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Obama Plans To Rescue States With Debt Burdens

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President Obama is proposing to ride to the rescue of states that have borrowed billions of dollars from the federal government to continue paying unemployment benefits during the economic downturn. His plan would give the states a two-year breather before automatic tax increases would hit employers, and before states would have to start paying interest on the loans.

The proposal, which administration officials said would be included in the 2012 budget that the president is scheduled to unveil next week, was greeted coolly by Republicans on Capitol Hill, who warned that the plan would ultimately force many states to raise their unemployment taxes in the years to come.

But the White House is calculating that the proposal will ultimately appeal to Republicans because it involves a tax moratorium right now for hard-hit states during a still-fragile economic recovery.

Administration officials will make the case that the plan helps the economy and states in the short run, while bringing overdue changes to the unemployment insurance system in the long run. And Republican lawmakers could find themselves under pressure from Republican governors, whose states owe the federal government billions of dollars.

The administration is also betting that employers will back the proposal, especially in states where their taxes would otherwise go up. Michigan, for instance, owes the federal government $3.7 billion it borrowed to pay unemployment benefits. Under current law the state would be forced to pay $117 million in interest to the federal government this fall, and the federal tax on employers would automatically step up each year to repay the debt.

The state’s newly elected Republican governor, Rick Snyder, has been lobbying for relief; his press secretary, Sara Wurfel, said that while they would need to see the details of the plan, they would “very likely welcome the much-needed relief.”

Robert Gibbs, the White House press secretary, said, “We are giving help to some states who have had to borrow and not been able yet to pay back.”

The states are in a tough spot. Many entered the recession with too little money in their unemployment trust funds, and they quickly ran through what little they had as unemployment rose and remained stubbornly high month after month.

With their own trust funds depleted, 30 states borrowed $42 billion from the federal government to continue paying unemployment benefits.

The federal stimulus act gave states a break on the interest for those loans for nearly two years, but that grace period ended Dec. 31. That has left hard-hit states, which have already laid off employees, cut services and raised taxes, facing an estimated $1.3 billion in interest payments to Washington due this fall.

Extend and pretend.

I love how they think that delaying these repayments for a couple of years will somehow fix the expenditure issues in these states. Revenues don't meet expenditure it's likely if current commitments continue they never will. The delaying of interest repayments will probably become perpetual, the govt will have no choice.

I think Gibbs meant to say we are giving aid to states who'll never pay us back.

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No one would pretend that this is a period of smooth sailing for the US, but optimists would tell you that the world's largest economy successfully navigated through the storms of the sub-prime debt crisis, while a federal government debt crisis, despite ongoing deficits, remains largely over the horizon. Except, could this be an iceberg right in front of us?

The prospective debt crisis that has everyone scurrying for their lifejackets now is not in the banking system, nor at the level of the federal government, but in state and local government in the US.

Of the 50 states, only a number in single figures are likely to have budget surpluses in the coming financial year, causing concern about their ability to meet interest payments on their debt. And below the state level lie thousands of counties, cities and other local authorities whose finances have been tossed around by the economic tempests of the past few years. Tax revenues are depressed and the money that they get allocated from the state government looks sure to be squeezed as states themselves try to face up to their budget problems.

Across these thousands of municipalities, some $2.8trillion of debt is outstanding. Privately, the most senior Obama administration officials accept that not all of it is going to be paid back. And in public, one of the most famous and most feared analysts on Wall Street is going round predicting between 50 and 100 defaults and a big surge in the interest rates that local governments will have to pay in the future.

That analyst is Meredith Whitney, who was out in front predicting crisis in the US banking sector back in 2007. Now, she says, there is a whole new crisis coming in municipal finances and it threatens to knock the economic recovery right off track. Her comments have provoked fury. She has been accused of ignorance and, worse, of willfully exaggerating the problem to win business for her new firm. And her critics warn she is causing the very problem she predicted, because she is scaring away the conservative private investors who traditionally buy municipal bonds.

