THE COMING MUNICIPAL BOND CRISIS
The following segment on 60 Minutes this evening is a must see. The segment covered the state and local funding crisis in the USA. Meredith Whitney was a special guest and predicted that the crisis would unfold in the “next 12 months”. Whitney says the states are susceptible to hundreds of billions in losses and local insolvencies could be widespread.
This is a particularly interesting development if it were to materialize. Of course, municipal bonds have been very jumpy in recent weeks and as revenue constrained entities the states have been hit particularly hard by the crisis. The states are exactly like the nations of Europe so solvency is a very real concern here. Their bloated budgets and out of control spending has created severe balance sheets concerns. With a government that is leaning more and more towards small government it will be interesting to see if austerity impacts the US economy through the state funding channels.
We appear to have dodged a bullet in the form of maintaining a $1.3T deficit during this balance sheet recession (and through the coming calendar year), however, the risks at the state level remain largely unknown and difficult to quantify. If the shortfalls are as large as Whitney believes it’s likely that we won’t have the political will for more bailouts. Whitney believes the issues are potentially more frightening than the banking crisis:
Cullen Roche
Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.
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81 Comments
TPC–
The debt crisis is a serious issue for governments which you trivialize by supposing the debts are simply an accounting issue that can be solved with a printing press. The government commits fraud by debasing the currency (when it spends more than it can tax + borrow). It DEFRAUDS the real savings and through this process destroys the pool of real capital goods. It is true that the government never “runs out of money” but it “runs out of resources” and ends up cheating anyone who loans the government any amount of currency (or the present purchasing power if you will). The reason for this is simple and obvious; the inflation in real goods is greater than the interest the government note is bearing. I don’t understand why you defend this process of partially defaulting on bondholders. The bondholders are the savers, the creators of the pool of capital necessary to finance all goods production and job creation. The process of default through currency debasement destroys capital formation and naturally disincentivizes real savings. In addition, the government bonds are not purchased in a vacuum. The government directly competes with the private sector pool of real savings. This means factories cannot be built and jobs cannot be created because the pool of savings has been absorbed by government borrowing. I strongly believe people trivializing this national debt crisis are the most dangerous charlatans in economics.
Well sure I will read your viewpoint, but I find it very concerning that you don’t find my points to be valid. The final point, being the least important to the primary issue: government default
It is not surprising to me at all that rates have declined through the crisis, infact I got long the 10 year several times and long the dollar futures for a counter trend move twice for multi month moves. We must keep in mind that market participants are being guided by false interest rate signals and the illusion of safety created by artifical interest rate manipulation. To paraphrase Wayne Gretsky, you and other investors are skating to where the puck was, I am skating to where the puck will be. The high in the 10 and 30 year has been seen, barring a QE3 of massive proportions, but even that would likely only give us a marginal new high in bond prices. In addition, any further treasury purchases will only worsen the the length and depth of the long term interest rate cycle and inflation problems down the road.
you might want to read the link if you believe govt default is in our future….
I think this rally puts away the myth that deficits are to high, that unregulated derivatives are destructive to capital formation, that citizens can take on too much debt and corporations should not control our government and educational institutions.
What will happen is they will be bailed out and forced to cut their budgets drastically by the new Republicans in office.
Sorry TPC, I’ve read your page and we disagree on more than we can agree. Good luck with your theory.
We can’t all agree on everything! Good luck elsewhere.