt Fabian, managing director of Municipal Market Advisors, an independent consulting firm. The issuers raised money to pay for projects like sewer connections and new roads in subdivisions that collapsed in the subprime mortgage disaster.
The states, he said, are different. They learned a lesson from New York City, which got into trouble in the 1970s by financing its operations with short-term debt that had to be rolled over again and again. When investors suddenly lost confidence, New York was left empty-handed. To keep that from happening again, Mr. Fabian said, most states require short-term debt to be fully repaid the same year it is issued.
Some states have taken even more forceful measures to build creditor confidence. New York State has a trustee that intercepts tax revenues and makes some bond payments before the state can get to the money. California has a “continuous appropriation” for debt payments, so bondholders know they will get their interest even when the budget is hamstrung. [Excuse me?]
The states can also take refuge in America’s federalist system. Thus, if California were to get into hot water, it could seek assistance in Washington, and probably come away with some funds. Already, the federal government is spending hundreds of millions helping the states issue their bonds. [What isn’t being discussed and should be is how much these ‘investors’ are being promised. It has been proven time and time again that there is nothing more profitable than business dealings with government…any government.]
Professor Rogoff, who has spent most of his career studying global debt crises, has combed through several centuries’ worth of records with a fellow economist, Carmen M. Reinhart of the University of Maryland, looking for signs that a country was about to default. [Why do you suppose he did that?]
One finding was that countries “can default on stunningly small amounts of debt,” he said, perhaps just one-fourth of what stopped Greece in its tracks. “The fact that the states’ debts aren’t as big as Greece’s doesn’t mean it can’t happen.” [Does anyone else see what’s happening here? Can you hear the Tea Partiers in the background, cocking their weapons?]
Also, officials and their lenders often refused to admit they had a debt problem until too late. [Um, is blockhead talking about ‘sovereign nations’ here, nations capable of printing their own money? This argument is missing so much information you can’t tell which end is up!]
“When an accident is waiting to happen, it eventually does,” the two economists wrote in their book, titled “This Time Is Different” — the words often on the lips of policy makers just before a debt bomb exploded. “But the exact timing can be very difficult to guess, and a crisis that seems imminent can sometimes take years to ignite.” [Um, nope, because we have some mighty convincing evidence that ‘Scary Mary’ and her conservative buddy’s hope you don’t pick up on.]
In Greece, a newly elected prime minister may have struck the match last fall, when he announced that his predecessor had left a budget deficit three times as big as disclosed. [Um, geez, how does that turn into the new guy’s fault? Oh, that’s right, eight years of financial devastation instantly became Obama’s fault the minute Bush headed for the hills.]
Greece’s creditors might have taken the news in stride, but in their weakened condition, they did not want to shoulder any more risk from Greece. They refused to refinance its maturing $54 billion euros ($72 billion) of debt this year unless it adopted painful austerity measures.
Could that happen here? [That all depends on who would be holding the gun? Could investors ‘sue’ the US if one of the states defaulted on its bond(s)? Um, would this be wise considering who is a nuclear power and who isn’t? Okay, THAT was a bit heavy handed…let’s back track a few inches and pull the next smaller club out of the bag…the ‘extraordinary rendition’ mashee! “We don’t need no stinking Habeas Corpus!” So, do you feel lucky today, punk? Well, do ya?]
In January, incoming Gov. Chris Christie of New Jersey announced that his predecessor, Jon S. Corzine, had concealed a much bigger deficit than anyone knew. Mr. Corzine denied it. [Gee, you don’t think the Republican is lying do you? Although Big Jon DID return to Wall Street…hard to say just who is more credible here…]
So far, the bond markets [Who own freakin’ Congress] have been unfazed.
Moody’s currently rates New Jersey’s debt “very strong,” though a notch below the median for states. Moody’s has also given the state a negative outlook, meaning its rating is likely to decline over the medium term. Merrill Lynch said on Monday that New Jersey’s debt should be downgraded to reflect the cost of paying its retiree pensions and health care. [Again, left unstated here is what happened to the money that was supposed to be paid into the pension funds? I vaguely remember a lot of taxes being slashed over the past three decades in an effort to make the climate more ‘business friendly’ and something about pension fund ‘overpayments’ being used to cover shortfalls created by these largely ‘unsuccessful’ moves to attract investors to the various states.]
In fact, New Jersey and other states have used a whole bagful of tricks and gimmicks to make their budgets look balanced and to push debts into the future.
One ploy reminiscent of Greece has been the use of derivatives. While Greece used a type of foreign-exchange trade to hide debt, the derivatives popular with states and cities have been interest-rate swaps, contracts to hedge against changing rates. [You don’t suppose ol ‘Scary Mary’ was instructed to ‘repeatedly’ draw parallels to the Grecian crisis, do you? It didn’t take the GOP long to replace Judith Miller, did it?]
