Fall of the American Empire – Update Dec. 23, 2010

Friday, 24 December 2010 10:53

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America is approaching economic collapse. The big problem appears to be coming from Municipal Bonds which may soon be going into default. Municipals are bonds issued by Cities and States, not Federal Bonds. The Fed is selling their own bonds to themselves by having the Federal Reserve Bank buy the Treasuries which is a joke amounting to nothing more than plugging up holes in the dyke with your fingers. Sooner or later you run out of fingers. Then the leaks start and eventually you need to withdraw your fingers and run away lest you get drowned.

States are in trouble. Arizona has sold twenty of their buildings to private investors for $735 million. This will only get them through fiscal 2010. The buildings sold included the State Capital. The state has agreed to lease purchase back the buildings allowing them to own them again in twenty years. Basically this is more borrowing.

California is following Arizona but on a grander scale. Their Governor has asked the California Supreme Court to decide on the sale of 24 state office buildings. The Supreme Court of Calif. recused itself since they occupy one of these buildings. Instead they sent it to some appeals court judges to decide. Arnold the Governor wants to sell the properties for $1.2 billion in a sale leaseback. The sale may be halted and not go through. If the sale goes through it would probably last California for one year. Then what do they do? Sooner or later they will run out of buildings. Doom and Gloom.

The States and Cities in many instances are spending more than they take in. This is called a deficit balance. They have lots of bonds out there. If they default on these bonds they hurt the investors but can keep going by not spending money on interest payments. This allows them to keep afloat another year while they continue to play the “I Hope Game”. This game is where they keep trying desperate measures hoping they find a way out of the mess. The next way out is to default on pensions. Bond defaults and pension defaults can be done through a bankruptcy. If they go for a wipeout bankruptcy then all their assets go to the bankruptcy trustee for liquidation and distribution to the creditors. This is an extremely unlikely scenario. Instead they will go for a repayment plan. They take their debts and line them up with the amount of income they have after operating expenses that are necessary (think electricity, payroll, things like that) and what is left over gets paid to the creditors. They can arrange debts according to priority or secured creditors and unsecured creditors. This could mean that bond holders may wind up with a small percent of their interest payment. This could be as low as 1% but usually is at least 10%. The pensioners can be treated in a similar fashion but they might get say 50% or 60%, not sure. Each bankruptcy is going to be different. Bear in mind that the bond holders that suffer losses will flow over into the general economy dragging it down. It will also ruin the bond ratings of just about every jurisdiction making them pay higher interest rates. Reducing the pensions of the retirees will also hurt them and thus they will spend less etc and the economy in general suffers from this as well.

Full Article: Fall of the American Empire – Update Dec. 23, 2010