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David's Macro Blog

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Tag: 60 Minutes

Municipal bonds are supposed to be one of the safest investments, especially for small private investors saving for retirement or using the interest income for their living expenses. Unfortunately states and other local municipalities have borrowed more money than they can pay back.

Wall Street analyst Meredith Whitney says muni bond failures (i.e. a default on the bond obligations) are inevitable. The analysis by her and her team concluded there just isn’t enough income to pay back the principal and interest on all $3 trillion worth of muni bonds.

60 Minutes – State Budgets Day of Reckoning with Meredith Whitney

Meredith Whitney Predicts Billions of Dollars of Muni Bond Defaults on CNBC Squawk Box

Local governments have to decide, “do I default on debt investors or my constituents.”

Paraphrased: The federal government will have to bail out the states that have to bail out local municipalities. Will Texas citizens want their taxes used to pay off bonds for a water treatment project in Illinois?

Whitney on Bloomberg

Legally taxpayers are required to make up any shortfall in pension funds. Legally everyone’s going to be required to pay higher taxes.

Summary

There are two sides to the equation: income and expenses. The Great Recession reduced income, which exposed the muni bond issue. Governments borrowed more money than could be paid back with a reasonable margin of safety given fluctuations in the economy and tax revenue. Note on the second video Whitney agrees with PIMCO’s Bill Gross, who says “states” won’t default but municipalities below the state level probably will default or restructure.

One of the biggest drivers of annual expenses is obligations to retired government workers. This issue will continue to grow as more retirees draw income and medical benefits from all levels of government.

The economy during the Great Recession rivals the collapse during the Great Depression. Never has the economy contracted this much and the recovery been this slow. Millions of Americans resorted to unemployment benefits to make ends meet, many for the first time in their lives.

The most shocking aspect of the Great Recession is the slow recovery and the length of time people are unemployed. In fact, Congress extended unemployment benefits to 99 weeks.

60 Minutes interviewed the “99ers” in San Jose, California, the high tech capital of Silicon Valley.

Many of the 99ers are people in their prime earning years of 40’s, 50’s, and 60’s. They should be stocking away excess earnings for their children’s college fund and their retirement. Instead, they are liquidating their 401 K’s and IRA’s to pay their mortgage and grocery bills.

The economic crisis in Silicon Valley is so severe that many people with PhD’s, Master’s and college degrees find themselves unemployed for the first time in their lives. Instead of saving for retirement and paying payroll taxes to fund the government, they are drawing benefits from the government, resulting in a trillion-dollar annual budget deficit.

One of the best quotes:

[The 99ers are] too young to retire, but too old to rehire.

After watching this video, ask yourself these questions and comment on your thoughts below:

  1. Who would you hire of the people profiled?
  2. Do you believe these people will ever again make $70,000, $100,000, or $200,000 per year?
  3. This the high unemployment college educated workers due to the global economy?
  4. Is $100 billion on 99 weeks of unemployment benefits money well spent by a government with over $10 trillion in national debt?

Source: 60 Minutes – Unemployment Benefits: The 99ers