Muni-Bond Market’s Descent into Hell

Just when it looked like the alleged economic recovery couldn’t get any weaker without extinguishing itself entirely, the municipal bond market has gone to hell. And just like in hell, there is no exit – at least none that we can imagine. Here’s why: Municipal and state borrowers who are on the ropes must pay a premium to continue borrowing; this drives their budgets deeper into the red, causing ratings downgrades that in turn raise borrowing costs even more. A vicious cycle, for sure, and it sounds just like much of Europe’s predicament doesn’t it?  Except that, for strapped U.S. cities and states, there is no IMF to pretend to bail them out.  And while Europe’s erstwhile deadbeats, the PIIGS, get plenty of time to work on balancing their budgets through measures of “austerity”  (Merriam-Webster’s Word of the Year, by the way),  U.S. cities and states must bring their budgets into at least a fleeting semblance of rectitude before the beginning of each new fiscal year.

State budget deficits, like slashers, keeping returning

We shouldn’t get our hopes too high that this recurring dog-and-pony show will work without eventually causing a taxpayer revolt. If you’ve been following the sordid bookkeeping tactics of such fiscal n’er-do-wells as California, Illinois and New Jersey, you’ll already know that austerity measures that would have been unimaginable just a few years ago have done little to eliminate structural deficits that keep returning like the slasher in a Wes Craven film. The big question is whether the lenders will continue to distinguish “good” borrowers from “bad.” At present they are doing so, charging, for one, the State of Illinois — the riskiest borrower of them all, with an A1-negative rating — 1.9 percentage points more than the broader muni market charges for 10-year bonds. For comparison, the borrowing spread for Nevada, which has been blighted by a real estate crash and severely depressed gaming revenues, is 0.80 percentage points, up from 0.50 in early November.

Although we’d like to believe that some miracle awaits to save the municipal bond market from disaster, it only gets worse. According to a report recently issued by the Congressional Budget Office, the revenue side of the equation – i.e., property taxes – is poised to decline because of downward reassessments across the length and breadth of America. Because homes are not reassessed every year, local property-tax revenues tend to lag behind falling home prices by about three years.  “Even small declines in collections could cause fiscal stress when the cost of providing public services is growing,” the report said. What this implies is more than mere belt-tightening in the years ahead. Since states and municipalities won’t be able to raise taxes much to cover the shortfall, we would predict either a hyperinflationary federal bailout with Funny Money; or, more likely, a deflationary wallow that will make the 1930s Depression look like  Mardi Gras.

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  • jj December 22, 2010, 11:36 pm

    Question to the group…..HyperInflation from QE2, 3 4 + ….I even saw RA suggest HI as Schiff and Sinclair have been pounding the table for years now.

    What happens to the price of your US real estate when hyperinflation unfolds?

    Seasons Greetings to all who make Rick’s comment board worth a read, happiness and health in 2011


  • dan December 22, 2010, 8:28 pm

    clean ’em load ’em stack’em prepare to use ’em

    never on my knees to these bastards……

    • Steve December 22, 2010, 10:38 pm

      I’ve been there. And, I’ll bet you that 90% will wet themselves and give up. Hell, I might even wet myself when swat comes a calling So much for the NRA and talk. One never knows until it happens.

  • Kumar December 22, 2010, 7:19 pm

    The low hanging fruit is for states to close the Online Sales Tax loophole exploited by Amazon via Entity Isolation legal voodoo to dodge the Nexus sales-tax gotcha. Texas has got wise to it because of whistle-blowing by a vigilant Dallas Morning News reporter. Will post-Schwarzenegger California wake-up next?
    Has been talked about for over a decade while Amazon has been eating Best Buy & Main St. retail’s lunch.
    Think time nigh?

    • Steve December 22, 2010, 10:35 pm

      The tax for doing business belongs on the corporation as an excise. When it was that way we were a creditor Nation. Putting taxes on the people is what got us here. Which tax is an excise tax establishing the inferior corporate character of the u.s. enfranchisee subject under feudal law. The corporations accomplished this by buying legislators and the people sit on their donkey thinking it is someone elses problem. Probable that nothing will change until it is too late to stop the death spin as well stated above in a couple of places.

