Why There Was no “Euro Crisis” in the USA

One of the better analogies for understanding the Euro crisis is to look at the USA and the relationship between the states and the federal government.  The USA, like Europe’s nations, is made up of a group of states that are all users of a single currency.  There is no trade rebalancing between the states because there is no floating FX between the users and they all have a potential solvency contraint since they can’t print dollars (ie, they can all “run out of money”).  Europe functions largely the same way (though it’s a bit more complex than that since they have national central banks, but the basic idea is the same).

Everyone knows the states in the USA have had major budget woes in recent years as revenues collapsed following the crisis.  And few predictions were more vocal in the last few years than Meredith Whitney’s call for hundreds of billions in municipal defaults (she wasn’t the only one though probably the most vocal).  But the crisis at the state level never panned out.  Why not?  The answer is simple and it gets to the crux of the difference between Europe and the USA.

The states in the USA, being part of a UNITED monetary system, have access to federal funding (and the federal government can’t “run out of money”).  So, while they have balanced budget amendments they also have access to the Federal government’s bottomless money pit.  This has been crucial in understanding why there was never a state solvency crisis.   Highlighting this point was a recent piece by the NY Fed:

“To mitigate the loss in state and local government revenue, the federal stimulus bill provided a substantial increase in federal aid, as the chart below suggests. Nevertheless, the stimulus offset only part of the effects of declining tax revenues, and total state and local revenues still dropped. Combined with the requirement to balance their operating budgets, the revenue gap forced states and localities to make difficult choices. Between fiscal years 2009 and 2011, states alone were compelled to make up more than $430 billion in budget shortfalls in order to satisfy their balanced budget requirements. Information on local government actions is harder to obtain, but it is likely that they also had to close large gaps.”

This has had a massively positive impact on the overall economy in the USA.  It’s likely that if the states had not been bolstered by the Federal government we could have had much broader solvency issues at the state level and perhaps something more closely resembling the crisis in Europe where unemployment rates are 20%+ in many countries.  Here’s more detail on this from the Center on Budget and Policy Priorities (CBPP):

“Federal assistance lessened the extent to which states needed to take actions that further harmed the economy.  The American Recovery and Reinvestment Act (ARRA), enacted in February 2009, included substantial assistance for states.  The amount in ARRA to help states maintain current activities was about $135 billion to $140 billion over a roughly 2½-year period — or between 30 percent and 40 percent of projected state shortfalls for fiscal years 2009, 2010, and 2011.  Most of this money was in the form of increased Medicaid funding and a “State Fiscal Stabilization Fund.”  (There were also other streams of funding in the Recovery Act flowing through states to local governments or individuals, but these will not address state budget shortfalls.)  This money reduced the extent of state spending cuts and state tax and fee increases.”

And a bit more:

“Although it is still too early to have a complete picture of how the funds are affecting every state’s budget, all evidence to date suggests that the money is making a substantial difference. Without the funds, the extent of budget cuts undoubtedly would be greater. A handful of concrete examples: (see link)”

Luckily, the USA is not Europe and is not becoming Europe because the USA has the political and fiscal unity that Europe woefully needs to complete their monetary union.  The recent crisis has made this abundantly clear by now.


Got a comment or question about this post? Feel free to use the Ask Cullen section, leave a comment in the forum or send me a message on Twitter.

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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  • SS

    Interesting. I didn’t know the extent to which the states were bailed out.

  • Greg

    I wish more people understood this. The states are in a perpetual state of “bail out” thanks to the government and it makes the economy much more stable than it otherwise would be.

  • SC

    It also goes someway to explaining the effect of using gov aid to offset the impact of loss of confidence and the increase in ‘hoarding’ which happens when you try to impose so called austerity. Mark my words,do you really think there is not massive wealth in countries like Italy,Spain and even Greece. Of course there is,but try bringing that wealth into play using current European policies.

  • Nils

    It should also be of note that some European countries have their own States (Germany for example) in which similar redistribution schemes are implemented, and the EU is already redistributing EU contributions from some nations to others.

  • http://www.pragcap.com Cullen Roche

    Yes, but for Europe I’d argue that it’s all about eliminating the solvency threat at the sovereign level. Gotta calm down those bond markets, otherwise, it’s all for nothing.

  • Pod

    Great. So we here in the USA can prolong the misery of death-by-socialism, dragging it out another 10 years, whereas Europe will (hopefully) have their socialist implosion and subsequent rebirth shortly.

    The ability to print money does not change the outcome, only the time and path taken.

