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Tuesday, September 7, 2010

The Debt Tsunami

A very intersting post by Richard Fernandez at Belmont Club.
Rich Man, Poor Man

Robert J.Cristiano believes that at least one financial tsunami “began long ago and very far out to sea” when public sector employees voted themselves wonderful compensation and benefits packages that now threaten to throttle the tax base. Or maybe it began more prosaically, the way an unpayable credit card debt starts, with Good Times. And it comes a-cropper when the cash flow slims down and the cardholder finds he can’t pay for all the dreams he purchased on installment.

Cristiano is referring to the Trillion Dollar gap between “between the $3.35 trillion in pension, health care and other retirement benefits states have promised their current and retired workers as of fiscal year 2008 and the $2.35 trillion they have on hand to pay for them … aided in part by campaign contributions from the unions to elect Democratic Party candidates and generous pay packages and retirement plans passed by those same politicians in return.” It is a Gap being closed by States which have no arithmetical alternative but to turn on the very people who were promised these benefits. With every state except Montana and South Dakota running projected budget deficits, governments like once city in California are simply hacking away furiously at their financial commitments.

One Orange County city has already taken bold steps to correct its $10 million deficit. It may be a model for other cities and states across the country. Internally, it has decided it will not replace any city worker that dies, retires, moves or quits. The city will simply out source the employment to an outside service company and eliminate healthcare requirements and unsustainable pensions. Building inspectors will be out sourced as will city plan checkers, librarians and meter maids. Only essential services like top executives and cops will remain on the city payroll. The city staff will eventually decrease from 220 to approximately 35 personnel.

It is perhaps telling that government at its minimum consists of “top executives” and cops. What Cristiano calls a “deconstruction” — the bankruptcy of governments — will affect millions of families. But preventing a “deconstruction” will be painful too. Greece, which epitomizes state bankruptcy, is already riven by tension caused by cutbacks aimed at keeping that country in a currency zone it cannot afford to be part of. A German economist warned that by avoiding the rational in pursuit of the politically irrational, Athens has only made things worse.

Read the rest here.

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