“Next to housing this is the single most important issue in the US and certainly the biggest threat to the US economy. There’s not a doubt on my mind that you will see a spate of municipal bond defaults. You can see fifty to a hundred sizeable defaults – more. This will amount to hundreds of billions of dollars’ worth of defaults.” — Whitney told the CBS 60 Minutes programme on Sunday night.
People who carp about government spending and high taxes seem to have little to no idea of what the underpinning problem is in California and many other states/cities. Basically, it’s the tax system itself which is inequitable and results in much less revenue to California governments than in other states. There are many problems, but an example is the property tax, which is based on what was paid for the property, not what it’s worth. Those of the wealthy who have owned their properties for years pay almost nothing, while recent buyers carry the load.
Many US cities are the perfect example of what has been happening to states, provinces, countries for years. Erroneously, the public sector unions have demanded and received the same types of wages and benefits, or better than those in the private sector, and as a rule, when the private sector has financial problems, in many cases due to high taxes a majority of which are caused by the constant compounding of wages etc of the public sector, the companies either downsize, move or close. Governments need to do the same: cut the taxes by off-loading some public sector workers, cut their salaries to today’s globalization competitive standards (with the exception of countries which devalue their currencies), and rebuild.
$2tn debt crisis threatens to bring down 100 US cities by Elena Moya (1)
More than 100 American cities could go bust next year as the debt crisis that has taken down banks and countries threatens next to spark a municipal meltdown, a leading analyst has warned.
Meredith Whitney, the US research analyst who correctly predicted the global credit crunch, described local and state debt as the biggest problem facing the US economy, and one that could derail its recovery.
New Jersey governor Chris Christie summarised the problem succinctly: “We spent too much on everything. We spent money we didn’t have. We borrowed money just crazily. The credit card’s maxed out, and it’s over. We now have to get to the business of climbing out of the hole. We’ve been digging it for a decade or more. We’ve got to climb now, and a climb is harder.”
American cities and states have debts in total of as much as $2tn. In Europe, local and regional government borrowing is expected to reach a historical peak of nearly €1.3tn (£1.1tn) this year.
Cities from Detroit to Madrid are struggling to pay creditors, including providers of basic services such as street cleaning. Last week, Moody’s ratings agency warned about a possible downgrade for the cities of Florence and Barcelona and cut the rating of the Basque country in northern Spain. Lisbon was downgraded by rival agency Standard & Poor’s earlier this year, while the borrowings of Naples and Budapest are on the brink of junk status. Istanbul’s debt has already been downgraded to junk.
Read more about Robert Prechter’s warnings for holders of municipals and other bonds in his free report: The Next Major Disaster Developing for Bond Holders. Access your free 10-page report now.