    In case nobody noticed, the USA has been marching down the road of socialism since 1913, and went full-retard socialism in 1932.

  • http://www.pragcap.com Cullen Roche

    All that “socialism” over the last 100 years created the most powerful private wealth creating machine ever known to man….

  • Nils

    Ironically there is now a discussion in Germany about Deutschlandbonds, so that the states can borrow at better rates and in a more liquid market because the constitution demands balanced budgets in 2020 which will lead to less and less liquid markets for refinancing the remainder of the debt – if they even manage to balance the budget.

  • Nils

    I’m currently in East Germany, I can probably find someone who can explain to you what real socialism looks like.

  • jpm1jr

    All well and good, but what happens when California and Illinois become like Greece– completely disfunctional with ever-increasing debt? Does the US federal printing press keep propping up profligacy at the state level? And if so, what incentive is there for other states to operate responsibly?

  • Pod

    OK, so I overstated my case. We opened the door to socialist ideas in 1913, began adopting socialist policy in 1932 and went full-retard socialism in 2008/9.

    Nevertheless, at this date the United Statess is effectively a socialist state, impercebtibly different from western europe. Comparing that with East Germany (another poster) is nonsensical as that was a totalitarian communist puppet state of the soviet union; different animal.

    I completely agree w/ your statement “the most powerful private wealth creating machine…”. It is self evident. But consider the horrendous balance sheet, including unfunded benefit obligations, that has built up as we enjoyed our “economic miracle”. General Motors “looked good” on the P&L for a long time as well; meanwhile GM’s balance sheet was turning into quicksand. Like GM before it, the liabilities of the USA are rising at a much faster rate than the wealth-creating power of its assets. What’s more, the assets or wealth to which you refer are highly concentrated in the hands of the so called 1%, while the 99% are wallowing in the collapsing socialist s&#t storm.

  • Andrew P

    The biggest difference between the EU and USA is the powers and responsibilities of the States are much less in the USA. The Federal Government has war, immigration, foreign affairs, the banking and monetary systems within its exclusive domain. Additionally, the Government has leveraged its power as the currency issuer to take exclusive power over medical care for the old, and pensions for everyone except state and local government workers. Most of the subsidies given by the Federal Gov’t to the States are for jointly operated social programs, primarily Medicaid and Unemployment Insurance. Essentially, the States manage those programs on behalf of the Federal Government. The USG also directly collects its own taxes, and has its own enforcement agencies, courts, and prisons separate from the States. EU States must handle everything mentioned previously, except the operation of the monetary system, farm subsidies, and EU scientific research. Yet, the EU States must collect the EU’s tax revenue for it since the EU does not collect it directly. Essentially, the EU is more of a burden on them than an asset.

  • Pod

    I think East Germany disappeared in 1992 or so, no?
    Bist du in Berlin? Ich liebe Berlin!

  • Andrew P

    The Obama Porkulus bought those states time (or more correctly bought their public employee unions time), but that time has just about run out. If those 2 States default, well they default. State defaults do not threaten our monetary system, so only the locals will care. I suspect that once they are forced to come to grips with their shortfalls, they will drastically cut state and local worker pensions and cut unnecessary government functions (particularly CA). They will have to. If they default on their bonds they will not borrow money again for a long time. But the temporary sugar high from Washington has allowed them to avoid fiscal reality for 3+ years. There is no way they can avoid it forever, especially with the way ZIRP is killing pension funds.

  • JonBubs

    People here in America think they know what Socialism is. They don’t..

  • Pete

    It has a lot to do with welfare. We have social security and medicare with federal subsidies to medicaid. Everyone in US pays equal amount to the welfare system. In Europe, who will pay Greek retirement or medical cost for Greeks?? Germany or France? Someone has to lose big before a union can happen. You really think Germany will sacrifice for Greeks?

    break-up and default is the only solution. The question is whether it is orderly or disorderly. Orderly means it takes long time, and disorderly means it happens in a hurry.

  • Happy Swede

    Do you think the 1% will have a smaller share if there is less socialism???

    Socialism in practice just means that a larger part of national income is transferred (social benefits etc.). To me thats it.

  • Bond Vigilante

    I object to the words “”there was no solvency crisis””. The states and the federal gov’t are already insolvent. What kept them from going “belly up” was sufficient liquidity. Did C.R. never have a job in accountancy where he learnt what’s those two words mean ?

