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alstry (35.03)

A SERIOUS question for ALL Caps Players....

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May 19, 2009 – Comments (22)

We all know that the tax revenues to the various government entities is evaporating at rates never seen in history.  And unlike The Great Depression, our state and local governments have incurred large amounts of debt to fund operations and expansion fulfilling the promises of our politicans. 

If the tax revenues to our cities, counties and state government deminish to the point where our local government can't pay for basic services and cover debt obligations at the same time.....

what demands will the creditors make on those governments and what demands will the governments make on the citizens to meet those obligations?

Are the debt obligations of the areas we live in the debt obligations of the citizens....in other words, is there joint and several liability between the debt obligations of the cities, counties, and states and its citizens?

(I like to use the analogy of a condo association where few are paying association dues.....where creditors of the associatioin can foreclose on the association including those that are current.)

If so, can the creditors foreclose on everything we have including our houses, IRAs, and bank accounts and force us into bankruptcy to protect our assets????????

22 Comments – Post Your Own

#1) On May 19, 2009 at 2:47 PM, jddubya (61.66) wrote:

what demands will the creditors make on those governments and what demands will the governments make on the citizens to meet those obligations?

I don't know.

 Are the debt obligations of the areas we live in the debt obligations of the citizens....in other words, is there joint and several liability between the debt obligations of the cities, counties, and states and its citizens?

No

If so, can the creditors foreclose on everything we have including our houses, IRAs, and bank accounts and force us into bankruptcy to protect our assets????????

Nah

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#2) On May 19, 2009 at 3:19 PM, alstry (35.03) wrote:

jd,

thanks for your opinion.  Then who pays for basic services such as education, police, fire, and hospitals when they can't meet there debt obligations and revenues are not even enough to pay salaries????

This is one of the few times Alstry is not kidding.....starting today in CA and on or about July for the rest of the country....this could be one of the biggest issues facing the nation....unless of course if a major conflict breaks out first making economic issues mute.

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#3) On May 19, 2009 at 3:22 PM, Aerius (82.68) wrote:

States have repudiated debt before...since they don't have a printing press like the federal guys do, it's possible for them-like municipalities-to default.

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#4) On May 19, 2009 at 3:27 PM, eldemonio (98.74) wrote:

It's funny you mention this.  Last week my car was repoed by the construction company who built our neighborhood park. 

Evidently the city stopped payment.  Vatos Locos Construction came during the middle of the day, took our vehicles, and tried to kidnap our children.  The craziest part of the whole story is that the police won't do anything because of Alstrynomics!

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#5) On May 19, 2009 at 3:29 PM, alstry (35.03) wrote:

Aerius,

If that is the case, could you imagine the effect on the holders of municipal debt such as retirees, pension plans and banks.

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#6) On May 19, 2009 at 3:51 PM, Rehydrogenated (32.56) wrote:

Wow...so confusing...so the banks take our stuff...but they have to pay taxes on the stuff...so they give it back to our government...who then gives it back to the bank to pay off more debts...but the banks are owned by the government...who owes the banks all this money...????????

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#7) On May 19, 2009 at 4:13 PM, Gemini846 (82.65) wrote:

King Obama will Be happy to pay for your schools, fire police, and hospitals after you vote for amendment 25 to the constitution which abolishes congress and makes the supreme court his puppet. Eliminates Presidential elections and allows the president term for life and to choose his successor.

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#8) On May 19, 2009 at 4:18 PM, finabuddy (96.67) wrote:

Minicipal bond defaults are rare and it isnt clear who is responsible for repayment - it really makes the lawyers rich I am sure. I will say that if this truely is a serious question, then the answer is an absolute no to a fear mongering question like the 'foreclosing on your IRAs to pay munis'.

 State budgets like CA that have large gaps doesnt mean there is a bond out there defaulting. It just means that  the budget is over bloan and they cant pay for all the programs. The state is very aware of their credit rating and will not allow defaults to start occuring on general revenue bonds because they wont be able to issue new munis any time soon.Programs will have to be cut, and tax revenues will increase, but you also have to remember, its citizens that own a lot of munis because of the individual tax benifits.

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#9) On May 19, 2009 at 4:20 PM, finabuddy (96.67) wrote:

correction: general revenue = general obligation

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#10) On May 19, 2009 at 4:27 PM, alstry (35.03) wrote:

It is not about fear mongering.....

It is simply math.....NEVER in our nations history has revenues to our state and local governments dropped so far so fast.  Compounding the problem is that NEVER have our states and local governments been burdened with so much debt and obligations.

They are simply running out of money and can't afford to pay both debt payments and salaries at the same time.

So if you are looking at history for the answer.....you are looking in the wrong place.

Just trying to teach you guys a little black swan analysis.

Remember, Alstrynomics is all about getting it right...

