State Budgets, Next Major Credit Crisis?

Budget Shortfalls Amongst States

Back on June 18, 2010 I wrote an editorial, “Municipalities: Are They The Next Potential Landmine?”, it sure is appearing that municipalities and the states are in deep trouble. For fiscal year 2011 the deficit in state budgets are estimated to run $121B and this total could be even higher.

From 2000-2008, expenditures have increased 60% while revenues (tax receipts) have only risen by around 45%, leaving a major shortfall. Many states have been robbing their pension funds to make up these deficits, something that always backfires in the future. California is one state guilty of this.

New York is in poor shape as well and does not have many options to raise revenues (tax receipts) since their tax burden is the highest in the country on a per capita basis.

States continued rampant spending has created massive short-falls and has caused them to become more and more leveraged by issuing debt. Believe it or not, Muni debt has doubled since 2000, an absolutely staggering figure. Ouch!

States constitutionally have to run balanced budgets but it is amazing that 48 states ran deficits in 2010, precisely why so many have had to issue debt and rob pension funds.

The problem of late has been elected officials will do whatever it takes to stay elected, meaning they create state jobs and new programs, thus creating more deficits.

These massive fiscal challenges could be what potentially causes the next major systemic risk as did the banks back in 2008-20009.

Fed Bailout Around The Corner?

With states so fiscally challenged and nowhere to turn, it appears more and more likely the Fed will come to the rescue. The question becomes, does this bailout in turn cause a double dip in the housing market and a double dip in the economy? By the way, I really do not know that we ever came out of the recession since much of the growth earlier in the year was artificial due to stimulus packages trotted out by Washington DC.

A double dip in housing is certainly a possibility since California makes up 20% of the housing market and is the state in the worst fiscal condition.

A double dip in the economy could also occur but anything is possible, even a depression. Nothing should be ruled out. Many economists think the US will stave off a double dip due to the strength of the economy in emerging markets but I am not so sure anyone can be certain of this.

A Fed bailout of the states will undoubtedly put more pressure on the US Dollar as they will have to take on more debt; in turn this will put more pressure on the economy.

End Game Near?

How much longer will foreign investors continue buying our debt? It is becoming very scary and evident we are having a difficult time paying the interest on the debt we have. The problem continues to compound itself everytime we issue more debt. At some point foreign investors will say the hell with the US since the reality is we really care nothing about being fiscally responsible. When that day comes it is GAME OVER. Don’t think for a minute that it can’t happen because it will unless the government gets it’s act together. .

Final Thoughts

States at some point will have to either cut programs which will increase unemployment or the Fed will have to bail them out. 36 governor seats are up for grabs in the November Elections. It will be interesting to see if politicians of the fiscally conservative states vote for the Fed to bail out states that are not fiscally conservative. If the Fed bails out the States out then the US balance sheet weakens and we could be facing real systemic risk to the financial system and to the economy. If the Fed does nothing, then states will be forced to cut programs and lay workers off. Neither choice will result in a favorable result.

Texas and Virginia rank among the most fiscally conservative while New York and California are among the worst.

One last thought, does reflating our economy as the Fed is attempting to do work and stave off disaster, or does it push us over the edge into the abyss and point of no return?

Here at PSTL, we still think from an economic stand point, the three D’s are in play: DEBT ISSUES, DEFLATION and DEPRESSION. Since late November 2009, we have been teaching our members in our nightly video updates and daily live webcasts to be vigilant in this continued complex market environment.

About the Author

Senior Trader
BrianP [at] ProfessionalStockTraderLive [dot] com ()