Oh, we still pretend but the collapse is in full progress at this time. As a nation we have already begun to default on our debts – that’s what “Quantitative Easing” is all about – a bankrupt nation who can no longer finance her debts and resorts to printing money using it in a circle of currency devaluing all the while talking up our “strong dollar policy.” It’s so ridiculous that a 4th grader could see through that scam. Yet we pretend, but we won’t be able to much longer as the collapse has already begun.
The government on all levels, city, county, state, and federal live on debt that’s generally financed by bonds. Many of these governments do not have the revenue (income) to pay the debts they already carry. And now that their revenue streams are crashing, they are being forced to lay off employees and cut back in general, but they are not doing so fast enough.
How bad is it? Impossible math bad. Let’s examine the state of California who is on the leading edge of the governmental crisis. Keep in mind that what’s happening in California is happening all over America and is likely to result in a domino of failures. The following article (ht Comrade Wannabe) details the anecdotal process of deflation and its effects on government:
Tax Bill Appeals Take Rising Toll on Governments
Homeowners across the country are challenging their property tax bills in droves as the value of their homes drop, threatening local governments with another big drain on their budgets.
The requests are coming in record numbers, from owners of $10 million estates and one-bedroom bungalows, from residents of the high-tax enclaves surrounding New York City, and from taxpayers in the Rust Belt and states like Arizona, Florida and California, where whole towns have been devastated by the housing bust.
“It’s worthy of a Dickens story,” said Gus Kramer, the assessor in Contra Costa County, Calif., outside San Francisco. “These people are desperate. They know their home’s gone down in value. They’ve watched their neighborhoods being boarded up. They literally stand in there and say: ‘When can I have my refund check? I need to feed my family. I need to pay my electric bill.’ ”
The tax appeals and reassessments present a new budget nightmare for governments. In a survey conducted by the National Association of Counties, 76 percent of large counties said that falling property tax revenue was significantly affecting their budgets, said Jacqueline Byers, the association’s research director.
Officials in some states say their property tax revenue is falling for the first time since World War II.
The recession has already taken a significant toll on states’ budgets, as rising joblessness, a weak business climate and a drop in consumer demand have cut sharply into receipts from taxes on sales, personal income and business earnings.
The pain at the state level is trickling down to county and local governments. To compensate, about 10 percent of large counties are raising the tax rates associated with home values to minimize the revenue loss, the county association said.
Even so, most counties simply have to absorb the lost revenue. Municipalities are laying off workers, renegotiating labor contracts, freezing salaries and cutting services.
The revenue losses are coming as homeowners prod towns for new assessments, and as municipalities conduct regular revaluations of their real estate. While declining residential values weigh heaviest on many governments, the value of commercial real estate is also sliding as businesses shut down and move out of storefronts or shopping malls.
Property taxes are meted out by a disparate patchwork of cities, towns, counties, and school and fire districts, all with their own rules. Because tax formulas vary widely county to county, not every decrease in assessed values automatically lowers a household’s property taxes.
But officials across the country say there is no question that the number of appeals has risen from the usual trickle to a flood.
In suburban Atlanta, thousands of people lined up at government offices to file their requests for reassessments before a March 31 deadline. In parts of Ohio, appeals have multiplied fivefold. Tax lawyers in the northern suburbs of New York say they have never been so busy, and some towns have hired extra employees to sift through the paperwork and are spending hundreds of thousands of dollars on legal fees to deal with the cases in tax courts.
The call for counties to acknowledge the falling price of homes is loudest in states where taxes are highest, or the housing crisis has hit the hardest.
“We’ve been absolutely getting killed,” said Robert W. Singer, the mayor of Lakewood Township, N.J., and a state senator, whose town is setting aside $2 million to pay tax refunds to homeowners. “We’ve never had this before. Usually they’re undervalued. Now, everyone’s overvalued.”
The appeals are not just coming from individual homeowners. Condominium associations and entire subdivisions are pushing for new tax assessments, as are companies that own office towers, industrial parks and shopping malls.
New Jersey, which has the nation’s highest property taxes, has been besieged by tax appeals from homeowners like Peggy Tombro, whose rambling home in Bound Brook is assessed at a value of $1.8 million but is languishing on the market with an asking price of $1.3 million. Her taxes are increasing to $53,000 a year.
“I don’t know what else to do,” said Ms. Tombro, 63, who has gone back to work selling antiques to pay her tax bill.
In the Inland Empire of California, near Los Angeles, Joylette Lynch, 70, is challenging the assessed value of her home as she tries to scrape together $1,158 a month to pay her mortgage, taxes and other bills. Her two-bedroom house in a community for older residents was worth as much as $280,000 three years ago, but houses on her block are now selling for less than $100,000.
