The Federal Government is now confirming what I reported in earlier blogs- the States are in trouble. Do you think $50 Billion is going to be it? Nada!
Dropping real estate prices hence shrinking real estate tax income is something states never plan on. Their spending is always one way: up. As state and local governments enjoyed the rise in revenue over the last 20 years, they generally failed to plan for the eventual downturn. Arizona is selling and leasing back its government buildings. California is issuing IOU’s. Illinois just doesn’t pay its bill under the stated terms of the purchases. Isn’t that a fundamental breach of contract? New York is looking at funding its pension funds by borrowing from them? Huh? Illinois’ credit rating has been reduced which will make it more costly for them to borrow their way out of their revenue shortfall.
The “W” is not for Bush
In previous blogs, the real question was whether we are going to experience a “V”, “U”, or “W” shaped recession. The stimulus package has just about made it run and now the big question is if we will enter the second leg of the “W” shaped recession. I believe we will. Bernanke calls the problem “headwinds” whereas many Americans call it sustained unemployment with no expectation of getting a job soon.
The average American is slowly moving away from reckless consumption and returning to a defensive posture. Those with jobs know others without and are adjusting their purchases accordingly. There is plenty of wealth for some but they will postpone purchases until they see true signs of recovery. By now most everyone has been burned by at least one investment.
Fixing the Housing Market by tearing down houses
Officials are coming up with new ideas to fix the housing market’s excess supply- tear down houses. Well, I guess that’s one way to eliminate the demand/supply imbalance. See: http://www.washingtonpost.com/wp-dyn/content/article/2010/06/10/AR2010061006075.html?wprss=rss_business
When you couple this situation with Europe’s “States”, the outlook is not rosy. The global contraction of the West and the expansion of China and India are hastening the move of the balance of power to the East. Have you learned Mandarin yet?