Record Job Cuts in States

In further evidence that our economy is in the process of slowing, states are projected to make record job cuts in the 3rd quarter. As I’ve said before, states in the U.S. are indistinguishable from Greece. The arguments that the U.S. won’t suffer a huge crisis since we own the reserve currency and can print our way out of this just do not apply to the states. States need to balance their budgets year in and year out. If they can’t balance their budgets, they must resort to creative accounting, which unfortunately, has its limits. Due to the massive cuts in the public sector that are coming, I am expecting some form of civil unrest to develop in the next 2 years.

I’ve previously stated that long-term trends develop in slow motion. While everyone was hopping on the V-shaped recovery bandwagon, I was saying that we were still in trouble because of the plight of states. And states were in trouble in part because property taxes were set to fall due to the lagging nature of assessments. States experienced a bonanza in revenue during the run up in housing that resulted in overspending. Now that housing has collapsed, states are coming face to face with an unpleasant reality.

Another “slow-motion” trend is the retirement of Baby Boomers. I get the feeling that the pension crisis in America will get a lot more coverage in the years ahead. States not only have to fund retirements, but they have to pay for replacement employees. Since states already have huge budget shortfalls, this situation is an outright disaster. Anyway, it’s amazing some people actually recommend buying muni bonds because defaults have been rare the past 30 years. This is pretty horrible advice. While people are mocking Meredith Whitney because munis have rallied recently, I am confident she will be vindicated eventually.

Devaluation

Our government basically must devalue the dollar or there will be a pretty severe deflationary Depression. This is a delicate balancing act though, for if people lose confidence in the dollar, there will be a severe inflationary Depression. The main problem with devaluing the dollar is that it effectively devalues bonds. With a huge debt load in the hands of foreigners, this presents quite the dilemma. The way the free market will counterbalance dollar devaluation is through higher interest rates. Higher interest rates, of course, will only accelerate the growth of our national debt. This is not a fun situation we find ourselves in.

It’s been 3.5 years since the recession began in 2007 and most people know that the economy hasn’t really improved. Confidence is faltering and I get the sense that Americans are questioning the logic of spending hundreds of billions on wars when so many Americans are suffering. It’s truly a sad state of affairs in America when the baseline opinion of politicians is that they are incompetent fools.

Gold has defied naysayers and risen year after year. The stupider politicians behave, the higher gold will rise. Judging by the recent price action in gold and silver, the lows may already be in. It is usually a bullish sign when gold and silver rise against the grain of most other assets. It is only a matter of time before a gold rally for the ages occurs due to government fiscal mismanagement unrivaled in history.

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