Earlier this month I posted a note called "Market Nerves." This is more on the same topic ...
I'm convinced. It's not "if" but "when and how" we face the next leg of the economic crisis that kicked off in 2007-8. While we've turned the corner we're not out of the woods yet. Certainly, it's been positive that corporate profits have pushed the stock market higher and given back some of the wealth that was lost. And, since that story has dominated the news it's also had a positive effect on consumer confidence leading to more consumption and the kind of self-sustaining dynamic that economists like to see.
But while some situations have undoubtedly improved, another important situation has gotten much worse and is about to become acute. Throughout the state budgets, country pension, and labor contract obligations are unsustainable. The tricks and means for covering up the problems have run out. The following link explains how severe state budget shortfalls are - http://www.cbpp.org/cms/index.cfm?fa=view&id=711
On the one side is the tax payer, tapped out and fed up. On the other side is the recipient with a binding contractual promise that they will not willingly surrender. The stage is set for spectacular confrontation. A confrontation that will begin when the first one falls and then a series more do. It will play out like a giant dominoes drop as one-by-one and then branching out to numerous parallel events the collapse spreads across the country and ultimately the world.
My guess for what sets it off the wave is the vote to raise the Federal debt ceiling in March 2011. If that vote gets caught up in a lengthy debate or filibusterer and the Federal Government is forced to shut down because it can't spend the impact on some states in awful shape will force them or municipalities below them on the receiving end of funds that depend on the Federal government into bankruptcy. The same could happen just due to draconian cuts by the Federal Government to funding that States and Municipalities depend on as a result of Federal budget negotiations in order to satisfy demands of those, such as Rand Paul, who would otherwise hold up a passage of an increase in the Federal debt ceiling.
Like all contract disputes that the parties can not mutually resolve, this one will end up in the courts. In this case it would be bankruptcy court because the dispute is not over the obligation but the ability to pay it. But, it's just as likely to end up in the legislature to make new law. I can't imagine the President or both political parties will want to rely on bankruptcy courts across the country to restructure the country's pensions and labor contracts without some "prepackaging."
While villages, towns, and cities can file bankruptcy, states have no constitutional right to do so. That may change. An article in the NY Times, http://www.nytimes.com/2011/01/21/business/economy/21bankruptcy.html speaks to this. As dramatic cuts in the Federal Budget ripple out to states pressures on state budgets will worsen dramatically. Compounding the problem to the states is the end of combination of the end of TARP/TARF assistance to states, the end of funding from "Build America Bonds," and a lost tax revenues, and tax credits and deductions that were granted as part of incentives to stimulate the economy and which will effect revenues from filings in 2010 and 2011.
In the end, since taxpayers are tapped out and fed up there is no more on the revenue side so the pain will mostly have to be absorbed on the side of the recipients which would be the bond holders, labor unions and their membership, and pensioners. If GE's restructuring is any model that gives us an idea of what's to come, the biggest losers will be the bond holders. But, it really get's interesting and complicated since the bond holders are often the pension funds.
While this has to get ugly and cause a rather large stock market reaction, it's not all bad actually. Frankly, I'm disappointed it didn't happen already. It's about time there was a reckoning. Unions have been robbing this country for years, stealing wealth from all of us with their ridiculous compensation and benefit packages. They've perpetuated the wealth grab in the form of pensions that grant outrageous retirement compensation to privileged few Americans while the rest of us struggle to pay the taxes that support them. Labor's hypocrisy has no bounds as they drive jobs overseas with their demands and then complain about corporations moving those jobs offshore.
And so what it USA companies make more money doing so - you and I benefit with lower cost products that raise our standard of living and create wealth in developing countries who in turn represent one of the most promising aspects for growth in the USA economy! You know what happens when you get a leg up on labor? A healthy GM and Ford who are making better products than ever!! That's what happens when you cut the strangle hold that labor has on all of us in America!
One thing is for sure, the economic crisis ain't over yet. I say bring on the reckoning. Let's do what we have to do to get our fiscal house in order! Next stop - the Pentagon and tort reform!!
I just hope we don't get too hammered in the stock market. There's no reason to spoil that party!! Personally I think the stock market should celebrate when this happens, but I think the opposite reaction is more likely.
