This Is How A State Goes Bankrupt, Illinois Edition

Somewhere back in the depths of the 20th century, a bunch of governors, mayors, and public sector union leaders got together and cooked up one of history’s greatest financial scams. They would offer teachers, cops, and firefighters extremely generous pensions but would avoid raising taxes to fund the resulting future obligations. Grateful workers would vote to re-elect their benefactors, while taxpayers would appreciate the combination of excellent public services and low taxes.

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California Is In Great Financial Shape – And Headed For An Epic Crisis

By John Rubino – Re-Blogged From Dollar Collapse

California Governor Jerry Brown inherited a $27 billion deficit from Arnold Schwarzenegger eight years ago. This month he’s leaving his successor a $13.8 billion surplus and a $14.5 billion rainy day fund balance. Pretty good right? Approximately 48 other governors would kill for those numbers.

Unfortunately it’s all a mirage. California, as home to Silicon Valley and Hollywood, lives and dies with capital gains taxes. In bull markets, when lots of stocks are rising and tech startups are going public, the state is flush. But in bear markets capital gains turn into capital losses and Sacramento’s revenues plunge. Put another way, the state’s top 1% highest-income taxpayers generate about half of personal income taxes. When their incomes fall, tax revenues crater.

That’s happening right now, as tech stocks plunge, IPOs are pulled and billion-dollar unicorns endure “down rounds” that shave major bucks from their valuations. So if this is a replay of the 2008-2009 bear market, expect California’s deficits to return to the double-digit billions.

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Public Sector Pensions: The Parasite Devours Its Host

By John Rubino – Re-Blogged From Dollar Collapse

The Wall Street Journal recently highlighted a better method of analysing the impact of public sector pensions on state and local budgets. The results are ominous for government finances, the bond markets, and pretty much everything else:

Why Your Pension Is Doomed

A new study shows that benefits are rising faster than GDP in most states.

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Really Bad Ideas, Part 4

By John Rubino – Re-Blogged From Dollar Collapse

As Hurricanes Harvey and Irma wreaked their havoc over the past couple of weeks, several interconnected questions popped up, the answers to which make us look, to put it bluntly, like idiots.

Why, for instance, are there suddenly so many Cat 4 and 5 hurricanes? Is this due to man-made climate change and is this summer therefore our new normal? The answer: Maybe, but that misses the point. There have always been huge storms (like the one that wiped Galveston, TX off the map in 1900, long before global warming was a thing), and barring another ice age there always will be. So the US east coast will remain one of Mother Nature’s favorite targets.

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Raising The Debt Ceiling Means Jacking Up Future Inflation

By Stefan Gleason – Re-Blogged From

The dramatic failure of the US Senate’s last-ditch Obamacare repeal effort leaves Republicans so far without a major legislative win since Donald Trump took office. No healthcare reform. No tax reform. No monetary reform. No budgetary reform.

The more things change in Washington…the more they stay the same.

Despite an unconventional outsider in the White House, it’s business as usual for entrenched incumbents of both parties. The next major order of business for the bipartisan establishment is to raise the debt ceiling above $20 trillion.

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Public Pensions System: Insolvent to the Core

By Constantin Gurdgiev – Re-Blogged From True Economics

A truly worrying view of the U.S. public sector pensions deficits has been revealed in a new study by Joshua D. Raugh for Hoover Institution. Titled “Hidden Debt, Hidden Deficits” (see the study opens up with a dire warning we all have been aware of for some years now (emphasis is mine):  “Most state and local governments in the United States offer retirement benefits to their employees in the form of guaranteed pensions. To fund these promises, the governments contribute taxpayer money to public systems. Even under states’ own disclosures and optimistic assumptions about future investment returns, assets in the pension systems will be insufficient to pay for the pensions of current public employees and retirees. Taxpayer resources will eventually have to make up the difference.”

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Gold, The Misery Index And Insanity

By Gary Christenson – Re-Blogged From The Deviant Investor

In 1980 Ronald Reagan spoke about the Misery Index.  An economist had added the inflation rate to the unemployment rate, called it the Misery Index, and used it to indicate the social costs and economic difficulty for the middle class.

Today the Misery Index is much smaller than in 1980, thanks to … intelligent fiscal management, economically beneficial monetary policy from the Federal Reserve, and wise political policy from the White House.  If you believe any of those, read no further.