  • fallingman December 22, 2010, 6:10 pm

    Yeah, Redwill. That and total consciousness.


  • John Jay December 22, 2010, 4:46 pm

    Government’s problem at all levels is that it keeps crashing into reality.
    At the Federal level, they just raise the debt ceiling some more.
    At the local level they are now having to deal with it and start with the cutbacks.
    Reality will slowly, but surely work it’s way up the government pyramid.
    At the Federal level reality may need to assert itself by a currency collapse.
    They will be the last to go of course.
    If the Euro collapses first, that may buy us some more time.

  • C.C. December 22, 2010, 9:43 am

    Due to the radically different societal make-up of today as opposed to the 1930’s, my bet is that any ‘austerity’ imposed by States will last only as long as the crime rate stays within bounds or, politicians are threatened with removal – or worse.

    The societal element seems conspicuously absent in many of these discussions, but I contend it will be front-row & center when a population which is roughly 3x what it was in the 30’s, given to sloth and dependency, grows restless when the subsidies dry up.

    $Money will be distributed, under different guises and schemes, of that you can be certain. And if it gets rough enough, all talk of ‘austerity’ and ‘belt-tightening’ will be dispatched without pause in order to keep order.

    When was the last time you heard a governor speak to his citizens of the virtues of ‘self-reliance’…?

  • Steve December 22, 2010, 9:41 am

    Its all federal, so what’s the issue? The STATE is already ‘federal’ under rebellion, Amos H. Short v. Francis Ertimanager 5 Opin 354, 524, Cert. denied (1852), and by conquest (War of Northern Rebellion), and by interstate agreement, (Buck Act), and by Treaty, and even under the Federal Migratory Bird Act/Endangered Specie Act. So what is the issue here? That the reality of federal corporate states might come to be known to everyone and the reality accepted instead of ignored. The truth might do what, scare people? Or, is the legislator scared for what they have done?

    It is time; persons are ready to accept anything as long as its easy. Education is so good 75% of 18 year olds cannot pass the test to enter the Army, and 23% of high school grads cannot pass no matter how old. Seems like bad numbers, but they came from the A.P.

    Opps I may be a hanging chad off point ! Are we talking the federal union of states territory of CO, Buck Act 1940, Article I, sec. 8, cls. 17, Article IV, sec. 3, cls. 2, Const. ? Or, is it the military DISTRICT OF COLORADO under the Reconstruction Acts of 1867 a.k.a. and the Commander in Chief and his ‘colors’ in said ZONE?

    Ya know it is really something to see the Colors of the Commaner in Chief flying with silks, cords, fringes, and Eagle and just say it ain’t so even though the Veterans of Foreign Wars tell you different, as well does 4 United States Code, and the department of State if you ask them to have Obama fly “those” colors while in Japan.
    So your Senator lied to you, gee whiz, about the Military Colors. And that judge says, gee whiz, well I fought for those colors, gee whiz, so did you when you was in the army, gee whiz. (I’d say under absolute control of the Commander in Chief you bet.)

    Do the same thing over and over again and expect a different result. Its all Federal, and its all Corporate. Its a democracy, not a Republic. Ya LOST, now get over it. The Eagle is the office of President. The Ball a ‘recruiting office’, and the Spear the district/territory commander. The Veterans of Foreign Wars says the fringe, silks of conquest, and cords of conquest are Military, and under the Eagle the Commander in Chief. Its all federal union of states, YA lost now get over it. 4 U.S.C. says our ‘civil’ flag has a specific size and is flown on a bare staff. Last I checked the flag Obama flys in the courts and federal states does not measure up. The last time Obama was overseas the flag was the civil flag because he was just an agent from the highly limited government of the People. But today, Obama is Commander in Chief in the territory of COLORADO.

    Now look at the Post Office, the Governor’s Office, and the President’s Office. The several States are dead. Free Citizens on one of the several States are dead. And the Commander in Chief #43 is not subject to Constitution, Treaty, Covention, Protocol, or Agreement. Its all federal union of states corporate as long as one goes along and will not deal with the facts.

