Trader Dan’s Commentary
The financial health of any state is directly related to the financial health of its various cities and towns. Here is further evidence of the mounting crisis that is yet to erupt and make itself felt in the larger scheme of things.
The rating of a city’s or state’s bonds is related to its fiscal condition. As their debt gets downgraded by the various rating agencies, the cost of borrowing increases, further compounding the already tenuous condition of these cities and states.
Remember those scenes of social unrest from Greece that we saw earlier this week? Wait until these deep cuts in services begin to take effect.
City of Angels on brink of abyss
Los Angeles, the second-largest US city, is facing a crisis of funding not seen since the darkest days of the Great Depression
Friday 26 February 2010 15.00 GMT
Sasha Abramsky
Two and a half years after the official start of the worst economic downturn and fiscal crisis in nearly 80 years, America’s economy is supposedly growing again, the stock market is halfway recovered from the lows of 2008 and early 2009, and the unemployment plunge seems to have been halted.
Yet, built-in time lags in how revenues are raised and budgets calculated mean that many states and cities around the country are only now starting to feel the worst of the pain. This year has been, quite simply, abysmal for local and state governments, and next year promises to be even worse. With easy cuts long-ago made, these days basic services are increasingly seen as luxuries, and public sector employees are increasingly vulnerable to wage cuts, benefits rollbacks, and unemployment.
While the federal government has considerable wiggle room to borrow or simply increase the supply of money to help fight its way out of financial collapse, smaller government units in America don’t have those options; increasingly cities, counties and states are facing the sorts of austerity measures we’ve come to associate with third world countries in crisis, or, in recent years, with vulnerable European nations such as Greece or Latvia.
In Arizona, a cash-pinched legislature put the Capitol building up for sale, proposing to lease it back for state use. In the small Colorado town of Colorado Springs, officials shut off half the street lamps and one-third of the traffic lights, told residents who wanted short grass in public parks to bring their own lawnmowers, and auctioned off a police helicopter on eBay. Around the country, libraries have been shuttered, after-school programmes have been curtailed, mental health services have been decimated.
In Los Angeles, the nation’s second largest metropolis, the Democratic mayor, Antonio Villaraigosa, addressed a full session of the city council on 9 February to detail just how grim the city’s finances had become. Miguel Santana, the city administrative officer (the CAO is the mayor and council’s chief financial adviser) had recently informed the mayor’s office that LA was facing a $200m shortfall through the end of this financial year and another half billion dollar-plus shortfall in the years to come if it didn’t radically, and rapidly, restructure its budget. Santana didn’t mince words. His nearly 300-page report (pdf) opened with this stark warning:
Trader Dan’s Commentary
The Fed chairman’s concerns are well founded. Please especially note the paragraph I highlighted in blue. That is translated as monetizing debt which will bear directly on the well being of the Dollar….
Bernanke delivers blunt warning on U.S. debt
Stage is set in U.S. for a Greek tragedy
By Patrice Hill
With uncharacteristic bluntness, Federal Reserve Chairman Ben S. Bernanke warned Congress on Wednesday that the United States could soon face a debt crisis like the one in Greece, and declared that the central bank will not help legislators by printing money to pay for the ballooning federal debt.
Recent events in Europe, where Greece and other nations with large, unsustainable deficits like the United States are having increasing trouble selling their debt to investors, show that the U.S. is vulnerable to a sudden reversal of fortunes that would force taxpayers to pay higher interest rates on the debt, Mr. Bernanke said.
"It’s not something that is 10 years away. It affects the markets currently," he told the House Financial Services Committee. "It is possible that bond markets will become worried about the sustainability [of yearly deficits over $1 trillion], and we may find ourselves facing higher interest rates even today."
It was some of the toughest rhetoric to date about the nation’s fiscal and budgetary woes from the Fed chief, who faces a second round of questioning Thursday before a Senate panel.
Mr. Bernanke for the first time addressed concerns that the impasse in Congress over tough spending cuts and tax increases needed to bring down deficits will eventually force the Fed to accommodate deficits by printing money and buying Treasury bonds — effectively financing the deficit on behalf of Congress and spurring inflation in the process.
Trader Dan’s Commentary
More signs of the strength of the “jobless recovery”.
Blockbuster Collapses: Shutting Down 500 Stores In Desperate Bid To Save $200 Million
Lauren Hatch | Feb. 25, 2010, 3:42 PM
Blockbuster is losing big when it comes to at-home videos, so they are cutting back on expenses and on advertising in the U.S. to make up for it.
US same-store sales fell 15.9% in the 4Q and revenue dipped 18% to $1.08 billion compared to last year.
By closing its 500 weakest stores, the video-rental company hopes to reduce expenses by $200 million, the Financial Times reports.
Jim Keyes, chief executive officer, said the company was working with Rothschild, its financial advisors, on ways to increase its liquidity, including a possible recapitalisation.
Under Mr Keyes, Blockbuster is seeking to establish its brand in rapidly emerging new channels such as digital downloads and vending kiosks.
But they’ve already been beat to the punch. Netflix and Redbox dominate market share when it comes to digital downloads and vending kiosks, and Blockbuster will have a difficult time growing in those segments.
Trader Dan’s Commentary
With the exception of some within the gold community, how many would have imagined this 5 years ago?
Head of IMF proposes new reserve currency
IMF’s Strauss-Kahn suggests IMF may one day provide global reserve asset
By HARRY DUNPHY Associated Press Writer
WASHINGTON February 26, 2010 (AP)
Dominique Strauss-Kahn, the head of the International Monetary Fund, suggested Friday the organization might one day be called on to provide countries with a global reserve currency that would serve as an alternative to the U.S. dollar.
"That day has not yet come, but I think it is intellectually healthy to explore these kinds of ideas now," he said in a speech on the future mandate of the 186-nation Washington-based lending organization.
Strauss-Kahn said such an asset could be similar to but distinctly different from the IMF’s special drawing rights, or SDRs, the accounting unit that countries use to hold funds within the IMF. It is based on a basket of major currencies.
He said having other alternatives to the dollar "would limit the extent to which the international monetary system as a whole depends on the policies and conditions of a single, albeit dominant, country."
Strauss-Kahn, a former finance minister of France, said that during the recent global financial crisis, the dollar "played its role as a safe haven" asset, and the current international monetary system demonstrated resilience.