Most people will agree that the Misery Index is much smaller today because the numbers have been gimmicked.  Does anyone believe a few percent for inflation or around 5% unemployment?   Massage (torture) the numbers and the Misery Index declines, incumbent politicians are re-elected, while far too many people remain out of work, earning practically nothing on their savings, and paying too much for food, clothing, drugs, medical care, college, transportation and so on.

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Social Security And The National Debt Are Misleading The American Public

B Daniel Amerman – Re-Blogged From

We are told that many economics experts don’t worry about the total national debt because $5 trillion of that debt doesn’t really exist; it is rather just a theoretical bookkeeping transaction for money that the federal government owes to itself. Netting out this bookkeeping entry then allows some authorities assert that while the debt is a bit on the high side relative to the size of the economy, it is far from historically unprecedented, and certainly no cause for despair or rash talk about insolvency.

We are also told that many financial experts don’t worry about the solvency of Social Security and other federal government retirement programs, because they are funded with $5 trillion of the safest assets on earth, those being United States government Treasury obligations (i.e., the national debt), which are being held for our benefit by the federal government.

Unfortunately, both statements cannot be true simultaneously.

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Let’s Control Our Government

cropped-bob-shapiro.jpg   By Bob Shapiro

In recent days, Congress has raised the National Debt Ceiling once again. The new ceiling of $20+ Trillion probably will not be hit until 2017, after the next election. No surprise there, as Members of Congress have proven to be cowards yet again.

A rising National Debt implies a continuing Budget Deficit. The size of the Ceiling rise implies an acceleration in the Deficit, as pork barrel spending will be used to help current Members get reelected. When I was a kid, this was called corruption. I’m not sure why it is not called corruption today.

So, what’s so bad about running a Deficit?


  • The US Economy is made up of two sides: the Government side and the Private, Productive Sector side. The Government side, almost by definition, involves spending which the Private, Productive Sector would not do. The Government side takes money from those individuals and businesses which have earned it, to give to those individuals and businesses which haven’t earned it.

      By its very nature, Government spending is less productive – less valuable – to the whole Economy than spending by the Private, Productive Sector, even though official GDP numbers give them the same weight.

     Since Government spending is less valuable, and directly reduces the Private, Productive Sector, every Dollar spent by our Government reduces the US Economy – increased Government spending makes every American, rich, poor, and in between, less well off. Government spending makes us all poorer.

Debt Burden

  • Government spending, since it takes money away from the Private, Productive Sector, this side of the Economy is less able to grow. Real GDP growth during the Obama regime has been dead flat according to the official fairy tale numbers. GDP growth has averaged only about 2% during the last generation or two, compared to growth of around 3.5% before 50 years ago. An Economy growing at 2% a year will double in size in 36 years. In 36 years, an Economy growing at 3.5% will grow to be almost 3½ times as big. Out-of-control Government spending (and Over-Regulation) has robbed all Americans of that extra 1½ times of GDP growth. All Americans would have been 75% more well off (3.5 times vs only a double) with previous relatively low spending levels than we are with the “drunken sailors” in Congress, in just the last 36 years.
  • Continuing Deficits and a growing National Debt need to be financed, which takes even more resources away from the Private, Productive Sector. They encourage the Government to print more Paper Dollars, which reduces the value of all the Dollars which you and I have saved. Deficits and a rising Debt level are embarrassing, so there is a government urgency to screw with the official numbers, making them look not quite so bad. The Private, Productive Sector works best when the data it uses is accurate. It works best when the money supply is not being inflated. It works best when the Government leaves it alone to do its thing. Bigger, more expensive Government make all Americans poorer.

GDP Shadow Stats 0115

  • If GDP is dead flat, as it has been during the Obama years, and the US Population grows, then each American alive today has a claim to a smaller portion of that GDP. The per-capita GDP has gone down. Even by the Government’s manipulated figures, All Americans are poorer because of our Government’s activities.

In past essays, I have proposed several “Action Items” to help reduce Government Spending. I’d like to recount some those here.

