Some states are in dire situations, no doubt…the state of Illinois is probably the poster child for what you speak of!
Illinois is desperately short of cash…worse off than California or some of the others such as Arizona, Florida, Michigan, etc.
Illinois is not paying its public schools, nor its public colleges, nor the hospitals for Medicaid…the situation is quite dire here. New fiscal year begins on July 1 for most states including Illinois, but you may not see a problem immediately because a new fiscal year means new budgets, so there may actually be some cash up-front for several months. As the fiscal year wears on, there could be real problems.
The states have to sell bonds too, and if bond buyers perceive greater risk (and ratings agencies downgrade the states’ debt), that could present real problems.
Cramer made a remark which mirrored what I stated on this board well over a year ago…with low interest rates and foreign money seeking US treasuries for their “safety” the US Treasury is really missing the boat by not selling more LT treasuries!
The US Treasury keeps selling lots of short term treasury notes which roll over every 90 days, 1 year, 2 years or 5 years….as Cramer said a couple weeks ago, it’s this short term cr*p that threatens the US over time…because there may come a day in the not very distant future when this debt is due for a rollover, but the auctions will fail.
This is critical for the states, because many states rely on Washington for Medicaid, Unemployment and Highway construction money…I presented numbers here over a year ago that showed if the US could roll all or most of its LT debt into 30 or 40 year treasury bonds and sell them off, we could easily manage our sovereign debt over time and minimize rollover debt risk (which would be failed auctions and lack of liquidity, thus causing a freeze in services!)…I even priced it out and showed how such a strategy would be do-able for America and its citizens….Cramer made a similar point (but without the math like I did) and said similar…but if the US lets this moment in time slip by and allows most of its debt subject to rollover risk, we are in a heap of trouble down the road.
The states are in trouble, no doubt, but so long as Bernanke can print money and Geithner can sell Treasuries, they have a lifeline in the Fed and Treasury…
That’s why this rollover risk down the road threatens all of us.
Reagan’s supply side economist, Arthur Laffer, recently pointed out that higher taxes kick in on January 1, 2011…something “my friend” Larry Kudlow* has been hammering away at for some time now too and has been a concern of mine on this board in past posts….the Bears argue for a Bear Market now…but I think their case will have a lot more meaning to it in 2011, if the Bush tax cuts are allowed to lapse and Obamacare taxes begin to kick in…it now seems inevitable that 2011 will witness quite a crimp in the productive capacities of America with new higher taxes on earnings as well as investment income (dividends of stocks!).
The higher taxes in theory should allow the Treasury to pay off its debt more easily, but as Laffer has shown, a reduction in the production capacity of American business will actually slow down tax payments (the opposite of the Reagan revolution!)…the double-dip scenario, if it’s going to happen, will happen next year, not this year, imho. Ace
* Larry Kudlow does not know me personally…I use the term in a global fashion, as I respect his many opinions on the economy. I believe he is a brilliant economist.