A number of U.S. states are facing bankruptcy – in fact if not in name – with Illinois and California leading the way.
When an individual goes bankrupt in the United States, it’s usually a Chapter 7. When a business goes under, it’s Chapter 11. Farmers have a Chapter 12, and there is a more complex individual option known as Chapter 13.
But what do you call it when a U.S. state goes under? There’s no official “chapter” for that. But it’s looking more and more like there should be. Your humble editor proposes “Chapter 66,” in honor of a famed stretch of interstate.
U.S. Route 66, also known as “Will Rogers Highway,” “Main Street of America” and “the Mother Road,” was one of the original routes in the U.S. highway system. Opened up to cars in the year 1926, it originally ran 2,448 miles, from Chicago, Ill., to Los Angeles, Calif.
Route 66 was also a major path for westbound migrants, seeking relief from the “dust bowl” conditions of the 1930s.
It’s fitting that Illinois and California were the termination points of that iconic road, because “Chapter 66” is a dark and looming reality for those two states now – with a number of others on the same path. As America endures a sort of new financial dustbowl, the “state of the states” looks grim.
Amber Waves of Debt
The Globe and Mail describes the situation as “red ink, from sea to shining sea.”
“Forty-eight of 50 states face budget shortfalls this year,” they further report. “Many shortfalls amount to more than 20 percent of planned spending. The plunge in state tax revenue is the worst on record.”
(Budget shortfalls may be in the news, but it's not the only thing moving the market right now. If you’re looking for additional market analysis, sign up to read fellow editor Adam Lass' latest on financial market trends and investment commentary.)
How did we get to this sorry spot? By and large the same way Greece did… by spending money we didn’t have, and ignoring the consequences as long as possible.
Oh Boy, Illinois
Illinois is something of an idiot poster child for how bad things have gotten… and how tough the fix will be.
“It is getting worse every single day,” the Illinois state comptroller laments. “We are not paying bills for absolutely essential services. That is obscene.”
Illinois is facing a $12 billion deficit and a $5 billion budget shortfall. To add insult to injury, the state’s pension system is 50% underfunded by conservative estimates.
It has reached the point where the state has, quite literally, stopped paying bills. This means that jobs are getting cut, paychecks are getting delayed, and businesses are being shut down. There is simply – and again, quite literally – no more money.
Meanwhile, the state’s pension shortfall is no longer a potential catastrophe. It is a guaranteed one. According to Fitch, one of the big three ratings agencies, “Their pension is the most underfunded in the nation… they can’t grow their way out of this.”
So what is the Illinois governor’s response to all this? Why, spending more money of course. Staff members have reportedly received 43 salary increases at an average of 11.4%. And 40,000 union workers in Illinois have successfully rammed through a pay raise of 14%.
The politicians and union bosses running Illinois are not just rearranging deck chairs on the Titanic. They are cheerily giving themselves pay hikes even as the iceberg heads straight for them.
California is another poster child for impossible foolishness.
“People think we’re becoming a third world country,” says Arnella Sims, a Los Angeles County court reporter. “We are on the verge of system failure,” warns the executive director of the California Budget Project.
“California’s fiscal hole is now so large,” The Globe and Mail further adds, “that the state would have to liberate 168,000 prison inmates and permanently shutter 240 university and community college campuses to balance its budget in the fiscal year that begins July 1… Mass layoffs, slashed health and welfare services, closed parks, crumbling superhighways and ever-larger public school class sizes are all part of the new normal.”
In an effort to fight back the tide, California governor Arnold Schwarzenegger – the “governator” – took a bold step last week, ordering 200,000 state workers to take a temporary pay reduction to $7.25 per hour, the federal minimum wage. The state comptroller balked.
It would be amusing if it weren’t so tragic. This is the kind of stuff that happens when you run out of money, courtesy of spending what you don’t have for years or even decades at a time.
Growth Won’t Do It
In the past, the prevailing belief was that economic growth would cover all sins. No matter how foolishly federal and local governments spent, no matter how recklessly the money was squandered, a tide of rising prosperity would ensure there would always be more. The great American growth engine would keep the coffers filled.
Sadly, it is exactly that attitude that brought us to where we are now. The terrible debt crisis that America faces was brought on precisely through a mixture of laziness and overconfidence. No matter how much was earned, the belief was always that things could be even better if we just leveraged up that prosperity by a factor of X.
Like the man who thinks that becoming a millionaire entitles him to spend like a billionaire, that mindset was always guaranteed to end in tears. And now we have reached that terrible point in the cycle where economic growth – the very thing we have always relied on in the past – is being choked off by mountainous levels of accumulated debt.
As Hunter Thompson once said: “The Edge... there is no honest way to explain it because the only people who really know where it is are the ones who have gone over.”
We were bound and determined to find the edge. And now we are in the process of going over. Be prepared.
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By Justice Litle
Justice Litle is the Editorial Director of Taipan Publishing Group, Editor of Justice Litle’s Macro Trader and Managing Editor to the free investing and trading e-letter Taipan Daily. Justice began his career by pursuing a Ph.D. in literature and philosophy at Oxford University in England, and continued his education at Pulacki University in Olomouc, Czech Republic, and Macquarie University in Sydney, Australia.
Aside from his career in the financial industry, Justice enjoys playing chess and poker; he enjoys scuba diving, snowboarding, hiking and traveling. The Cliffs of Moher in Ireland and Fox Glacier in New Zealand are two of his favorite places in the world, especially for hiking. What he loves most about traveling is the scenery and the friendly locals.
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