"It has tentacles as wide as anything I've seen," Ms Whitney told the prime-time news show 60 Minutes in December. "I think next to housing this is the single most important issue in the United States, and certainly the largest threat to the US economy."

And – in words that were chilling to hear for the risk-averse investors who have piled into municipal bonds since the credit crisis, seeing them as a safe and tax efficient way to beat record-low interest rates elsewhere – Ms Whitney went on to say financial advisers were being complacent to ignore the mounting concern. "When individual investors look to people that are supposed to know better, they're patted on the head and told, 'It's not something you need to worry about.' Well, it'll be something to worry about within the next 12 months," she said.

Not everyone agrees. Peter De Groot, at Barclays Capital, says: "Municipal defaults are expected to remain low despite the difficult budget environment, as states have demonstrated the willingness and ability to cut spending to offset structural imbalances. Public entities plan to spend and borrow less and have implemented policies to begin to address longer-term pension and healthcare liabilities."

More at the link.

It would appear we won't have to wait too long to find out who's correct although I'm sure the Ben Bernanke will get the printer whirling at 150% to try and save the day.

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The central government must do what it can to bail out the states. The challenge will be making sure not to just give money to thoe who spent recklessly as that will create major problems. But to give to all states that it lifts the boats of the weakest financially.

For example the original stimulus package had something like 80 billion for the states. A relatively small sum in American terms. But still for California which has so many people, their share if it was given equally based on population would have been nearing 10 billion dollars. Well this is a state with a 110 billion dollar budget, sot hat goes a long, long way to balancing the budget. And like I said 80 billion isn't much anymore in these QE days.

Relieving states of the employment insurance costs is a good plan, and it inherently helps out the states who have been hardest hit by the job loss.

Naturally pundits and economists are concerned with such large deficits, because they are so different than the history we are used to. The post war era. Well that era is comign to an end and in historical terms central governments running very large deficits is not that unusual. The USA has all the room in the world left to stimulus spend.

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aa3: is there a limit to what a central government can do to bail out states? If so what determines this limit, when will it be reached and what should happen after that limit is reached?

What determines the limit is when the printing and borrowing of the federal state reach a point where inflation starts going beyond the normal range. What happens in normal times is 80-90% of the credit expansion is through the private sector. So the federal government cannot borrow too much without driving up rates.. and at the same time with the expansion in the private sector there is juicy new revenues coming in that smooth over any problems.

For bailing out states it looks to me like there is no limit anytime soon for the federal government. Because in the USA the states only have a total of 1.1 trillion in debt. The federal government has other bigger concerns for the deficit, it looks like it will run like 2 trillion just this year.

Because economic growth and technological progress is an exponential function, there is going to be more and more room to print each year. The US government wants the private sector to pick up and take things on its own, and then bring down the deficit when the private sector is flying high. As long as the problem is just a private sector deleveraging as the root of the problem, then the situation is always under control.

However it appears to me this crisis will seperate the men from the boys. Like Britain is trying to use the same strategy as America and the EU, but we are seeing UK inflation is creeping up, nearing getting out of contol. That is when you start asking is this more than just a private sector deleveraging? A good example to clearly show it is Zimbabwe. That nation took away the farms from the white Rhodesians, and over the following decade it led to a greater than 80% decline in food production. The country's main export. If the money supply even remained the same, but production hugely fell there has to be inflation. Same amount of money chasing less goods.

Thats what scares me about the UK, our business and government leaders have chased so much production out of the country, that it can be that same amount of money chasing less goods.

The US has a further advantage, in that so many nations purposely buy US dollars to prop up the dollar and build reserves. So that could be one change, if in the future nations turn away from the US dollar, the US would be in a much tougher situation.

In the case that a nation is having inflation getting out of hand, and there is defaults going on.. then it has no choice but to let defaults go forward.. and make cuts. Probably would never happen in a democratic society though, no politician is going to deliver painful cuts to anyone. The Tories show that clearly, running and elected on a cutting campaign, and still not going to do it. So the likely case then is either partial default, turn to the IMF, or hyperinflation.

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  • 311 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?

      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%

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