I have to say I normally pay remarkably little attention to the Sovereign Society in the USA. They are, if I put it nicely, good friends of tax havens. That’s why I read their newsletters. You have to know who’s writing about you — and these guys do seem to have it in for me and my friends, quite often. But we’re pretty thick skinned — and since almost without exception people think people of this ilk come from beyond the fringes, who cares?
Well, on this occasion they seem to have spotted something, so I’ll take note for once. Of course, someone may point out what is wrong with their logic — and it will be good if they did. But their beef (spread over thousands and thousands and thousands of words) is that they’ve spotted a massive short selling opportunity because they think 48 of the 50 US states are about to go bust.
The two exceptions are, I think, Montana and North Dakota. The rest, they claim, have no prospect of balancing their budgets by yesterday — when they were, apparently legally obliged to do so, because US states can’t run deficits, although they can borrow for capital spending. And they do borrow: the “municipal bonds” they issue are massively popular because they’re tax free in the US. Apparently there are some $2.81 trillion of those bonds in issue (and you thought UK debt was big?) and the Sovereign Society thinks they’re going to default, which has happened in the case of these bonds before now.
Well, I bet they don’t: the US can underwrite that debt and I’m quite sure it will. But what this shows are a number of things.
First is the madness of trying to enforce balanced budgets when the situation just does not allow it. People have to come first.
Second, if this is true, is that risk is created by the folly of policy based on poor economics, not by the underlying economic reality.
Third, that the far right just see this as another opportunity to benefit from other people’s suffering — because the whole tone of the Sovereign Society’s message is that no one should miss out on the chance to speculate on this crisis. Which is pretty sick — and precisely why short selling is a mechanism to be eliminated.
And finally — that quite where the next crisis comes from can’t be predicted, but as some banks like RBS in the UK have been saying, we’d better be prepared for it, because it will be hitting us soon.
I note the world is now catching up.
In the US this is the next big banking crisis.
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And all of it predictable. That’s the rub.
Something you overlook in your analyis: most of the muni securities are held by taxable capital makrkets investors, and NOT by banks.
It seems highly likely that there will be some problems ahead, but the muni capital markets are reasonably deep and liquid that it should be able to absorb the shocks.
To undertand this, please consider the following:$2.8 trillion is less than £2 trillion. The US economy is over 20 times bigger than the UK and so, in “UK terms” the entire outstanding muni market would be less than £100 million, less than one year of the UK’s deficit which you argue time and time again is not something one should worry about.
So you are wrong.
@Million Dollar Babe
Hang on – I said I bet they did not default
But I did draw attention to an issue
And the issue seems to be a real one
In those circumstances I think you’re agreeing with me
Small correction—not true that ‘US states can’t run deficits’; rather, many of them passed ‘budget balancing’ laws in the 80s in the wake of California’s Proposition 13′(the first state referendum requiring the budegt to balance annually). The point is not entirely trivial; it shows how anti-Keynesian views emerged strongly even before Reagan. On the main point, you’re quite right—in the absence of Govt support, US states are now going to default on debt (to be followed by German laender, etc etc)
@GWI
Completely agree
These places would be fine without this insanity
It’s that that is tipping them towards default
This week, the Telegraph has run four columns condemning ‘banker-bashing’, and saying we should ‘get behind’ the banks. No explanation is offered as to why we should chant in support of very rich people whose achievements to date are:-
(a) Emptying the Treasury
(b) Starving small business of much-needed capital
(c) Cheating, overcharging and mis-selling customers at every opportunity
(d) Poking us all in the face by continuing to award themselves bonuses with our money
(e) Lying to every stress-test on every continent
(f) Lending money rashly to sovereign and private borrowers
(g) Laundering money for terrorists and …
(h) Forcing almost every worthwhile institution in Britain to cut back on social and health programmes, some of which might at least do some good.
The only thing I’d ever get behind big banking is the largest steel-tipped boot I could find….followed by a demand for our $23 trillion back.
Borrowed by the PSG with thanks from “The Slog”.
Evidence-based bollocks deconstruction