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#11) On May 19, 2009 at 4:30 PM, mode7 (84.87) wrote:

King Obama, I always find phrases like that ironic, even if he is a bit more leftist. People always think the world's ending when their choice of elected official didn't get the office, quit being a Chicken Little and at least give the guy a full year before flipping out.

The US thrives on rotating out our elected officials and their different idealogies, I really don't mind Obama being president at the current time as I think 4+ years of McCain could've had more destabilizing effects (although I would've preferred McCain over Bush the previous 8 years).

First, everyone calm down and take a deep breath. We've always had debt, the trick is being aware of it and being able to manage it. 

In the next few years we need to stabilize and begin to cut our debt, but currently running a deficit is not as bad as it seems.

I think the most practical conclusion we will see with out rising debt levels is some inflation in the US dollar and possibly a few years of stagflation.

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#12) On May 19, 2009 at 4:59 PM, alstry (35.03) wrote:

We've always had debt, the trick is being aware of it and being able to manage it. 

BUT WE HAVE NEVER HAD DEBT LIKE THIS....THAT IS WHAT SOME OF YOU FOOLS SIMPLY FAIL TO APPREICIATE.

Now the debt is simply too large to service for the rapidly shrinking revenues....there is no mathematical way pay expenses at the end of this summer....less wait a few years for things to stabilize.

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#13) On May 19, 2009 at 5:16 PM, finabuddy (96.67) wrote:

"end of this summer"

 What are you saying is going to happen exactly in September? Might as well be clear. No mathematical way? How is there no way for the states to pay the interest on their debt? Be more specific.IE show math.

 

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#14) On May 19, 2009 at 5:37 PM, alstry (35.03) wrote:

YUP.....end of summer!!!!!!!!!!!!!

 

Just take a look at California.....we are already there.....practically every city, county and the state itself

The end of Summer is not Alstry...it is the mayor of LA and the Governator himself!!!

Governor Schwarzenegger has sent a letter asking the feds to reconsider, noting the cuts were taken in response to "an unprecedented fiscal crisis." Even now the state faces an estimated cash-flow problem of some $17 billion by July.

OR

Villaraigosa said the worsening economy and an expected $300-million drop in city tax revenue gave him "very few options." L.A.'s budget gap is expected to grow to $1 billion in the 2010-2011 fiscal year because of investment losses in the city's pension systems, which the city is required to keep solvent.

"The gravity of the fiscal emergency that we face is enormous," Villaraigosa said in his letter to the council. "Unless we act with urgency, the city will face a cash flow crisis, raising the prospect of running out of cash between November and February."

the math is open for anyone to see...... it is an unprecedented and enormous mess and getting a lot messier!!!!!!!!!

IT IS AMAZING HOW UNAWARE SO MANY CAPS PLAYERS ARE!!!!!!!

Remember...Alstrynomics doesn't make up the FACTS because Alstrynomics is all about being Right!!!!!

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#15) On May 19, 2009 at 5:46 PM, jddubya (61.66) wrote:

Then who pays for basic services such as education, police, fire, and hospitals when they can't meet there debt obligations and revenues are not even enough to pay salaries????

 

The government will default.  This will create a need to essentially start from scratch.  This is, of course an armageddonish type of situation.  A situation which I don't believe will occur, but on the other hand it may be a good thing for the future of the world if it occurred.  An econmony where things of value are traded for things of value.  Work for work.  Work for food.  Food for services.  Services for food...and so on.

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#16) On May 19, 2009 at 6:29 PM, UKIAHED (45.40) wrote:

I did a little research for you to get some answers on your specific questions:

what demands will the creditors make on those governments and what demands will the governments make on the citizens to meet those obligations?

It depends upon the specific Muni bonds type.  There are a few types of Muni bonds – General Obligation and Revenue are the most often issued.  There are other types – but they are small enough denomination that they should be disregarded for this post. 

Basically, the Revenue bonds are bonds issued to pay for specific projects – think new sewer plant.  When these bonds are issued – covenants are created to cover the “demands” that creditors can make in the event of a default.  An example may be that if the bonds go into default – the agency may need to raise sewer rates to cover the bond payments. In the event that rates cannot be raises enough – then things get a bit dicey.  The creditor cannot force the agency to raise rates – or the power of the elected government would have been superseded and would be thrown out in court.  See news on a recent case.  

In any event – only those assets that generate the revenue for the bond can be addressed by the creditors.  There is no “walking up the ladder” to get to a higher taxing authority.

General Obligation bonds are backed by the full faith of the taxing entity – and it’s ability to generate funds thru taxes.  Think of GO bonds like credit card debt.  The creditor gives you the money and you promise to pay it out of your paycheck over time.  When a state (or other agency) does not have enough revenue – then the coupon payments stop and the bond goes into default.  In this case – the creditor can work with the state – or force the state into bankruptcy.  The creditor cannot force the state to raise tax rates – and cannot seize property of the state or it’s populous.  At this point – a bankruptcy court helps both sides work out the details of payment.  Like credit card debt – it is possible for the creditor to loose their money (all or part).  And like you and me – the state’s credit rating would go to crap. 

