The following segment on 60 Minutes this evening is a must see. The segment covered the state and local funding crisis in the USA. Meredith Whitney was a special guest and predicted that the crisis would unfold in the “next 12 months”. Whitney says the states are susceptible to hundreds of billions in losses and local insolvencies could be widespread.
This is a particularly interesting development if it were to materialize. Of course, municipal bonds have been very jumpy in recent weeks and as revenue constrained entities the states have been hit particularly hard by the crisis. The states are exactly like the nations of Europe so solvency is a very real concern here. Their bloated budgets and out of control spending has created severe balance sheets concerns. With a government that is leaning more and more towards small government it will be interesting to see if austerity impacts the US economy through the state funding channels.
We appear to have dodged a bullet in the form of maintaining a $1.3T deficit during this balance sheet recession (and through the coming calendar year), however, the risks at the state level remain largely unknown and difficult to quantify. If the shortfalls are as large as Whitney believes it’s likely that we won’t have the political will for more bailouts. Whitney believes the issues are potentially more frightening than the banking crisis:
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.