My week started off with a trip to the post office where I was greeted by a letter from the State of Pennsylvania questioning my prior tax returns. My first reaction was “I guess when you’re broke you have to try anything you can”.
Little did I know that just one day later I would see an AP report that was originally published on August 20, 2017. The title? Pennsylvania running out of options for cash to pay bills.
Many are aware of the problems in many other states like Illinois, California, Connecticut, New Jersey and others but Pennsylvania is rarely mentioned. I guess if I didn’t live here I might not care either.
I think the most important point here is that the article points out that without a loan or emergency revenue package the state will face hard decisions of who will get paid within days. “Somebody’s not getting paid if this doesn’t get fixed”, Auditor General Eugene DePasquale, a Democrat said Friday. Who it is- the vendors, I don’t know- that’s a decision for others to make. It’s simply a math equation: there’s not enough money to pay everybody”.
Of course, this is similar to our Federal government who need to raise the debt limit to continue to fund their promises, wars, etc. We have obviously passed the point where revenues can pay for the promises made and we have resorted to, where possible, “printing up money” out of thin air and pretending that all is well.
While virtually all of the developed world finds itself in the same boat and central banks have enabled this experiment by expanding the “assets” that they have purchased by 400% (Last count around $15 TRILLION) since 2008.* This has drastically altered asset prices and has, in my opinion, given the world a false sense of security that doesn’t actually exist.
The importance of this AP article is that we are possibly at the precipice of this experiment becoming undone in a quick and possibly violent manner. The most likely place in this scenario would be a state that is under the radar- like Pa. For a black swan to be a black swan it by definition has to be a surprise.
I was aware of the borrowing to make payments into pension funds which, in my opinion, will bring forward the actual date with destiny for those funds. I was aware of short-term borrowings in the past to plug short-term problems. Fast forward to today- again from the AP story:
“Since the recession, the State Treasury Department has reliably bailed out the state during low-flow periods of tax collections. However, Treasurer Joe Torsella, a Democrat first elected last November, said Wednesday that he may not continue loaning money, questioning whether patching the state’s growing gap was a fiscally responsible use of the department’s short term cash. Approval from Torsella and DePasquale is legally necessary for the Wolf administration to borrow from a bank. But without a credible revenue package in place, neither says he is willing to authorize a short-term bank loan to the state-assuming a bank would actually lend to the state”.
What kind of economic impact could we expect if money for handouts are not available? Not only do the recipients have a problem with survival but that money multiplies throughout the economy. This would likely result in a decrease in employment, tax receipts, and violence (higher costs for police, fire, etc.) This could cause cascading problems not only in one state but in many states. Keep in mind that many states are already in similar positions- some even farther along.
One plan suggested by the Pa State Senate uses a $1.3 billion-dollar loan against future proceeds from the tobacco settlement, raises $400 million from higher utility taxes and another expansion of casino style gambling. Of course, higher taxes mean less of earned (or unearned) income can be spent elsewhere which should lead to at least $400 million less getting spent elsewhere. Thanks!
So basically, we are taking out loans being paid back by loans and we keep spending money that doesn’t actually exist. In layman’s terms we have been living above our means for quite some time. It appears that the future (where all problems come together and must be addressed) has finally arrived even if those in charge don’t want to admit it or deal with it. Their hand is now being forced.
While the Federal governments around the world can “print” money to buy new debt, and pay interest on old debt- heck even buy some stocks and junk bonds while they are at it- we folks and the “leaders” in our states and localities don’t have that luxury. Of course, this has restrained many cities and states and they have had to be more responsible than those that can “print” their mistakes away- if only for a short period of time.
To me, this illustrates why this cannot last forever. While the “printing” can give an illusion of solvency and normalcy it creates neither. This modern-day alchemy is nothing more than a something for nothing run by those who can get away with it. If you or I could “print” money to turn into real assets and wealth I am sure we would too.
Soon enough, however, as tax receipts start to fall- as they are across the country those without the advantage of “something for nothing” have to stare down real world problems of a stagnating economy, lower revenues and more dependence upon social services for those being left behind. In the fantasy world of central banks all is well. Here in the real world where we need productive assets and real food, water, energy, etc. the outlook isn’t quite as rosy as those in charge may think.
In addition to all of this, many resources that we need, because of interference in the markets, are grossly mispriced. This could ultimately lead to shortages of many necessities because it is not economically viable to look for new supplies at current prices.
If a farmer knows he can make more money planting a certain crop he will plant that crop and not another. If it costs $65.00 for a barrel of oil to be produced but it costs only $45.00 to buy that same barrel production will likely decrease. This scenario will likely lead to higher long term prices and supply shortages along the way as any mining or farming activity is always more long term in nature.
I believe the same holds true with gold and silver. Silver in particular because silver is used in many industrial applications. If the prices are artificially low, which I believe they are, then many exploration projects get put off until the economy supports higher prices. Again, a lack of infrastructure development takes place because of artificially low prices so that production goes down over time.
There are warning signs everywhere. This is no time for complacence. The can has been kicked down this road for far too long. Times are changing.
How many of my readers are aware that, as I write this, the DOW and gold are neck and neck in year to date returns? Almost no one I am sure because you RARELY hear this anywhere in the mainstream media- it doesn’t fit the story.
Mike Savage, Financial Advisor
2642 Route 940 Pocono Summit, Pa 18346
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