The wave of capital destruction which many have been warning about for the last few years, is now breaking like a tsunami,Poland, Ireland (also here), Spain, Germany (and here), and the rest of the Euro-zone (and here) are being inundated with failures and the overhang of immediate risk is effectively unsurvivable for the currency union, at this point.
The US is actually in just as acute and critical a fiscal and economic predicament – The “Federal Reserve” is out of functional options (save for outright confiscation) as Bloomberg reported in July 2010: delve deeper, and you will find that the IMF has effectively pronounced the U.S. bankrupt. Section 6 of the July 2010Selected Issues Paper says: “The U.S. fiscal gap associated with today’s federal fiscal policy is huge for plausible discount rates.” It adds that “closing the fiscal gap requires a permanent annual fiscal adjustment equal to about 14 percent of U.S. GDP.” (Source)
In addition to the intractable Federal fiscal profligacy, 44 out of our 50 states are functionally insolvent, (the top five are Rhode Island, Connecticut, Massachusetts, Illinois, and Hawaii) as well as hundreds of municipalities and municipal sub-entities such as school districts and water districts on the verge of bankruptcy.
Interestingly, many states restrict the ability of municipalities to file bankruptcy – only 12 States provide blanket authorization for a city to file Chapter 9, and yet a full 22 States prevent a municipal entity from filing Chapter 9 proceedings altogether.The remaining 16 have restrictions and processes that vary from strict to lenient. In Illinois, a Governor-appointed commission has to decide filing is necessary, after first trying everything else to save the situation. (source)
What all this boils down to is a shocking amount of unresolvable debt, at every level of government, across the United States – while there are no audited figures to define the total risk pool of states and municipalities, those who follow state and municipal bonds have assessed the total bond market at well over $ 40Trillion dollars (this includes pensions and other retirement benefits for workers which are “not fully funded”), and analysts have stated that as much as one third of these bonds are presently at “high risk” of default, and another 30 to 50% at “moderate risk” in the longer term of 3-11 years.
Meanwhile, Morgan Stanley clearly states a warning of “significant weakness at the long end” of the bond curve, beyond the 11 year point (source P.3). One third, or ~$13.5 Trillion dollars of state and municipal bonds at a high risk of default, right now! And yet, State and Local bond issuance continues apace at over $25B per month!
Projected total issuance of state/muni bonds for FY 2013 is in the ~$270-280Billion range. Worse, there is no functional mechanism of law in place for dealing with more than 75% of state and municipal debt. Therefore, as the damn breaks and the financial curettage goes into overdrive, you can fairly assume that individual citizens and small businesses will take it in the seat of the pants, while large corporations who have been making their campaign contributions will be protected to the greatest extent possible by state legislatures and “special panels” delegated by state executives to bail in ailing municipalities.
This is why, for the calendar year 2013 to date (9/4 report and also here), outflows from municipal bond funds have netted over -$1.5Billion per week over the past 15 consecutive weeks. In other words, investors are rejecting state and municipal bonds at a rate not seen since the stagflation of the late 1970s, and the coming fall and winter will prove increasingly difficult for distressed municipalities to survive as competitiveness for bond investments increases.
In short, the crash of the State and Municipal bond market in the US is a fait accompli, just as the utter decomposition of Greek, Irish, and Spanish bonds within the “ECB Umbrella” was a foregone conclusion a year before each of their economies crashed. This is not a house of cards, folks. This is not even just “dominoes laced with dynamite“. This is the mother of all economic holocausts… and it is breaking now