Rocky Vega

The big news this week in terms of ginormous government transfer payments is, as usual, out of the Fed, as it embarks on an equally ambitious and ill-fated mission to buy $600 billion of US Treasury debt. Unsurprisingly, it’s not the only immense transfer of wealth taking place between governmental bodies. As spotlighted by Meredith Whitney, CEO of the Meredith Whitney Advisory Group, the feds are continuing to subtly bailout state governments at record levels and in an ongoing and unsustainable fashion which she describes in a recent WSJ opinion piece.

From The Wall Street Journal:

“What […] investors fail to appreciate is that state bailouts have already begun. Over 20% of California’s debt issuance during 2009 and over 30% of its debt issuance in 2010 to date has been subsidized by the federal government in a program known as Build America Bonds. Under the program, the U.S. Treasury covers 35% of the interest paid by the bonds. Arguably, without this program the interest cost of bonds for some states would have reached prohibitive levels. California is not alone: Over 30% of Illinois’s debt and over 40% of Nevada’s debt issued since 2009 has also been subsidized with these bonds. These states might have already reached some type of tipping point had the federal program not been in place.

“Beyond debt subsidies, general federal government transfers to states now stand at the highest levels on record. Traditionally, state revenues were primarily comprised of sales, personal and corporate income taxes. Over the years, however, federal government transfers have subsidized business-as-usual state spending not covered by state tax collections. Today, more than 28% of state funding comes from federal government transfers, the highest contribution on record.

“These transfers have made states dependent on federal assistance. New York, for example, spent in excess of 250% of its tax receipts over the last decade. The largest 15 states by GDP spent on average over 220% of their tax receipts. Clearly, states have been spending at unsustainable levels without facing immediate consequences due to federal transfer payments and other temporary factors.”

Because the federal government will backstop the states regardless of their profligacy — a situation which tends to play out differently in the European Union, for example — the bickering, relatively speaking, flies under the radar and the fiscal irresponsibility just isn’t as high profile (as compared to the highly-visible EU member state (GIIPS) meltdown). As it goes, the state budget situation is continuing to deteriorate just as the Fed is firing up the presses for another moonshot-caliber of stimulus for the economy. Basically, when the debt-laden US can already least-afford the expenditure. According to Whitney, “almost all of the major federal government subsidy programs [for states] will run out in June 2011.” So, we can probably go ahead and mark that “unforeseeable crisis” announcement date on next year’s calendar.

You can read more details in Whitney’s WSJ opinion piece on how state bailouts have already begun.

Best,

Rocky Vega,
The Daily Reckoning

Rocky Vega

Rocky Vega is publisher of Agora Financial International, where he advances the growth of Agora Financial publishing enterprises outside of the US. Previously, he was publisher of The Daily Reckoning, and founding publisher of both UrbanTurf and RFID Update -- which he ran from Brazil, Chile, and Puerto Rico -- as well as associate publisher of FierceFinance. Rocky has an honors MS from the Stockholm School of Economics and an honors BA from Harvard University, where he served on the board of directors for Let?s Go Publications, Harvard Student Agencies, and The Harvard Advocate.

  • Just4thefax

    Fact: Tea Party will fight to keep tax payer money from bailing out these states! Vote the rest out in 2012. They elect them so eat crow!

  • a devils advocate

    All the states are going bust. I rejoice at the news. It is time that everyone including Tea baggers suffer for the over spending and borrowing. This is good. I thank Reagan for the path we have taken. Borrow and spend. Now is the time to pay up.

  • http://gardenserf.wordpress.com GardenSERF

    Consumers spend too much and expect their government to do anything different than they do?

  • Value at Maturity

    Seems like you have caught Stockholm syndrome over there in austerity-mad Europe, Rocky. State revenues are recovering slowly, and as long as the government can stick with its Keynesian program and the economy makes its move slowly back to recovery things in the states should stabilize. Of course if the Tea Partiers and their corporate backers slash taxes and nothing is done to make up for the lapse of the stimulus then state finances, and the economy, will blow apart. But the D students have taken over the House so hold your hats.

  • American Patriot

    Gov Perry pulled Texas out of a $300 billion dollar hole since he took office and last I heard, we have $800 billion plus in the bank. Christie in NJ is starting to pull things together after the democrats slaughtered their budget to pieces.

    No one should ever be bailed out when they spend recklessly and destroy their company or themselves. Didn’t approve of Bush doing it and I sure haven’t approved of the way Obama has handled finances at all ~ he’s like a kid in a candy store with no common sense on finance ~ bet he doesn’t handle his money this way !!

    Parents ~ don’t bail out your kids when they get in financial hot water ~ teach them how to handle their mistake and correct it themselves, If you truly love them, you will teach them to take responsibility for their actions. You can’t help them build character by coddling them every time they get in trouble.

  • Pingback: Trackback()

Recent Articles

Can Money Printing Cause Deflation?

Marc Faber

"There has been an issue that has preoccupied my mind for a long time," writes Dr. Marc Faber. "In economics, it is generally accepted that if the quantity of money and credit is increased, prices will rise… However, since economics is so complex… I question whether the expansion of central banks' balance sheets and policies of zero interest rates could have a deflationary impact…" The good doctor wrestles with the question, in today's essay...


Forget the Oil Crash – Crush the Market With Biotech Stocks

Greg Guenthner

The Biotech iShares ETF is up 23% since the Oct. 15th bottom. No, that is not a typo. Biotechs have torched the S&P over the past two months--more than doubling the returns of the big index. And biotechs as a group are up more than 38% year-to-date. In fact, since we first highlighted the June comeback, the Biotech iShares have gone nowhere but up.


How Low Will Oil Go – And What Can You Do?

Matt Insley

The oil market has been under siege for six months. From service providers to producers this downturn has been painful. Of course, we’ve known all along that oil prices were a little toppy over the summer. In fact, when asked just how low oil prices could go I usually answered with a simple “lower than you’d expect…”


Cuba’s Berlin Wall Moment

Peter Coyne

Our forecast that Cuba would be open and integrated within 5-10 years is on track after yesterday's big announcement. Ahead of schedule, even. Click here to see how some investors have profited and what the island's likely future is...


The $4 LED Trend You Don’t Want to Miss

Chris Mayer

The opportunity to sell and install LEDs is enormous. We’re talking about over a billion lighting fixtures. And the areas with the largest potential -- like parking lots -- have barely begun to change. Banker to the presidents Chris Mayer says you could triple your money in this new tech trend. Here's what you need to know.


How to Make the Casinos Pay You for a Change

Greg Guenthner

It's a theme we've shared with you since April. And it's only gotten worse. The gaming industry has come under all sorts of pressure--a situation I first noticed in the charts. The powerful, multi-year uptrends started showing cracks. And it wasn't long before those cracks turned into gaping holes you could drive a friggin' truck through. That's where things stand today.