    That extra liquidity was provided by e.g. foreigners who bought Agency paper (from 1973 up to july 2008) and T-bonds and allowed the US to live beyond its means. But it seems foreigners have stopped buying T-bonds in spite of the $ 600 bln. trade deficit. That’s precisely why:
    – the US has made plans to leave Afghanistan (too expensive),
    – why the US gov’t is forced to go ahead with “Tax Armageddon”,
    – why one Alan Greenspan is so worried about rising interest rates.

    Banks have reserves and they invested that money in what they perceived to be a safe asset class, i.e. Government bonds. That’s why rising interest rates were the root cause of the crisis. US banks have been able to avoid that fate because US interest rates didn’t increase up to now.

    MMT and MMR give a lot of good explanations of things in the financial world but fail to see the complete picture.

  • Bond Vigilante

    To see why wealth has increased in the 20th century, one has to pull up a chart depicting worldwide oilproduction in the 20th century.

  • Anonymous


    Meredith Whitney’s Muni Report from 2010 might be worth a revisit.

  • Dunce Cap Aficionado

    Oh stop, everyone knows you never go full-retard…. :)

  • Don Levit

    The states had a $430billion shortfall from 2009-2011, even with the extra federal aid.
    Why didn’t the government simply provide that extra $430 billion? What advantages did the ststes lose?
    Apparently, there are no downsides for not extending the additional aid?
    Or, are there?
    Logic tells me yes, my heart tells me no, we are the USA, the greatest wealth producing nation on the planet.
    Don Levit

  • Colin, S.Toe

    I remember thinking back in 2008 or so,’if Obama and the Dems, or any other group. were truly visionary, and looking for something that might find bipartisan support, they would call for rethinking federalism here’.

    If nothing else, the Euro crisis may get that conversation going. Thanks for expounding on some relevant aspects.

  • Colin, S.Toe

    “Essentially, the States manage those programs on behalf of the Federal Government.”

    A different way of looking at this is that to some extent the FG funds programs that the states get to run as they see fit.

    An implication of the MR/MMT account of the ‘currency issuer’ is that the role of the FG should be to provide funds and collect taxes; while a revised federalism might support wider discretion at the state and local level, eg to manage social welfare programs as they see fit. (Let Uncle Sam be ‘Uncle Moneybags’ – but with some oversight from federal agencies and courts to see that funds are used fairly and effectively, etc).

  • Colin, S.Toe

    Clearly some regulation needs to be federal: pollution in the air and water does not recognize state lines.

    However, to shift the focus to another discussion, perhaps most ordinary domestic banking should be restricted to banks chartered and regulated by the states. Banks providing services on the national or international level, eg to large corporations could be limited to that function, and regulated at the federal level.

  • jaymaster

    There have been quite a few jobs lost at the state and local level, with some estimates claiming those jobs add 2-3% to the national unemployment numbers.

    Whether you consider that a “cost” or a “benefit” probably depends on your political leanings….

  • jt26

    The other reason why there is no crisis in the US is because of labor mobility … states with the largest received transfers has the slowest population growth …

    In Europe, even with fiscal union, it will be a permanent transfer from North to South, esp. given the demographics (retired people don’t work). In this respect, it’s easy to see what Germany will do because their own policy over the last 40 years is to import labour (Turks in autos + garbage pickup, Portugese in construction) **only** when necessary (that’s why they’re called, euphemistically, “guest workers”; like prisoners are “guests” of the state ;->). They will subsidize the south only indirectly, if there is a labor shortage in Germany, but I don’t see this happening as Germans would have invested in the PIIGS rather than lending to them over the 2003-2007 period, and they did not.

  • Johnny Evers

    Three points.
    My tax dollars coming back to my state does not constitute a bailout.

    That aid to states was primarily sent to Democratic party favorites — public unions and Medicaid payments.

    Last, city bankruptcies have doubled this year. Stockton, CA is busted. Many states and counties and towns have unfunded liabilities in the billions.

    More and more, MMR is sounding like an apologia for endless deficits.

  • http://www.pragcap.com Cullen Roche

    Just describing why the states didn’t go bankrupt. Not prescribing “endless deficits”. If you think it’s good for states to go bankrupt then make the case. Personally, I think the stability adds to growth over time. But that’s just me.

  • Colin, S.Toe

    To be fair, if they hadn’t had to invest some much in the former E. Germany to get it up to speed, the Germans might have invested more in the Euro periphery.

  • Johnny Evers

    Also, Italy redistributes money from the north to the south; in Ireland, Dublin subsidizes the poor western counties; I’m sure there are many other examples.
    However, these movements have popular support and come within standard budgeting. And let’s be practical here — Germans would be no more willing to subsidize Greece than Americans would be to subsidize Mexico.

