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Chanos: The "cracking of state and local municipalities is coming"

A Preview of What's to Come

Written by Steve Christ
Posted November 12, 2009 at 7:16PM




If you want to take long dark look into the future borrowing power of the United States, you need to keep your eyes on California. After all, everything seems happen there first.

In that regard, it's kind of a preview of what's to come since the Golden State can't make ends meet either.

In fact, California is so broke that IOU's are the new state currency. As a result, the state has tried to sell $21 billion in municipal bonds over the last seven weeks alone.

The problem is there is so much of this paper on the market that yields have had to rise significantly to attract buyers. They are willing to lend, but only if the price is right.  

Because of this the state recently had to pay a 4% tax-free yield on bonds maturing in 2013. That's significantly higher than just two weeks ago when the state paid a yield of 2.48% on similar bond.

Unfortunately, that's a future the United States faces someday when its lenders decide it's not worth the risk. At that point interest rates will go north in a hurry—just like they are now for Gov. Schwarzenegger.

In the meantime, the municipal bond market itself is starting to wobble a bit as one state government after another begins to feel the pinch of caviar dreams on a bologna budget.

Unlike their Uncle Sam, they just can't print their way out of their troubles.

At least not yet....Given enough time, some of them will be certainly be the next up begging for a bailout.  In fact, without last year's stimulus it would have happened already.

Maybe that's why famed short seller James Chanos now has munibonds on his hit list.

"State and local municipal finance are a mess and going to get worse," Chanos told Barron's earlier this week,  the "cracking of state and local municipalities is coming."

As for the states to keep an eye on, here is the list released by the Pew Center just yesterday.

It's in article on CNNMoney by Tami Luhny entitled: 10 states face financial peril

"Here's a summary of what Pew found is plaguing each of the states:

California: The Golden State's housing collapse — and resulting unemployment surge — has plagued the state's economy. The weakening economy prompted revenue to fall by nearly a sixth between the first quarters of 2008 and 2009. State lawmakers have limited ability to deal with California's massive budget gap due to several voter-imposed restrictions, including requirements that all budgets and tax increases pass the legislature by a two-thirds majority.

Arizona: The state depends heavily on a growing economy to bring in tax revenue, and lawmakers don't have a lot of leeway to address budget deficits thanks to voter-imposed spending constraints. Lawmakers relied on one-time fixes to balance its budget instead of making long-term changes.

Rhode Island: The Ocean State has among the highest unemployment rates in the nation and among the highest foreclosure rates in New England. High tax rates, big budget deficits and a lack of high tech jobs are hurting its chances to pull out of the doldrums. State government has a poor record of managing its finances

Michigan: The state never climbed out of the recession that started in 2001, and matters only became worse during the Great Recession. Two of the Big Three Detroit-based automakers went bankrupt in 2009, sending shockwaves through a state on track to lose a quarter of its jobs this decade. The recession accelerated drops in state revenue, and has left Michigan's government trying to deal with today's problems on a 1960s-sized budget.

Nevada: Nevada is one of the recession's big losers as its gaming-based economy suffered. Year-over-year revenue has fallen for two consecutive years, a record. But changing tax laws is tough because some are written into the state constitution.

Oregon: Oregon's leading industries, such as timber and computer-chip manufacturing, have been hit hard in the recession. Lawmakers have approved more than $1 billion in new taxes to keep it afloat. But voters in January will have the final say on another $733 million in new income taxes.

Florida: For the first time since World War II, Florida's population is shrinking — bad news for a budget built on new residents flocking to the Sunshine State. Lawmakers raised $2 billion in new revenue this year, but could face a similar shortfall next year.

New Jersey: The Garden State, which has been plagued by years of fiscal mismanagement, spends more than it collects in revenue. The collapse of Wall Street, which supports about one-third of New Jersey's economy, has only made matters worse.

Illinois: Since the last recession earlier this decade, the state piled up huge backlogs of Medicaid bills and borrowed money to pay its pension obligations. The state's current budget still relies heavily on borrowing and paying bills late.

Wisconsin: Wisconsin has a long history of budget shortfalls. It also borrows frequently to cover operating expenses, among other measures. Unemployment is climbing as manufacturing, the state's largest sector, sputters."

This is what happens when you would gladly pay someone tomorrow for a hamburger today.

Eventually, the bill comes due Wimpy.....


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