Pay Bondholders or Pay Employees?
August 17, 2008
– Comments (6)
There is little doubt our economy is facing some unprecedented negative headwinds.
The PE on the Dow 30 and Russell 2000 is nil.
Unemployment jumped in July and some areas in CA are reporting 12-18% unemployment rates. In recent weeks a large number of retail chains and restaurant chains declared bankruptcy.
Housing foreclosures are at record highs and with more and more losing their jobs that trend doesn't seem to be stopping anytime soon.
GM sees no signs of improvement even after falling gas prices.
Target is forecasting negative same store sales comps even though food prices are up significantly from last year.
From the above, clearly things are slowing and the outlook doesn't seem bright. This slowing is exacerbated on a historically high level of debt that is suffocating our economy.....especially as revenues decline debt payments consume a greater and greater percentage of revenues.
If you really want to have some heart wrenching conversations, sit down with anyone of the millions of construction workers, real estate agents, or mortgage brokers who have seen their incomes disappear and have been forced to liquidate their 401Ks and savings just to make ends meet as they have been unable to find replacement jobs. Few of these people are counted as unemployed but their suffing is real nonetheless. This same issue is happening to many others as businesses go bankrupt or layoff large numbers of workers with few being able to find comperable replacement work.
As the savings are being drawn down....the slowing is speeding up.
RIGHT NOW,
a tsunami is developing very fast....due to the rapid slowing, state and local governments have seen tax revenues evaporate. Going forward, states are going to have to make a difficult choices.
Revenues have really started to decline signifcantly over the last two months and governments must now deal with a problem that growing with each passing week. The mainstream media have been remarkably silent about this....
A major concern is some of the states biggest taxpayers in the past are no longer earning money and you can't extract tax from those that are losing money. Some include banks, auto dealers, airlines, mortgage companies, real estate agents, mortgage brokers, retailers, restaurants, and vendors to the above. As more and more can't pay.....that leaves fewer and fewer that will have to shoulder an increasing burden.
In CA, it reduced workers wages to minimum wage and it still didn't cover the deficit. We saw unemployment in CA skyrocket in July only compounding the problem going forward.
NY saw 20% of its tax revenues evaporate when Wall Street Banks started losing money....and it is likely this money won't come back for years with NOL carry forwards.
As the gap between revenues and expenses continues to widen....pretty soon states and local governments will demand more and more out of fewer and fewer and likely be forced to make a choice.....pay the bondholders or pay its employees.
Some people call it communism/socialism when every dime you make goes to the state and the state chooses how to allocate among the people. Remember, the money must come from somewhere....it not from your neighbors and business.....then it must come from you.
In upcoming weeks, watch the spreads in municipal bonds......it could get interesting.
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