Jim Sinclair’s Commentary
There is no question about whether we will experience state failures on debt. In truth it is already locked and loaded into many states of the USA.
It is one of the items that the Fed has considered as it embarks on the unprecedented course of QE to infinity, regardless of how QE is presented this week.
QE to infinity is an attempt to once again kick the can of economic problems down the road to perdition.
Everything we have spoken about for years has happened. The final act in this play of disintegration will unfold exactly as we anticipate.
Do not allow the madness of algorithms to impact your emotions to the degree that you throw away your insurance.
State of default
Oct 25th 2010, 18:24 by Buttonwood
WHAT happens if an individual state defaults? That was the question posed to a panel of luminaries at the Buttonwood gathering in New York, including Robert Rubin, Josh Bolten, Glenn Hubbard, Laurence Meyer and Laura Tyson.
The panel was assumed to be a bunch of Presidential advisers faced with a request for funding from New Jefferson, a fictional state with many of the problems of a typical state – unfunded pension promises, years of fiddling the numbers to balance the budget and a government divided between the parties. New Jefferson is shut out from the markets and asks the Federal government for $1.5 billion to meet a debt repayment due 48 hours away. There could be systemic risks if default occurs with the Chinese government raising the issue of contagion and with some state banks owning a substantial portion of the state’s bonds.
The panel reluctantly agreed to provide temporary funding for the state – say for 30 days – but to require the state to sort out its mess. But it suggested a whole series of stringent conditions, including the use of proper accounting and a requirement to fund its pension plans properly. they were divided over what would happened if New Jefferson failed to save its problem within 30 days.
One suggestion for the long-term was that failed states might see their finances taken over, as happened to Washington DC, with the Federal government taking the decisions. The tricky issue is whether they legally could take such a power.
The panel didn’t really have time to consider whether the long-tem pension problem can be tackled if the courts decided that existing pension rights are legally protected. If they are, then the only answer would be substantial tax rises to pay for them, the last thing the Federal government might want if the economy remains weak.
