Here’s the Next Crisis “Nobody Saw Coming”

| |

money
When borrowing become prohibitive (or impossible) and raising taxes no longer generates more revenues, state and local governments will have to cut expenditures.

Strangely enough, every easily foreseeable financial crisis is presented in the mainstream media as one that “nobody saw coming.” No doubt the crisis visible in these three charts will also fall into the “nobody saw it coming” category.

Take a look at this chart of state and local government debt. As we noted yesterday, nominal GDP rose about 77% since 2000. So state and local debt rose at double the rate of GDP. That is the definition of an unsustainable trend.

state-local-govt-debt8-15

When borrowing become prohibitive (or impossible) and raising taxes no longer generates more revenues, state and local governments will have to cut expenditures.

Strangely enough, every easily foreseeable financial crisis is presented in the mainstream media as one that “nobody saw coming.” No doubt the crisis visible in these three charts will also fall into the “nobody saw it coming” category.

Take a look at this chart of state and local government debt. As we noted yesterday, nominal GDP rose about 77% since 2000. So state and local debt rose at double the rate of GDP. That is the definition of an unsustainable trend.

local-govt-taxes8-15x

State and local government expenditures have risen faster than inflation or GDP.
state-local-govt-exp8-15z

Here is the context that matters: household income. This is median real income, i.e. adjusted for inflation.

household-income8-15

Wages and salaries are barely keeping up with inflation, real household incomes are down 8.5% since 2000 and state and local government taxes and spending are rising at twice the rate of inflation–where does this lead to?

  1. The bond market may choke if state and local governments try to “borrow our way to prosperity” as they did in the 2000s.
  2. If state and local taxes keep soaring while wages stagnate and household income declines, households will have less cash to spend on consumption.
  3. Declining consumer spending = recession.
  4. In recessions, sales and income taxes decline as households spending drops. This will crimp state and local tax revenues.
  5. This sets up an unvirtuous cycle: state and local governments will have to raise taxes to maintain their trend of higher spending. Higher taxes reduce household spending, which reduces income and sales tax revenues. In response, state and local governments raise taxes again. This further suppresses disposable income and consumption. In other words, raising taxes offers diminishing returns.

At some point, local government revenues will decline despite tax increases and the bond market will raise the premium on local government debt in response to the rising risks.

When borrowing become prohibitive (or impossible) and raising taxes no longer generates more revenues, state and local governments will have to cut expenditures. Given their many contractual obligations, these cuts will slice very quickly into sinews and bone.

If this doesn’t strike you a crisis, please check back in a few years. It is easily foreseeable, but very inconvenient. As a result, it too will be a crisis that “nobody saw coming.”

More Resources

The Modern Survival Manual: Surviving the Economic Collapse

The Beginning Of The End (by Michael Snyder)

The Death of Money: The Coming Collapse of the International Monetary System

Crash Proof 2.0: How to Profit From the Economic Collapse

Delivered by The Daily Sheeple

We encourage you to share and republish our reports, analyses, breaking news and videos (Click for details).


Contributed by Charles Hugh Smith of Of Two Minds.

Wake The Flock Up! Please Share With Sheeple Far & Wide:
  • Revenue is no longer of concern or necessity. They just create the dollars on a computer and send them on their way. If revenue was important, the federal government couldn’t be in over $200 trillion in debt, which is several decades of revenue at current income rates.

    • Nexusfast123

      You are correct as derivatives will have no counter party as they are incestuous – banks insuring each other via financial instruments in terms of interest rate risk, etc (perversely this increases risk). They will appear as a massive loss on the balance sheets of the banks.

      As for the US printing Dollars. This could have gone on for ages if other countries had continued to use the Dollar to trade. However, other countries are dumping the Dollar and trading in their own currencies, using gold or bartering. At some point Dollar assets will suffer a lose of confidence and the Fed will push up interest rates (think what would happen to the cost of servicing debt in the US) to defend the Dollar. Painted into a corner comes to mind.

      The ultimate ‘black swan’ is China rapidly divesting out of US denominated assets. The Fed would have to print Dollars to pay for the assets. The Chinese then buy gold and other currencies. Wash, rinse and do again. The world would quickly be awash with Dollars. Not sure the Chinese would do this though.

      • Since 70% of the Federal Reserve Notes circulate outside of the physical United States, it will be difficult to eliminate them as a basis for the dollar. They can create as many imaginary dollars as they want in computer memories and paper ledgers, but eventually the loss of value will catch up with them, like the trillion dollar Zimbabwe note has them.

  • Bobby Brown

    Nope, no crisis here – I’ll check back in 2017.

  • Nexusfast123

    This is amusing as the other day American commentators were gloating over the debt incurred by Chinese cities. The US has a bigger problem as municipal debt is only one facet of the debt ‘problem’. Currently interest charges on Federal debt, I believe, is around $600Billion and this is at historically low interest rates. Add in the municipal debt and this figure is pretty big.

  • Anothereno

    Detroit saw this coming. Search youtube for Detroit mower gang… They mow parks etc that the city can’t afford to.