• 16 hours The Small Company Looking to Revolutionize The Trillion-Dollar Drug Sector
  • 18 hours The Unexpected Retail Segment On Track To Hit $68B
  • 3 days Oil Demand Falters On New Wave Of Lockdowns
  • 4 days Signal, Telegram Gain Ground As Social Censorship Breaks Headlines
  • 5 days Investors Should Be Worried About Tech Stocks
  • 7 days Battle For Market Share Intensifies In COVID Streaming War
  • 9 days Censorship Is Now Private, And That’s Scary
  • 11 days Markets Hit ‘Ignore’ Over Capitol Coup
  • 13 days Tesla’s China Strategy Is Yet Another ReasonTo Double Down
  • 14 days NYSE Reverses China Company Delisting Plans … For Now
  • 16 days The Dollar Could Remain Weak For Years To Come
  • 19 days The Simple Secret To Tesla-Like Gains
  • 20 days US-Listed China Stocks Have 3 Years To Become Transparent
  • 22 days $30,000 Is The New $20,000 For Bitcoin
  • 22 days Gold Slips Following Stimulus Announcement
  • 23 days Illegal Streaming Targeted In The 5,000 Page COVID-19 Stimulus Bill
  • 24 days Big Investors Are Dumping Gold For Bitcoin
  • 25 days The Most Exciting And Strange Energy Tech Of The Year
  • 26 days Morgan Stanley Sees Apple As Major Threat To Tesla’s Dominance
  • 28 days U.S. Lawmakers Pass $2.3 Trillion Relief Package
Trade In Counterfeit Goods Hits Half A Trillion Dollars

Trade In Counterfeit Goods Hits Half A Trillion Dollars

The counterfeit market has breached…

Zombie Foreclosures On The Rise In The U.S.

Zombie Foreclosures On The Rise In The U.S.

During the quarter there were…

Is The Bull Market On Its Last Legs?

Is The Bull Market On Its Last Legs?

This aging bull market may…

Clint Siegner

Clint Siegner

Clint Siegner is a Director at Money Metals Exchange, the national precious metals company named 2015 "Dealer of the Year" in the United States by…

Contact Author

  1. Home
  2. Markets
  3. Other

Government Insolvency Gets Harder to Ignore

Several U.S. states and the federal government are hopelessly insolvent. It’s something many bullion investors have known for years.

The real question is when this reality will pierce the mainstream illusion that deficits, and the crushing pile of debt which accompany them, don’t matter. That moment drew closer last week when ratings agencies downgraded Illinois state bonds to one notch above “junk” status.

S&P and Moody’s dropped the state’s creditworthiness rating to BB+/Baa3 – the lowest ever for a U.S. state. Illinois currently has $14.5 billion in unpaid bills and a government deadlocked over forming a new budget.

That stack of bills represents a whopping 40% of the state’s operating budget. At the heart of Illinois’ problems are massive union pension obligations for retired government bureaucrats.

Sluggish economic growth, below par returns driven by zero interest rates, and the extravagant promises made to retirees created a funding gap that likely cannot be bridged. But the state looks like it will have to die trying.

Government union bosses and their supporters got pension obligations converted into a constitutional mandate in 1970. They made it so that certain benefits can only be adjusted in one direction – higher. Article XIII, Section 5 reads:

Membership in any pension or retirement system of the State, any unit of local government or school district, or any agency or instrumentality thereof, shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired.

Adding that language was a neat trick, given the implicit mandate that the private taxpayers are permanently on the hook for these obligations – even as they enjoy no such guarantees in the face of their own impaired incomes and retirement benefits.

How this crisis gets resolved will be telling. Illinois is one of seven states where meeting pension obligations are constitutionally mandated regardless of the state’s solvency, and many of those aren’t in much better shape.

What happens when insolvency finally catches up to governments and they can no longer borrow to fund deficits? Entitlement benefits cannot be cut without a change in constitutional law. And that is a very difficult proposition.

More likely the political class will ask taxpayers, who already earn less than public employees on average, to pony up. Or, they will attempt to kick the can once more by seeking a bailout from their equally insolvent Uncle Sam and his magic money machine.

The days of borrowing cheap money are numbered. The Fed may keep rates artificially low. But lenders and the ratings agencies are already waking up to the notion profligate governments aren’t exactly AAA borrowers. It won’t be long until Americans at large are grappling with the reality that some promises can’t be kept. When the debt cycle ends, default is next – either outright or via the printing press.

By Clint Siegner, Money Metals Exchange

Back to homepage

Leave a comment

Leave a comment