  • http://www.pragcap.com Cullen Roche

    One currency user funding another segment of currency users is totally irrelevant to the broader message here.

  • Dismayed

    “OK, so I overstated my case.”

    You didn’t overstate your case – you have no case. Start by trying to learn the definition of socialism first.


    “THERE ARE IDIOTS. Look around.”
    ~ Larry Summers

  • Pierce Inverarity

    If you really want to politicize this, then at least get your facts straight. The “Red” states receive more federal funding per tax dollar paid than “Blue” states.


  • jt26

    Yes, true. Maybe I’m being too harsh. There may be other reasons that they did not invest more; possibly: PIIGS’regulations or political climate impeded investments. As well, PIIGS corporates had so much easy money that they did not want to take more investment or reduced profitablility to fight new competitors.

  • Pierce Inverarity

    Once again, you have the causality backwards.

  • Johnny Evers

    Rural states get more back than urban states. Rich states get more back than poor states. (Think of it this way — a Wall Street broker pays more in taxes than a Mississippi dirt farmer on Medicaid, and the dirt farmer gets more of his tax dollars back.
    I suspect that taxpayer movement affects this. A man pays taxes his whole life in Illionois and then moves to Florida — so it may seem that Florida is getting more than its fair share of dollars.
    And big, rural states have more highway miles per citizen; however, a lot of those highways benefit intrastate commerce.
    At any rate none of this has anything to do with ‘bailing out’ states or cities. A couple of states in Michigan are in receivership and there are not plans to send federal money to make up their budget shortfalls.

  • Anton

    Europe has the exact same united monetary system as the USA (TARGET2). Counties can fund through this system indefinitely, without a lmit and witnout collateral (with the ECB). Under this system no EU country can operationally default. The market cannot push a EU country out of the EU. Please challenge this with facts – links to papers, etc. if you disagree. If you involve politics i can understand the differences but politcal opinions are just that – opinions. No one can predict the actions of politicians. The disagreement between Merkel and Hollande to a large extent is smaller than the disagreements between Republicans and Democrats. Europe does not have a senior politician in any country like Ron Paul in the USA who wants to abolish the central bank. No country in Europe has come out openly and said they want to introduce their own currency (13 states in the USA inquired with their local state legislature on the legality of introducing their own currency). We can go on but these are just subjective judgements, they carry no real weight because what matters is not reality but the perception of reality. Perhaps history is against Europe when it comes to political opinions but if history was any guide to the future, historians would always be richer than anyone else ( if that was their goal in life). So, if we stick to how the monetary system in Europe works, my claim is that no EU country can operationally default – just like in USA, and I am in 100% agreement with your analysis on the monetary system.

  • Anonymous

    I am amazed at some of the respondents not knowing that States stay alive through Federal funding.

  • http://www.pragcap.com Cullen Roche

    Most people don’t know that….

  • Anonymous

    I have not checked but I think you will find that some States received Federal funding under Republican administrations……….

  • Anonymous

    It comes up often enough in the financial/economic commentary on the web…

  • Colin, S.Toe

    I understand that under ‘TARGET2′, the ECB and member NB’s can be viewed as a single system. Correspondingly, I would then say the collective sovereign debt of the member nations is equivalent to the US sovereign debt.

    Cullen’s key point is that even if no one else were buying UST’s, the Fed can buy and hold them – ie US sovereign debt – on its balance sheet, as it has with QE, Twist etc.

    Does TARGET2 mean that the collective Euro sovereign debt is, and can be, held by the ECB-NB system to such a significant degree?

  • http://www.loandoctorsnw.com Roger Ingalls

    It seems to me that the great recession forced an orderly austerity on US states, but not enough to crash the system (as appears to be the case in Greece and Spain). There certainly have been painful budget cuts in WA state, and there will be more to come.

  • http://www.pragcap.com Cullen Roche

    Absolutely. Look at this chart showing Federal grants over the last 30 years. http://libertystreeteconomics.typepad.com/.a/6a01348793456c970c0176157b98df970c-450wi

  • http://www.pragcap.com Cullen Roche

    If that were true then there would not be surging yields across Europe. There very obviously is a default risk there. And the problem is that the lack of political unity has resulted in funding risk. The states in the USA have an implicit guarantee. European nations do not.

