Bill Bonner

“The Day of Reckoning has come!”

So said New Jersey’s new governor-elect.

New Jersey is hardly unique. Practically every government in the developed world faces the same problem. National. State. Local. Expenses grew during the boom years. We all know why. Politicians prefer to spend then to save. They buy votes with other people’s money. That’s why they like programs for poor people. They come cheap. But the votes they buy on credit are even cheaper. Give a job…a handout…free drugs…housing subsidies – and send the bill to the next generation. With declining interest rates and an expanding economy, governments could get away with it. Low interest rates made deficits easy to finance and reduced the cost of refinancing existing debt too.

The trend was always unsustainable, even when things were going well. You can’t spend more than you can afford forever. Everyone knew that a day of reckoning would come. And guess what…here it is.

These new governors are no dopes. They have some room to maneuver. They can blame the problems on their predecessors. They can be heroes, solving them. In cutting spending now, they’ll be doing what has to be done. The smart thing to do would be to exaggerate the problems. But in the present case, exaggeration is hardly necessary. The financial problems are so grave, they don’t need to be puffed up.

Newly-elected governor Jerry Brown in the Golden State is in the same position. Hardly had the votes been counted when Jerry began taking more careful inventory. Naturally, what he found surprised him… He was shocked…SHOCKED…by the seriousness of the fiscal challenge. He pledged to come into the state capital with a broom the size of the Inland Empire…sweeping away unnecessary expenses and cleaning up state finances.

The story is the same in practically every Middlesex, village and farm community. States and municipalities spent more than they could afford. They ran up pension obligations. They borrowed for stadia and swimming pools. And now, like Ireland and Greece, they can’t keep up with the payments.

What are they to do? Default!

Yes, but before they do that they need to make a show of trying to be responsible. They need to talk about budget cutting and financial integrity. They will try to cut wages, close libraries, and renegotiate contracts.

Some will succeed. Many won’t. All we know for sure is that it will be fun to watch.

We also know that people who lent money to these governments will wish they hadn’t. In the US, as in Europe, there are bound to be debt crises. Cities and states will come to the brink of insolvency. There will be bailout initiatives. Austerity drives. Showdowns with unions.

New York City almost went broke in the ’70s. The mayor asked the federal government for a bailout.

“Drop dead,” said President Jerry Ford…or at least that was what was reported in the New York tabloids. The feds said no. New York had to get its own house in order. Of course, it succeeded, thanks in part to a huge boom in the financial industry that began in 1982.

Will there be another huge boom in the US? Maybe. But there’s a bust to live through first. And in the crises ahead, municipal bonds are almost sure to go down.

Beware.

Bill Bonner
for The Daily Reckoning

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success in numerous industries. His unique writing style, philanthropic undertakings and preservationist activities have been recognized by some of America's most respected authorities. With his friend and colleague Addison Wiggin, he co-founded The Daily Reckoning in 1999, and together they co-wrote the New York Times best-selling books Financial Reckoning Day and Empire of Debt. His other works include Mobs, Messiahs and Markets (with Lila Rajiva), Dice Have No Memory, and most recently, Hormegeddon: How Too Much of a Good Thing Leads to Disaster. His most recent project is The Bill Bonner Letter.

  • scottybk

    Bill, Chris Christie of NJ is not “governor-elect”- he has already been governor for a year. NJ elected him in Nov. 2009, as the state has off-year gov. elections.

  • kenn

    Your getting better with that maybe, sorta, kinda jargon Bill. Maybe a future astrology column? :)

  • John

    Everyone’s going broke except Goldman-Sachs and their lackeys at the Fed.I guess it’s not hard when you’re being constantly supplied with wheelbarrows full of freshly printed greenbacks.

  • Tom

    I’m SHOCKED that Jerry Brown is SHOCKED!

  • 2 funny

    I’m shocked that Jerry Brown isn’t embalmed.

  • Joe

    Christie did say (almost) that, back in June 16, at 2:51 here:
    http://www.youtube.com/watch?v=Evtt-R7Rmdw

  • Len

    From the late forty’s to 1979 one percent of the people owned 10% of the wealth in the US – From 1980 to the present one percent of the people now own 25% of the wealth, mostly due to “supply side economics” in the form of a government – business partnership. A return to “demand side” economics and a “fair” tax structure is needed to get us back on track to national growth.

Recent Articles

Why a Strong Dollar is the Mortal Enemy of Gold and Oil

Frank Holmes

Gold and oil are down because the US dollar is up, despite all the inflationary pressures the Fed has put on it. What's going on? Today, Frank Holmes, breaks down the U.S. economy’s current direction with several important charts. Plus, he's got a mining play for you that's prospering despite the current sentiment...


Bill Bonner
Confessions of a Newsletter Man

Bill Bonner

Being a financial newsletter writer certainly has a few advantages. Namely, it affords one the opportunity to comment on the financial markets without having to take them seriously. Today, Bill Bonner looks back on what drew him to this business, and the unique and entertaining cast of characters he's met along the way. Read on...


Extra!
The Most Important Factor of the Swiss Gold Initiative

Grant Williams

The Swiss Gold Initiative has the the Swiss National Bank in a panic. Should the referendum pass, the SNB will be responsible for ensuring that 20% of its total assets are held in gold. That's an awful lot of yellow metal. Today, Grant Williams puts that number into perspective and explains how it could affect the gold market...


How Solar Power Could Heat Up Your Portfolio

Greg Guenthner

Regardless of how you feel about the "green energy movement" there is no denying that solar power is becoming more mainstream. As it closes in on price parity with conventional electricity, more and more people are turning to solar as a viable source of energy. And that's great news for solar stocks. Greg Guenthner explains...


R.I.P. Tapir (5/22/13 – 10/29/14)

Greg Kadajski

The Tapir, beloved pig-like mammal and financial machination, quietly passed away at 2:00 p.m. EST on October 29, 2014. He lived a misunderstood life and was held responsible for many things entirely out of his control. Nevertheless, he will be missed by all who thought they knew him...