The states issued variable-rate bonds and used the swaps in an attempt to lock in the low rates associated with variable-rate debt. The swaps would indeed have saved money had interest rates gone up. But to get this protection, the states had to agree to pay extra if interest rates went down. And in the years since these swaps came into vogue, interest rates have mostly fallen. [And who do you suppose ‘sold’ these municipal customers on the strategy of using expensive Credit Default Swaps?]
Swaps were often pitched to governments with some form of upfront cash payment — perhaps an amount just big enough to close a budget deficit. That gave the illusion that the house was in order, but in fact, such deals just added hidden debt, which has to be paid back over the life of the swaps, often 30 years. [You don’t suppose those brokers didn’t make out like bandits come ‘bonus time’, did they?]
Some economists think the last straw for states and cities will be debt hidden in their pension obligations. [Why is this ‘failure’ so critical good citizen? Could it be because it might cause cops, firefighters and teachers to ‘walk off the job’ if their pension obligations aren’t honored? What are you gonna do, call the cops?]
Pensions are debts, too, after all, paid over time just like bonds. But states do not disclose how much they owe retirees when they disclose their bonded debt, and state officials steadfastly oppose valuing their pensions at market rates. [Why do you suppose State budget officials refuse to admit to the piss poor condition of their pension funds? Understand, these guys are ‘civil servants’, the politicians they answer to come and go but these guys are there for the duration. Worse, there is nothing they can do to prevent a two-term, just passing through, politician from looting their pension fund or keeping the politician from handing the account over to his ‘buddies’ (for a fee, naturally!)]
Joshua Rauh, an economist at Northwestern University, and Robert Novy-Marx of the University of Chicago, recently recalculated the value of the 50 states’ pension obligations the way the bond markets value debt. They put the number at $5.17 trillion. [Um, many states are extremely ‘liberal’ when it comes to handing out retirement benefits, some might even say ‘too liberal’.]
After the $1.94 trillion set aside in state pension funds was subtracted, there was a gap of $3.23 trillion — more than three times the amount the states owe their bondholders. [And guess who is going to demand first crack at the States’ tax coffers? Who do you think should get it?]
“When you see that, you recognize that states are in trouble even more than we recognize,” Mr. Rauh said. [Understand good citizen that these libertarian nutjobs who believe in social Darwinism and doesn’t think any State employee ever deserves a pension! Should be damn happy they had a job in the first place.]
With bond payments and pension contributions consuming big chunks of state budgets, Mr. Rauh said, some states were already falling behind on unsecured debts, like bills from vendors. “Those are debts, too,” he said. [Bloomin’ genius, that one!]
In Illinois, the state comptroller recently said the state was nearly $9 billion behind on its bills to vendors, which he called an “ongoing fiscal disaster.” On Monday, Fitch Ratings downgraded several categories of Illinois’s debt, citing the state’s accounts payable backlog. California had to pay its vendors with i.o.u.’s last year.
“These are the things that can precipitate a crisis,” Mr. Rauh said.
These ‘signs’ are ominous enough but while driving my daughter to Band practice tonight (my peanut plays the Trombone) I was listening to NPR and another bit of ‘old news’ resurfaced…
The report where the government was ‘taking over’ the issuance/administration of student loans. Unlike mortgages, student loans are ‘bullet-proof’ the only force capable of discharging them is ‘death-personal’…and yet banks are no longer interested in writing (and profiting) from this business.
What does this tell you?
More succinctly, what does this say about the expanding ‘economic desert’?
Can you say Banana Republic? Because it sure as hell is looking like these ‘eventualities’ are ‘baked into’ calculations regarding the future of the USA.
Back to the bigger question, why are all of the state suddenly ‘broke’? You don’t suppose ‘globalization’ has anything to do with it? I mean, heck, if your workforce shrinks down to nothing you aren’t generating enough tax revenue to support basic operations never mind cover pension obligations for the people who make it happen everyday.
There’s no such thing as ‘something for nothing’…and our corporate overlords most certainly knew what they were doing when they started campaigning to off-shore our entire fucking economy.
The good news is idiots like ‘Neutron Jack’ Welsh are still alive…it is so much more satisfying than hanging a corpse! Then there are all of the thieves who ‘stepped down’ from the chairmanship of major Wall Street firms…they are all ‘guilty as sin’ too.
Not that ‘punishing’ these criminals will alter the trajectory of our rapidly decaying nation, but it is necessary if we are to restore ‘justice’ to this land.
Tick-tock good citizen, how much time do we have before the fabric of society turns to dust and it’s ‘every man for himself?’
Thanks for letting me inside your head,
Gegner
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