Tuesday , 27 September 2016


The Financial Crisis “Nobody Saw Coming” IS Coming

Almost every financial crisis is presented in the mainstream media as one that “nobody saw coming” yet, as the 4 charts show below, the next one is foreseeable – “the writing is already on the wall”.

The original article by Charles Hugh Smith (oftwominds.com) is presented below by the editorial team of FinancialArticleSummariesToday.com and  munKNEE.com (Your Key to Making Money!) in a slightly edited ([ ]) and abridged (…) format for the sake of clarity and brevity to ensure a fast and easy read.

If state and local taxes keep soaring while wages stagnate and household income declines, households will have less cash to spend on consumption and declining consumer spending = recession.

1. State and Local Government Tax Receipts, Expenditures & Debt

a) Tax Receipts

b) Expenditures

c) Debt

[Tax receipts up 75%, expenditures up 82% and state and local debt up 150% since 2000.] That is the definition of an unsustainable trend.

2. Stagnating Individual Wages = Declining Household Income

[To exacerbate the problem is the fact that] wages and salaries have barely kept pace with inflation (38% since 2000) so state and local taxes have risen at a rate twice that of wages/salaries.

We Are In An Unvirtuous (Vicious) Cycle

In recessions, sales and income taxes decline as households spending drops. This will crimp state and local tax revenues which sets up an unvirtuous cycle:

  • State and local governments will have to raise taxes to maintain their trend of higher spending.
  • Higher taxes reduce household spending,
  • which reduces income and sales tax revenues.
  • In response, state and local governments raise taxes again.
  • This further suppresses disposable income and consumption…

At some point,

  • local government revenues will decline despite tax increases, and
  • the bond market will raise the premium on local government debt in response to the rising risks.
  • When borrowing becomes prohibitive (or impossible) and raising taxes no longer generates more revenues, state and local governments will have to cut expenditures.
  • Given their many contractual obligations, these cuts will slice very quickly into sinews and bone.

Conclusion

If this doesn’t strike you as a crisis in the making, please check back in a few years. Unfortunately, it will be a crisis that “nobody saw coming” in spite of the clear signs that it will soon be upon us.

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One comment

  1. This Financial Crisis Looms is a good article and says exactly what I have been preaching for a long time.

    While he didn’t say it directly, the single biggest problem for municipalities and states are the unfunded pension obligations and low rates of return on pension fund investments.

    Unions, local politicians in the bag to their employee unions, and the senior bureaucrats who are also pending pension recipients, are also aligned with their unionized colleagues to sand bag court challenges.

    Regardless, this is an immovable debt wall which can’t be avoided.

    All hell will break loose at varying times and places depending on how bad the situation is. The worst will be First.