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The State & Local Gov’t Debt Trainwreck Nobody is Talking About

by Brett on October 6, 2010

The City of Harrisburg is broke – but at least it’s not alone!  From The New York Times:

Across the country, a growing number of towns, cities and other local governments are seeking refuge in similar havens that many states provide as alternatives to federal bankruptcy court. Pennsylvania will have 20 cities and smaller communities in its distressed-cities program if Harrisburg receives approval. Michigan has 37 in its program; New Jersey has seven; Illinois, Rhode Island and California each have at least one. This is on top of troubled housing, power and hospital authorities.

The increasingly common pleas for state assistance — after two relatively quiet decades — reflect the yawning local budget deficits that have appeared in the last two years.

It’s likely that state and local governments are just beginning some very hard and lean times to come.  Especially because, unlike the Federal government, they:

  1. Cannot print money to purchase their own debt
  2. Must pay higher interest rates as a result of this “handicap”

It’ll be interesting to see what happens with Muni bonds.  Some investors believe that California munis, for example, are still safe, because the state will get bailed out by the Federal government if push comes to shove, or the unions will be broken as austerity measures are pushed into place (or some combination of both).

Others, like deflationist Robert Prechter, believe that muni bonds are toast - the final bubble in a series of bubbles that began with stocks, spread to housing, then commodities, and is culminating with the implosion of bad sovereign debt.

Hat tip to good friend and reader JL for sending this along!


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