    “The national and state Courts not being foreign to one another, as the State Courts are, but; subordinate parts of one complete system of government. . .” Bennett v. Bennett 1 Deady 307 ft.nt. 2, pg. 55 Oregon General Laws 1872.

    Its all federal corporate BOYS and GIRLS and it will stay that way as long as everyone just goes along and believes your legislator. Don’t believe what I just wrote. Go to the Veterans of Foreign Wars and ask for their book on the Flag. If you cannot believe them, well; I have a bridge to sell. Study current voter registration versus the Right of Elector on a several State. Read the State of Georgia v. Stanton 73 U.S. 50 (1867).

    Assume I am a liar and prove it with research.

    • Robert December 22, 2010, 6:00 pm


      Federal and Corporate- with only a lone sovereign.

      So, the relevant question to ask is: Can the King go bankrupt?

      Or, does the Kingdom merely degrade in perpetuity as the royalty bleeds the serfs one by one?

      They better buttress the walls and fill the moats- the castle is bound to be ransacked.

    • redwilldanaher December 22, 2010, 6:20 pm

      Robert, when? What’s your window on the ransacking? The response to driving the country’s convoy of trucks (each representing something important about the society, well at least something that once was important, you know, things like the LAW etc.) off of cliff intentionally and then blaming the pedestrians has drawn the Tea Party’s ire. WOW! The most notable response has been to play right into the hands of the dispatcher! The only things I see that are being ransacked are a society’s foundations and the online pharmacy that sells “stockholm syndrome” pills because I see more and more people emerging to offer up thanks for the great job the FED has done in “saving” us from hellfire. Most of them no longer merely like to be lied to, they’re now addicted to it and grateful for it. You expect to see them at your side when it starts to get hairy? They won’t respond until they miss the first meal only after being shackled and confined. Look at what has happened in the past 10 years. Look even more closely at the past 3. Despite the worse than disgraceful performance before, during and as we type, the sick bastards are riding higher than ever and have consolidated more power than ever. Good luck with the solo ransacking though. I hope you’re on par with Rambo otherwise you’re in for a real [email protected]

    • ebert December 22, 2010, 11:45 pm

      Someone is “goin to rise again”….not so sure its the south!

  • Other Paul December 22, 2010, 6:24 am

    “…federal bailout with Funny Money…”

    That’s my bet.

    Federal money is already supporting state unemployment benefits, make-work projects, food stamps, rescue of mortgages entities, etc.

    How is a “little” direct Fed help, gonna hurt states and munipalities, such as Federal-back state and local bonds?

    QE 1, QE2 and the host of other Federal programs have had an almost zero effect on the ability of the Federal Government to borrow at cheap rates.

    If Fed funny money is good enough for banks and GM, why not CA, IL, NJ and others?

    • Rick December 22, 2010, 5:29 pm

      Food stamps, unemployment benefits and all the rest amount to chump change compared to taking on the cost of present and future liabilities that are baked into bond prices. Thus, a federal bailout of muni and state bond markets, as opposed to the ongoing bailout of state and municipal operating costs, will produce hyperinflation, just as Schiff has predicted. Moreover, the mere attempt to bail out the bond markets will be self-defeating, since it will detonate hyperinflation.

  • redwilldanaher December 22, 2010, 6:21 am

    Not to worry too much Rick, CNBC informs us that the big Wall St. banks are positioned to benefit from the looming Muni disaster. So we’ve got that, and “total consciousness” on our deathbeds going for us. Which is nice. Also, and I may be wrong, but it seems like you think that credit defaults still matter. Why worry when you can just POMO? New and Improved POMO removes the toughest stains, even grease and blood. Get POMO today. POMO is available online from the NY FED’s website.

    • Benjamin December 22, 2010, 4:14 pm

      But is new and improved POMO safe and nontoxic?

      I think the answer is crickets… … …

      Anyway, these problems probably explain why IL is, all of a sudden, suing the state of IN. It’s so obvious that IL is just looking for any loose change it can, as this accusation of poisoning the city of Chicago through steel production (Ha!) is the equivalent of slipping and falling inside a convenience store…

      Oh! My back! My poor, poor back! Somebody get this tremendously toxic debt burden… I mean sludge from Indiana steel mills… off of me!