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John Galt

In keeping with the theme I first started in February 2008, the Municide train apparently has finally left the station as the state and municipal crisis has finally made the headlines in the mainstream media with this piece from the Sunday December 19th edition of 60 Minutes on CBS. During the program Meredith Whitney warns that the crisis is beyond the scope of comprehension due to faulty and flawed fiscal data from the states. She also warns that there would be 50, maybe 100 or more major municipal bond defaults in the near future. I warned about this in the commentary Municide in February of 2008, but the state and local governments continued their policies of reckless spending and waste which all but guarantees that as the residential real estate depression enters into its fourth anniversary, the impact on the economy from years of foolishness will be far more severe that it needed to be. When I wrote the words:


“How the Suicidal Fiscal Behavior of Government at every level, Federal, State and Local will Crash the US Financial Markets”

I was dead serious that the combined debt load of the Federal government in combination with the states and municipalities would crush our financial system, much worse than the housing crisis created. Within the article, I pointed out the following:

False Economic Assumptions Based on a False Economic Reality

This brings us back to the problem we are encountering now. For several years now the false economic assumptions that “real estate never declines” and “homeowners would never walk away from their homes” built the derivatives up, up, and up on RMBS and allowed the risk to spread out the world over. The mathematical models assumed that it was beyond any reality to assume a default rate above 1.5% or so and the political assumption was that the Federal Government would never allow it to get that bad.


Now that it is officially worse than “that bad” and those assumptions are obviously blown to smithereens, let’s take a look at the false economic reality which is impacting this side of the equation:

1. Wages are increasing. While that sounds nice, concise and easy to perceive it’s complete, utter and total nonsense. The BLS statistical reports have demonstrated flat to declining net income levels for years now.

2. Inflation is under control and reasonable. And hedonically speaking I’m the Pope.

3. Real Estate valuations fluctuate but never experience long term declines. I guess these folks ignored the 1930’s. Along with the 1830’s. And many other time periods of stagnant prices in the real estate markets.

4. Governments will never let everyone fail. The problem with that theory is what if government is the preeminent cause of all the failures?

5. Unemployed people will always find a way to pay their bills. No comment necessary.

Thus far all five conditions have worsened since that time period in 2008 and in fact are in the process of accelerating. While the hedonically manipulated C.P.I. may not look impressive, it is in fact a disaster getting ready to slam the unsuspecting American public with the worse possible combination imaginable; declining assets held by the middle class along with deteriorating net wages while the cost of living skyrockets.

The one issue the 60 Minutes piece missed was the continuing deterioration in the residential real estate market and its impact on the ability to collect revenues within the municipalities in distress. The big problem with this is the media’s incessant desire to promote and act as cheerleaders for the various financial institutions who are refusing to allow the residential markets to hit an ultimate bottom, thus delaying the day of reckoning for the securities they pawned off on the world at the same time. Oh, and was it mentioned that these same real estate securities and derivative instruments were sold to guess who? That’s right boys and girls, the states and their various pension plans.

This in combination with a continued paralysis by analysis of the problems in most state houses and at the Federal level all but assures that the crisis will be beyond any reasonable course of repair and that the banking system will once again seize up until another Federal Reserve backed bail out program is developed. Regardless of the solutions bandied about by the powers that be, the only solution they know will work, a direct monetization of at least one trillion dollars of municipal debt, is going to be the end game. The resulting inflation from this fiasco will be the final straw that banishes the U.S. Dollar to the dustbin of historic fiat funny money experiments and create a new order for the world as our system implodes like Argentina on steroids.

America: It was a nice idea while it lasted.


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