Have any of these defaults happened in the past – you bet:

The most infamous default cases involving general obligation bonds include New York City's default in 1975 and Cleveland in 1978. The largest default in the history of the municipal bond market was the Washington Public Power Supply System's (WPPSS) default on $2.25 billion in bonds.

Are the debt obligations of the areas we live in the debt obligations of the citizens....in other words, is there joint and several liability between the debt obligations of the cities, counties, and states and its citizens?

Absolutely not.  There are no Muni bonds issued that create a direct liability of the citizens.  This does not mean that the state cannot raise taxes to pay the debt.  But the creditor does not have any say in this event.  For example – Income taxes in California cannot be raised without a supermajority or a proposition voted upon by the people.  Just because California defaults on it’s debt – does not mean that taxes will be raised.  Of course – a default would be bad for California should we want to float new debt anytime in the future…

If so, can the creditors foreclose on everything we have including our houses, IRAs, and bank accounts and force us into bankruptcy to protect our assets????????

There are no Muni bonds issued were the population’s private property or assets would be held as collateral.  I’m not even sure how you could do it – can you imagine the paperwork required to foreclose and bankrupt 30+ million people all at the same time…? J.  Can you imagine what the judge would say?  LOL

BUT WE HAVE NEVER HAD DEBT LIKE THIS....THAT IS WHAT SOME OF YOU FOOLS SIMPLY FAIL TO APPREICIATE.

Not really true.  Public and private debt ebbs and flows with time and the rhythm of the economic cycle. 

In 1988, a study by Enhance Reinsurance Co. looked at historical patterns of municipal defaults from the 1800s to the 1980s and concluded that municipal defaults usually follow downswings in business cycles and are also more likely to occur in high growth areas that borrow heavily.1 Following the 1873 Depression, when more than 24 percent of the outstanding municipal debt was in default, the greatest number of defaults occurred in the South, the fastest-growing region at the time. Factors that caused defaults included fluctuating regional land values, commodity booms and busts, cost overruns and financial mismanagement, unrealistic projections of the future, and private-purpose borrowing. The report also said that since World War II, revenue bonds have been a new source of default, largely a result of revenue overprojections. 

Did you catch the dates?  That was the 1873 Depression with a Muni default rate of 24%.  Did you catch the final paragraph?  Sounds kind of like the same factors that are the cause of  today’s crisis…

Then who pays for basic services such as education, police, fire, and hospitals when they can't meet there debt obligations and revenues are not even enough to pay salaries????

Ironically, should the state get to this point – they default on the debt payments – which frees up plenty of extra money to pay salaries. Bad for the bond holders - good for the state employees...at least in the shortterm.

I hope that this helps with your questions.  Follow up questions are cool with me – glad to do the research.  If you find info that is different than mine – please let me know – information is power – and we all need some power today!

Have a great day

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#17) On May 19, 2009 at 6:31 PM, debtRichQuick (< 20) wrote:

Alstrynomics, no way to deny it in the short term. You'd have to be BLIND to not think more short term pain is coming...until the equipement gets here, the Gov is trying to use a desk fan and a candle to reinflate the hot air balloon...it's gonna be a while....

"Hewlett-Packard Co. announced Tuesday it will cut 6,400 more workers -- or 2 percent of the company's total work force."

http://cbs5.com/business/hewlett.packard.jobs.2.1013527.html

 

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#18) On May 19, 2009 at 6:42 PM, alstry (35.03) wrote:

debtRich,

Thanks for being you....you keep the air always fresh.

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#19) On May 19, 2009 at 6:44 PM, alstry (35.03) wrote:

Uki,

That is some of your best work....I knew I liked you for a reason.

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#20) On May 19, 2009 at 7:19 PM, AdirondackFund (< 20) wrote:

Bought Faz after reading your posts a few days ago and then came along this a moment ago.  I agree.

http://www.bloomberg.com/apps/news?pid=20601103&sid=a4UnmJtPVOnU

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#21) On May 19, 2009 at 8:10 PM, IIcx (< 20) wrote:

alstry, are you some vodka swilling spy from Siberia who has seen the light of day 24/7 to the point your brain is fried or have you been in the "back-hills" too long?

Your preconceived notions about taxation are naieve. 

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#22) On May 19, 2009 at 9:36 PM, alstry (35.03) wrote:

Alstry has no preconceived notions about taxation....he simply KNOWS that state and local governments are broke and their citzens are running out of money too.....and there is no time in the past century we can look back and compare.

Houston....we have a problem.

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