Click to enlarge.
Missing from the chart is the $2.8 trillion in debt we've racked up in the municipal bond market. That's another $9,000 per capita that we owe. Have no fear though. We're told not to worry.
December 9, 2010
Fiction an easy sell in U.S. muni market
Armageddon makes for a sexy story. Volatility in the $2.8 trillion U.S. municipal bond market is real, but the scary tale being spun out of budget-busting states like California involves a lot of literary license.
There's nothing sexier than Armageddon. Agreed.
Yet while a state default isn’t impossible, comparisons with, say, Greece or Italy are misleading. California’s debt-to-gross state product ratio is just 5 percent — minuscule compared with the Greek debt-to-GDP level of 133 percent, as estimated for the year-end by JPMorgan, or the U.S. federal government’s 88 percent.
That's a fascinating way to look at it. I was under the impression that Californians owe money at BOTH the state level and at the national level. The least misleading way to look at it would therefore be to add the 5% state debt to 88% national debt and realize that 93% is not "minuscule".
It might also be worth mentioning that unlike the federal government, California currently does not have a monetary printing press. I don't think it takes "a lot of literary license" to therefore suggest that California really could run out of money someday.
Source Data:
FRB: Flow of Funds Accounts
St. Louis Fed: Total Federal Government Debt
St. Louis Fed: Total Population
St. Louis Fed: CPI-U
"Missing from the chart is the $2.8 trillion in debt we've racked up in the municipal bond market."
ReplyDeleteI sold VWITX on November 15.
It was a nice ride up!
G.H.,
ReplyDeleteNice!
My TIP sale (in my IRA) in August is finally back in the black. Investors piled in after I left and then they recently ran for the exits.
I try real, real hard not to keep a watch on the prices of investments I've sold.
ReplyDeleteBut if it's a fund that you'll probably use again in the future I guess there's really no choice is there?
G.H.,
ReplyDeleteI hear you. I plan on riding out my entire retirement in TIPS (and I-Bonds) so I just don't have much choice in the matter.
For what it's worth, it would require a state constitutional amendment for California to default on its state muni bonds. (Not so much, for city/county/other bonds. And as Harrisburg, PA and those boys in Alabama have demonstrated, even "revenue" bonds can go bad if the revenue doesn't keep up with the expenses...)
ReplyDeleteNote that while there may be a number of defaults on individual issues, it may still be very worthwhile to own a muni fund or a diversified portfolio.
Also, with the FedGov now streaking ahead in the race to drive Debt/GDP higher, it's quite possible that the states will scrape by as a result of the inevitable inflation.
Mark, if you get a chance, I'd be grateful if you'd post your thoughts (if any) on the perils of considering oneself "safe" from inflation by being a debtor. I keep seeing people who claim that inflation will be no big deal, since they "own" their house and their "mortgage will get smaller" if there's inflation. They seem to be ignoring the _very likely_ chance that inflation may drive prices up without actually increasing their own personal income (or not as much). In that case, the debt-service on the mortgage may cripple their cash-flow enough to leave them gasping for air. Also, the inflation may (likely will) bypass the home price, leaving them still underwater when they can no longer make ends meet... Stagflation could well be a b**ch even for those who think they're "safe"...
"...it may still be very worthwhile to own a muni fund..."
ReplyDeleteTrue, but not while the theatre crowd is heading for the exit doors.
There will be another entry point for tax-free muni funds, just not real soon IMO.