Buffett: Municipal Debt Meltdown Will Hit US … Add investment legend Warren Buffett (left) to the list of those who warn of a municipal debt meltdown. Many municipalities have promised overly generous retirement and health benefits to public workers without any viable plans to bring in the money necessary to pay for those benefits. They have assumed unrealistic returns in their pension fund investments and unrealistic revenue from taxes. The Pew Center on the States recently estimated that as of the end of 2008 budget years, states had $1 trillion less than needed to pay for future pensions and medical benefits. And that number doesn't even reflect much of the losses suffered by pension fund investments in the second half of 2008. "There will be a terrible problem, and then the question becomes will the federal government help," Buffett said at a hearing of the U.S. Financial Crisis Inquiry Commission in New York, Bloomberg reports. – MoneyNews
Dominant Social Theme: Another problem for bankers to overcome.
Free-Market Analysis: The issue of over-spending by US municipalities has been evident for a long time but has also been overshadowed the European sovereign crisis. But in a sense both crises are similar in that participants overspent and were supported in doing so by the larger securities industry. (We have even read on Bloomberg and elsewhere that municipal insolvency is going to be complicated by a burgeoning, trillion-plus bid-rigging scandal that involves Wall Street's largest firms, municipalities and states.) Here's some more from the article:
"I don't know how I would rate them myself. It's a bet on how the federal government will act over time." In May, Buffett said the feds may end up having to bail out some states from their extreme financial woes. "It would be hard in the end for the federal government to turn away a state having extreme financial difficulty when they've gone to General Motors and other entities and saved them," Buffett said at Berkshire's annual meeting, Bloomberg reports. "I don't know how you would tell a state you're going to stiff-arm them with all the bailouts of corporations."
It is hard to tell how media pundits and forecasters keep speaking of the upcoming recovery when municipal and state finances are in such poor shape. We see this as something of an elite promotion, a dominant social theme that is being propounded in a desperate effort to create the appearance of a recovery when the reality is less certain. We are sure the same sort of thing is going on in Europe despite that continent's terrible troubles. Did the power elite misjudge?
Is the crisis deeper and more unmanageable than they expected? Certainly, the Internet has broadcast their manipulations to millions. The result is that the twin tools of media optimism and money printing are far less effective than during a shallower downturn. These last few years have been like something of a "perfect storm" for the elite, and even the possibility of war has been somewhat precluded by the over-availability of nuclear weapons, by the growing suspicion of war and general war weariness.
We've watched the "financial recovery" proceed in fits and starts throughout the West. It was supposedly just getting started in Europe when the sovereign crisis hit. The promotion is still ongoing in America. But it may soon come to a screeching halt. The cash-drain is going to cause taxes to go up at a state and local level. And we're not sure how the Federal Reserve is going to begin to tighten interest rates or slow money creation while cities and states around the country are facing empty coffers. The revenue-raising has already started:
N.Y. State Hammers Drivers With Slew Of New Fees … New Yorkers, Be Prepared To Pay Out Your Noses For Privilege To Drive On Empire State Streets And Highways … The new license plates that have begun popping up on the streets of New York are a money raiser for the state, but that's not they only way the state is sticking it to motorists. There are higher fees for just about everything. It may be no coincidence that the state's new license plates are called "Empire Gold" because the new plates — with their higher fees — will turn out to be a gold mine for the state. "Makes me feel like taking money from my pockets, literally," said Anthony Acevedo of the Lower East Side. – WCBSTV
Nonetheless, the Fed is going to have tighten at some point because there has been so much money dumped into the economy. If the US economy heats up even a little bit, a lot of this money will start to circulate, creating significant inflation. And it is obvious to us that the Fed is desperate to begin monetary tightening maneuvers. Here's an excerpt from MoneyNews on this very subject:
US Almost Strong Enough for Rate Hike … The U.S. economy is almost strong enough to allow the Federal Reserve to begin thinking about raising interest rates, Atlanta Fed President Dennis Lockhart said on Thursday. While he noted unemployment would likely remain elevated for some time, Lockhart said the U.S. central bank should not wait too long before beginning to tighten the reins. "The time is approaching when it will be appropriate to consider recalibrating interest rate policy. I do not believe that time has yet arrived," Lockhart said in the prepared text of a speech in Atlanta. "As the economy continues to improve and financial markets find firmer ground, extraordinarily low policy rates will not be needed to promote recovery and will become inconsistent with maintaining price stability."
It all sounds very solemn and scientific, but we have questions. While central banks can print money, there is no guarantee of when that money is going to circulate, or how much of it – and when "tightening" and "sterilization" and the other terms that bankers like to throw around are to be applied. There is, in fact, NO forward looking numerator.
As a result, the chances of a central bank doing what needs to be done when it should be done are uncertain indeed. More than this, there is certainly an inflationary bias built into the money system because central bankers will always shy away from shutting off "stimulation" too soon. The constituency of a central bank is generally the money industry – not citizens per se – and no one in the money industry gets rich during a fiat-money deflation.
We've maintained all along that these are most tricky times for investors – and for Western citizens generally – because the power elite itself has lost some control over themes it has set in motion. These are not merely verbal promotions: power promotions are inevitably stitched to action of some sort … the creation of certain entities and the passage of laws. Picture a rocket ship or dragster running out of fuel. The technology is finely tuned and the mission clearly defined, but suddenly propulsion has ceased. Not good.
Once sufficient public confidence in a promotion has been lost, restoring its momentum is difficult indeed. The best thing to do is to readjust and retune it. We fully expect this is taking place now with global warming – which is morphing into "climate science," and which will soon result in the discovery that the globe (as a result of global warming) is beginning to cool dramatically … something like that.
The long-term EU promotion and consensus that central-bank-run economies are most effective and "modern" are more problematic these days; great deal of wealth can disappear while promotions are being reconfigured. This may well be happening now. Another problem: If too much wealth is lost, the public itself will grow so angry that further promotions of all sorts will fall on deaf ears. We think the elite is worried about this.
In the 20th century, one merely had to figure out the breadth, depth and commitment of the power elite to a particular promotion and then hitch a ride. But life is nowhere near so easy today. This is good news from the standpoint of those who believe a monolithic Western power elite is not desirable. But it is bad news as well. The West is in for continued economic turmoil at the very least in our opinion – and the much discussed "recovery" (a fiat-money reflation), is obviously going to be slowed by sovereign debt issues both in America and Europe. Will the dreaded "double dip" recession look that much different than the beginnings of a "depression?"
Virtually every part of the Western sociopolitical, military and economic conversation has been bent to serve the global governance ambitions of the powers-that-be. But perhaps the mechanisms have started to come undone. This seems to have happened during the era of the Gutenberg press. The results were certainly liberating, as it can be argued that the Renaissance and Reformation were a direct or indirect result. Yet any such era is bound to be uncomfortable as well.