  • Bond Vigilante

    There’s actually no complete free flow of money in the US: One example is tax exempt muni bonds. A person who lives in CA can buy muni bonds but unless those bonds are issued by a CA municipality he can’t claim this taxdeduction. That actually prohibits the existence of a truly free bond market in the US. Otherwise municipalities would be paying a (much) higher rate.

  • Bond Vigilante

    I don’t have it backwards. (In)solvency determines whether or not an financial entity is able to pay (back) its liabilities (better defined as debts or principal). Insolvency becomes an issue only when someone gets into liquidity problems (i.e. of interest payments becoming too large).

    The US has made it clear that it never intended to repay its debts. It wants foreigners to take on more and roll over existing debt. But I wouldn’t be surprised to see foreigners actually start REDUCING their T-bond holdings in the 2nd half of 2012. Because I see similarities between the situation in the 1st half of 2008 (Agency paper) and the first half of 2012 (T-bonds). The similarity is that foreigners haven’t added to their holdings of that type of paper. And a shrinking US trade deficit won’t help either.


    Good read Collen and glad you posted it as most people do not know that some states put in more cash then they receive back. Ca is one of them. AR is another.

    The problem for Europe is soverign countries are not going to give up soverignty to Brussels. There is a huge difference in the USA and Europe. Those coutnries are older then the whole United States and they did not form and join the USA.

  • Johnny Evers

    It’s a long road from ‘The feds return some tax money to the states’ to ‘the states can never run out of money.’
    Presumably, even if Europe did have a fiscal union, there still would be some limits on their ability to spend money.

  • michael schofield

    If I understand it correctly, Germany signed on with the euro to gain support for Re-unification with East Germany. They didn’t want the euro to begin with. According to something I read a while back.

  • http://None Midas II

    I made a mistake yesterday in my post about the British in China . It was opium that they used to balance their trading deficit. Sorry.

  • Pierce Inverarity

    It has everything to do with your statement: “That aid to states was primarily sent to Democratic party favorites — public unions and Medicaid payments.” Factually incorrect.

  • http://Facebook.com Chris

    Cullen this is a good investigative article on the financing activities of state and (although somewhat cloudy) local governments. But you fail to see the similarities in our form of democratic unified governance and that of the EU. For their governance abroad involves sovereign politicians that each have a say in deciding the fiscal trajectory- as Merkal and Greece have indicated- whereas our governance involves one ‘parliament’ of state unified congressional representatives separated only by partisanship effectively making our ‘Lehman’ moment of financial liquidity crisis much shorter than their current financing issue. For our US government leaders HAVE to work together for the best interests of the other states (and territories) regardless of past prudent or exorbitant financing actions therein, ideally, in order to thwart intra-state contagion, lest failure threaten their re-election for the following year. If the EU were instead united fiscally as stated and all politicians had to work together then they would be closer to a ‘fiscal cliff’ than a solvency cliff, as we are, IFF they held re-elections this year like we do thereby making their lame-duck term in the same year as us (I believe ms Merkel is up for re-elect in 2013, right?). instead of fighting over how to merely finance their respective ‘banking’ bail-out like they are doing now, they would be closer to figuring out how to grow thus putting them in the same debacle we are currently in. since our political figures are polarized by republican and democrat taxing fundamentals (as indicated by palin, bachman, and Romney’s distaste at the taxing implications of the recent healthcare ruling by the SCOTUS decision), we have effectively postponed our destruction by being able to always finance liquidity failures through our own ability to print and mechanisms inherent to our central bank- qualities unused by EU which logically provides the source of difference that you highlight in your article. If our austerity measures were also met by lack of funding then we would be just like EU. But only our federal austerity is met by political polarization and not our state/local austerity which allows our states to muddle through with the government leaders. Which means our respective Spain’s and Greece’s have been bailed out easily and swiftly, but our growth prospects, like the EU are hindered by both of our abilities to act based off the people we put in power to act on our behalf.

    In short, our only seperation from the EU is the confidence we hold in our overarching government. Because, We too are doing austerity. We too lack the ability to grow ourselves out of a crisis predicated by uncertain top-down policy enactions whether deemed tax cliffs, auto tax cuts, fiscal cliffs, banking bailouts or sovereign potential to exit our unions (as researched by Bloom 2011- coined the ‘uncertainty’ variable). The USA’s sole separation is that it brought each member state into the union via civil war, thus solidifying the states’ safety into the capital markets and avoiding future succession like Sourh Carolina or, potentially, Greece. I hope to hear your thoughts soon as I believe mine would be juxtaposed well to your own.