Saturday, February 27, 2010

Los Angeles on the Financial Brink

Grim news from Los Angeles: The Chief Administrative Officer's report begins with
"The city is facing a budget crisis unlike any it has ever experienced … The enormity of our current fiscal crisis forces the City to take swift action now and lay out a financial plan for the future."
Government-as-normal has become impossible to run in LA. Double-digit declines in revenues, untouchable commitments to pensions and policing, 11% unemployment with the attendant municipal services required to carry people through, all these and more combine to provide a premonition of troubles to come in cities that were just trying to keep people happy and well-served even if it meant spending a bit extra to do it.

You probably don't want to own any municipal bonds for US cities. More fundamentally, you may want to think twice about what it will be like to live in one in a few years.


JR said...

LA nearly bankrupt. California near bankruptcy. Are they too big to fail? Will Obama bail them out? And who's going to bail out the U.S.A.?

Halfwise said...

JR that is the economic question of the century.

One end of the range of outcomes is a deflationary collapse of the financial system as debts become non-performing and notional wealth (which assumed debts would be repaid) evaporates.

The other end of the range is a Weimar or Zimbabwe-style hyper-inflation where paper money, representing no underlying asset, is created so that debts can be repaid, even if the repayment is merely symbolic since it was done with something worthless.

Either way, paper wealth is destroyed. The world has seen this outcome every time countries debase their currencies by disconnecting them from the discipline of gold as a valuation.

Canada is not immune to the disease but the US is going to get it before Canada, and get it worse. We have debts and deficits, but our currency is more closely tied to commodities than to services. It may not be a bad time to be a hewer of wood and drawer of water.

What to do? Buying silver 1 ounce Maple Leaf coins is good, cheap insurance. They will never be worthless, they are likely to be worth much more than you paid if silver and gold return to monetary importance, and you will have a source of wealth at your personal control, independent of the banking system or the stock market.