Tuesday, June 22, 2010

State Governments Soon Likely to Shut Down!

Illinois has now passed California as the state most likely to default, at least that's how the Credit Default Swap (CDS) market sees it. Buying $1 million worth of protection against default on Illinois now costs $30,000. In contrast, the same amount of protection on California costs $29,700 and $24,500 for New York. ($1 million of protection against the United States will cost you $4,000.)

Let's not kid around: the states are in trouble and the worst part is there is no will in Congress right now for any help because of the Deficit Terrorists. Witness the recent scuttling of the "extender" bill in the Senate. This bill sought to extend unemployment benefits, but it also contained about $24 billion in aid to the states.

A couple of weeks ago the state of New York had to almost shut down. Thankfully this was averted because the state legislature passed an emergency spending bill, but the fix was only temporary because cash flow problems are only getting worse.
Everywhere you look the situation is becoming more and more grave with the threat of entire state governments shutting down as Congress and the president sit frozen by the cries of the Deficit Terrorists.

It is beginning to look unavoidable...there will be some government shutdowns as states run out of cash and make no mistake about it...the effects will be devastating. There is the real prospect of total anarchy as police, firemen, prison guards and other vital state employees walk off their jobs because they're not going to be paid.

We've already seen how ineffective Obama is in a crisis situation. His mishandling of the oil spill has been monumental. Now, as states begin to fall apart and devolve into chaos he will do as he's done before: freeze and seek to cast blame on others as the situation spirals out of control.


Matt Franko said...

this is like watching a slow motion train wreck...

the right is just going to watch as Obama implodes, the left has got to engage and give him a kick in the posterior, they seem afraid to hold him accountable as it may make him look even weaker...I heard some chatter out today that many of admin are preparing to leave: Orzag, perhaps emanuel, axelrod...maybe he's going to clean house and get some new thinking involved, our only hope here...

do you think a major state default can have the same effect as Lehman did?


Mike Norman said...


Yes, I posted something about Orszag. I also heard talk about Rahm Emanuel being thrown under the bus. Let's hope. If they truly change direction (and he should also get rid of Geithner), then I will buy, hand over fist!

Mike Norman said...

Axelrod is the worst! He's gotta go!

googleheim said...

Matt and Frank

Not only is the right and libertarians waiting for implosion, they are getting what they want : creative destruction.

they want austerity because it is their recipe for rapid deflation.

lauffer/libertarianism says he sees inflation, is completely wrong, but still gets what he wants because this deficit terrorism is about worrying people into losing their assets - that they cannot afford them because they are on a single ledger system ...when in reality they need their assets and a manageable way to keep them

the deflation is a product of austerity and creative destruction.