  • No Bill shall be introduced, voted on, or passed which is over 50 pages in length. If the Sponsor can’t say what he wants within 50 pages, then he doesn’t know what he wants. This also means no more last minute “Ear Marks” to buy a Congressman’s YES vote.
  • No Member of Congress may vote YES on a Bill unless he can attest that he has read the Bill. He may vote NO or may ABSTAIN. ObamaCare was just one example of a Bill passed without giving Members of Congress time to understand what they were voting on.
  • Both Houses of Congress must send every Bill (and every amendment to that Bill) to a Constitution Committee, whose job is to show – specifically – where in the US Constitution every provision of the Bill is authorized. Both Houses shall hear/read public comments and must respond to each one of them in their report to their respective Houses.
  • A Constitutional Amendment shall be passed to Balance the Budget. It could include salary sanctions for the top brass of all three branches of our Government if the Budget is not Balanced during any year. The Limit shall apply to both Annual Spending and to Un-Funded Liabilities.
  • A Constitutional Amendment shall be passed to Pay Off the National Debt over a set number of years (perhaps 20), with a specific timetable.
  • A Constitutional Amendment shall be passed to place a Dollar Limit on Government spending, perhaps 10% above Government spending during the year it’s ratified. This will be an effective way to prevent further debasement of the Dollar. (A constant Dollar allows for more Government spending than a depreciated Dollar.)
  • A Constitutional Amendment shall be passed to require the Federal Budget to meet GAAP accounting rules, including Un-Funded Liabilities.

Our Government is supposed to work to increase the well-being of all Americans, not to make all Americans poorer.

The Great Illinois Gold Rush!

By Gary Christenson – Re-Blogged From

There is no gold rush in Illinois.  The important question is, “Why Not?”

Per Mike Shedlock (Mish) here and here:

  • “Illinois is in serious financial trouble.”
  • “Illinois has no current budget.”
  • “The reality is Illinois is flat-out broke.”

The State Comptroller estimates that the backlog of unpaid bills will exceed $10 Billion by December.  Worse, “In January [2015], Illinois’ total cumulative liability was $159 Billion.”

“Pay-Later Budgeting” has not worked.  “… the state of Illinois has run deficits in every fiscal year since 2001.”  The state borrowed, sold assets, underfunded retirement plans, borrowed even more money to fund retirement plans and yet pretended all was well.

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Why We Can’t Handle An Equities Bear Market, Part 1: State Budgets Will Implode

By John Rubino – Re-Blogged From

Back when society’s balance sheet was reasonably solid, the occasional bear market was no big deal. A 20% drop in the average S&P 500 stock would scare investors and lead to slight declines in consumer spending and government capital gains tax revenue, but the overall economy would barely notice such a minor speed bump.

But that was then. Like a person with an impaired immune system, today’s developed world is so highly leveraged that a shock of any kind risks catastrophic complications. Which is why governments and central banks now meet every incipient crisis with quick infusions of newly-created cash and lower interest rates. We can’t risk letting markets be markets any more.

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Here Comes The Next Trillion-Dollar Bailout

By John Rubino – Re-Blogged From

As boxers like to say, it’s the punch you don’t see that knocks you out.

In a world where a growing part of the financial system is hidden from view and excluded from official statistics, those are words to remember. A couple of examples from the 2008-2009 crisis:

  • Fannie Mae and Freddie Mac were private companies through which the federal government funneled a lot of mortgage debt and to which it granted a kind of de facto backing, though it asserted confidently that this would never be needed. When the real estate bubble (inflated in large part by Fannie and Freddie) popped, government — read taxpayers — had to assume responsibility for pretty much the whole $10 trillion US housing sector.
  • Over-the-counter derivatives are largely hidden by bank and hedge fund accounting tricks, but when that market blew up in 2008 it turned out that AIG, the world’s biggest insurance company, had enough of the instruments to bring down the whole financial system. The result was another huge bailout with taxpayer cash.

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Did The Fed Just Admit to Deep Uncertainty About Our Financial Security In Retirement?

By Daniel R. Amerman, CFA – Re-Blogged From

Generally speaking, the chairperson of the Federal Reserve is treated by the mainstream financial media as being the very paragon of respectability. If the Fed says it – then the voice of economic authority has spoken, and we need to listen carefully.

Yet, recent comments by Janet Yellen have instead made her a source of “controversial” economic ideas, with some financial reporters and their editors apparently feeling a duty to protect their reading audience – and let them know this is not acceptable economic thinking, but rather is “far outside the mainstream.”

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Crowding Out

cropped-bob-shapiro.jpg   By Bob Shapiro

Back in 1971-72, the Wall Street Journal ran a pair of editorials on how the government was crowding out the private sector. Back then, it was the “massive” official National Debt plus Unfunded Liabilities – together about $4 Trillion then compared to today approaching $250 Trillion.

The Wall Street Journal noted that all of that spending beyond Uncle Sam’s means (deficit spending) had to be financed through borrowing.

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