“If the house is not worth what I bought it for, why am I paying the same amount in taxes?” she asked.
Ms. Lynch, meanwhile, lost her job at a Bed, Bath & Beyond this year, and is behind on her mortgage payments. Shaving a few hundred dollars off her annual tax bill of $4,300 might not keep her out of foreclosure, but it would help, she said.
“Everything’s in God’s hands now,” she said.
Officials say stories like these are common as unemployment hits 9.5 percent and people seek to trim their budgets. Appraisers and assessors, normally concerned with land values and comparable sales, are becoming ersatz crisis counselors.
Jeff Furst, the appraiser in St. Lucie County, Fla., said a 62-year-old man recently walked into his office and described how his wife had been laid off and his salary had been cut in half. He was struggling to pay his taxes and looking for relief, Mr. Furst said.
“We’re hearing from people like this every day,” Mr. Furst said. In St. Lucie, which sits along the Atlantic, property tax revenue is expected to fall 20 percent, and tax appeals are 10 times as high as they are normally. “Most people are going to see a significant decline in their tax bill.”
Mr. Kramer, the assessor in Contra Costa County, said homeowners started swamping his office with requests for new assessments in December. As many as 500 people would call in one day. His voice mail message now begins: “If you’re calling to request an informal review of your property value due to the declining real estate market.”
Contra Costa has now reduced the recorded value of more than a third of the 350,000 privately owned properties in the county.
Lisa Driscoll, the county’s budget director, said property tax revenue had been growing about 8 to 9 percent a year but was now projected to decline 5 percent next year. The county has cut $50 million from its budget to offset the decline in real estate and other taxes.
Bonnie Grassley’s house in Fort Pierce, Fla., reflects the rise and fall of the broader economy. Its assessed value topped $153,000 in 2006, as Florida’s housing market caught fire. Now, it is worth $77,500.
Though her tax bill is only $150 a month, Ms. Grassley is out of work, spending her savings, and says she hopes a reassessment will save a couple hundred dollars a year.
“My home means everything to me, and it’s all I really have,” Ms. Grassley said. “I’m determined to keep it, come hell or high water. It’s a terrible way to lose your home, just over taxes.”
Property assessments are just one way in which the economy ripples from the real world and finds its way back into government.
This is a continuation of the crises that is occurring in slow motion – a depression. Sub-prime to home builders, to banks, to insurers, to car manufacturers, and now to government itself. Backstopping the failure of businesses in an attempt to create never-ending growth is exactly the cause, the very reason we are in this mess. It ends now, not with your grandchildren.
And as Martin Weiss explains, it’s likely to get a whole lot worse:
Day of Reckoning
by Martin D. Weiss, Ph.D. 07-05-09
This is a day of reckoning for California and, ultimately, for all of America.
Will our nation’s largest debtors meet their massive financial obligations? Or will many ultimately default?
In California, the answer given by the state Treasurer’s office was a commitment never to default, seeking to directly refute my forecast issued here 13 days ago under the headline “California Collapsing.”
According to the BusinessJournal:“The California’s state Treasurer’s office on Monday refuted an analyst’s recommendation last week that investors dump California municipal bonds and that the state is likely to default.
“Analyst Martin Weiss of Weiss Research said in a June 22 report that California’s financial woes create ‘a very high probability’ that California will eventually miss debt service payments.
“Mr. Weiss’ analysis and recommendation, to put it kindly, is misinformed,” responded Tom Dresslar, a spokesman for state Treasurer Bill Lockyer. “Even the credit rating agencies said, in announcing possible downgrades, that the likelihood of default is low.”
Ironically, just two days later…
California Defaulted on Its
Short-Term Debt Obligations
In lieu of cash, California issued i.o.u.’s to meet obligations to vendors and citizens, postponing payments on its current liabilities.
But current liabilities are short-term debts. Ergo, based on this standard definition, California is already defaulting.
It’s not the same as defaulting on its bonds. But for reasons I’ll explain in a moment, I’m now more convinced than ever that a bond default is also coming.
Consider the importance of this week’s events…
If California’s creditors had a say in the issuance of i.o.u.’s, Sacramento officials might be able to deny they’re in default by implying mutual consent. But that’s far from the facts. The creditors had nothing to do with this decision. It was unilateral, a telltale aspect of debt defaults.
If the i.o.u.’s were as good as cash, Sacramento might also deny the D-word. But the sad reality is that, if you’re among those stuck with California i.o.u.’s, you have only two choices: You have to either hold them while you sweat and cross your fingers or you have to sell them at a steep discount — exactly the same choices facing bond investors after a default.
