Things That Should Make Us Very Nervous

Nicole Gelinas at City Journal asks an excellent question, “Is it not daft to lend New York and California one more dime?” In the past two years tax revenues have plummeted. Overall state and local governments face an operating gap equal to 15 percent of their budgets.

Credit ratings agencies such as Moody’s do not expect municipal governments to default, because they will do anything to avoid it, they have the power to tax (i.e. they will find the money), and states can’t declare bankruptcy. Of course it is also expected that Washington D.C. will bail out an insolvent state.

But, those state and municipal bailouts need to be added to the most frightening tab of all.

In the next year, our economy will enter a ‘debt super cycle’. the United States’ $13 trillion in federal debt will overtake GDP in 2012. By that time several states will need to contribute increasingly large amounts to pay pension obligations with Illionis leading the way to insolvency sometime in the next few years.

We are, as my colleague Veronique de Rugy puts it, on the verge of a financial disaster. Simply, this level of indebtedness is unsustainable. The next question is how will it end?