If all major financial institutions accepted California i.o.u.’s, that might also help Sacramento justify a continued denial of default. But the reality is that most banks are not accepting the i.o.u.’s, and no one could argue their reasoning is financially unsound.
Why accept a piece of paper at face value when it’s worth significantly less than face value on the open market? The nation’s largest banks already have enough troubles with toxic mortgages, toxic credit cards and toxic loans on commercial real estate. They’re not exactly anxious to pile on toxic California paper.
If, as in past episodes, California’s budget mess were mostly due to a political snafu, it could be argued that the i.o.u.’s are merely a temporary stop-gap. But that’s clearly not the case either.
To the contrary, California’s budget crisis is rooted in an unprecedented economic depression with 11.5 percent unemployment and the greatest concentration of mortgage delinquencies in the nation. Even if the i.o.u.’s are ultimately paid in full, California’s debt troubles are not going away.
Why I Expect a Default on California’s Bonds
Short of an 11th-hour rescue from Washington — where political resistance to bailouts has grown dramatically in the wake of recent federal rescues — it will be extremely difficult for California to avoid a default on its bonds.
The fundamental reason: A vicious cycle of budget tightening and falling state revenues.
The state cannot balance its books without inadvertently making the California economy — and its deficit — even worse.
When it cuts spending, it merely creates more unemployment and forces consumers to slash their own spending or default on their own obligations, driving the economy into a still deeper depression. And when it raises taxes, it has a similar impact.
Either way, the end result is lower revenues flowing into the state’s coffers.
But now California has over $28 billion in bonds coming due between now and October. How will it come up with the cash is a great mystery to me. Bond holders are certainly not going to be among those accepting i.o.u.’s.
Wall Street Rating
Agencies Also in Denial
The business model of Moody’s, S&P and Fitch is to sell their ratings to bond issuers; the ratings are bought and paid for by the very institutions being rated, including the state of California.
After multiple investigations of the Wall Street ratings agencies, Congress and the Obama Administration are proposing radical changes. But right now, it’s business as usual, and the egregiously conflicted business model of the Wall Street rating agencies still stands.
I believe that’s a key reason the rating agencies have not yet fully recognized the obviously dire state of California’s finances. And that’s why California’s state Treasurer can still claim Wall Street “doesn’t agree” with more realistic analysis like ours.
In effect, the state virtually pays them to hold their punches.
But despite these blatant conflicts of interest, the truth cannot be bottled up forever. Here’s what I see coming next:
1. Downgrade massacre: A series of multi-notch downgrades by Fitch, Moody’s and S&P, making it extremely difficult — if not impossible — for California to roll over maturing debts at any cost.
2. Worsening deficit: Surging interest costs and greater than expected declines in cash inflows, bloating California’s deficit even further.
3. Washington snub: A last-ditch effort to persuade Treasury Secretary Geithner and President Obama to reverse their earlier decision not to bail out California.
But Washington’s arguments against a California bailout are relatively firm: They’re already giving California billions through the stimulus package. If they bail out California, what will they say to the dozens of other states that line up on the White House lawn asking for theirs?
In contrast, arguments supporting a federal bailout of California sound like a hollow rerun of last year’s “bailout-or-meltdown” ultimatum by former Treasury Secretary Paulson to Congress. It’s a long-ago discredited approach to financial emergencies.
4. Default on California bonds: Despite Sacramento’s official mantra that a default is impossible and unthinkable, it happens.
5. Cascade of defaults: If giant California can default, the new assumption is bound to be that almost any issuer of tax-exempt securities can do the same. A cascade of downgrades and defaults by other states and municipalities ensues.
What to Do…
If you’re a U.S. citizen or resident — whether in California or not — don’t count on borrowing money. Prepare yourself for a return of last fall’s environment in which consumer credit was either too expensive or unavailable.
Pinch pennies. Sell off unneeded assets and possessions. And raise as much cash as you can — for emergencies and for your family’s future.
If you’re a bond investor, better to be safe than sorry. Unload your tax-exempt bonds and tax-exempt mutual funds. With few exceptions, the benefits do not justify the rapidly growing risk.
Good luck and God bless!
Good advice. My only disagreement with Martin; the Federal Government is indeed insane enough to attempt to bail out the states and will do so… eventually. Most likely this will occur after they have used it as leverage to remove the politicians that stand in their central banker way. Of course the combined scope of the problem is way larger than even the Federal Government, but so is the banking crisis and they will do anything to bail out the interests of the central bankers who control them. It will all come to a head, of course, and we will all suffer for it. Life attached to the central banker’s fiat and DEBT was simply irresistible…
Robert Palmer – Simply Irresistible:
*Picture of Arnold by AZRainman.