Pennsylvania: Another State Descends into Financial Crisis

by: Jeff Nielson

As California's suicidal budget-impasse continues, another large, U.S. state is facing a similar (if smaller) crisis. Pennsylvania announced on Friday that it, too, is reneging on pay-cheques for state workers – with 69,000 currently affected, according to a CNN article.

The overall problem is that with state revenues plunging by close to 1/3rd, and with costs for virtually all state social programs soaring in the U.S.'s Greater Depression, this spending-crunch at the state level is just beginning. Even if, the U.S. economy began some anemic “recovery”, the best-case scenario at the moment, all this would do is lessen the rate of revenue-declines for U.S. states – meaning another round of budget-impasses and spending cuts this time next year.

However, for many reasons there is zero possibility of a “U.S. economic recovery” either this year or next year. The mini-crises of individual states are merely part of a much larger and broader pattern. The problem is that the U.S. chose to turn itself into an unsustainable “consumer economy” (i.e. a borrow-and-spend economy). Because individual Americans are unable to borrow, this means they are also unable to spend.

The plunge in U.S. spending currently amounts to somewhere around $2 TRILLION per year. This total can be broken down into the following categories. First, there is the loss of about $500 BILLION per year in home-equity spending. At the peak, this borrowing-spree reached over $800 BILLION per year. Now, those trillions of borrowed dollars are spent, the home equity that served as collateral is gone, but the debts remain.

Americans must now begin paying back those trillions in home-equity loans, along with attempting to reduce credit-card balances and other forms of debt – as U.S. consumers begin to “deleverage” their own individual balance sheets. This means somewhere around another $500 billion per year in reduced spending.

Then there are the unemployed. Contrary to the outrageous lies produced on an ongoing basis by the Bureau of Labor Statistics, somewhere around 15 MILLION Americans have already lost their jobs – with roughly 2 million more losing their jobs each month (see “U.S. economy to lose 20 MILLION jobs this year”). That is another huge chunk of lost spending.

However, what must be added to that is the declining wages of Americans fortunate enough to still have jobs. Hours of work for the average (employed) American dropped to a little over 33 hours/week, while reduced wages and benefits cut into spending power much further still.

Returning to the states, even those who have managed to complete their budget process have all been forced to slash spending – by well over $500 billion this year. The $26 BILLION budget-gap in California (which gets larger each day) is a funding gap on top of billions which have already been cut from state spending. Much of those spending-cuts were transfer payments (i.e. benefits) to the poorest Americans – and every dollar of spending cut from these programs is one less dollar spent at U.S. retailers.

Then there is the the additional lost spending power as rising loan delinquencies and defaults cause U.S. banks to reduce credit card limits and lines of credit. Added to that is yet more lost spending-power caused by rising interest rates.

Thus, when we add in the 15 million Americans who have lost their jobs, declining hours/wages/benefits for those still employed, the huge drop in state social-spending, and the additional reduction in credit-based spending, we arrive at a total of somewhere close to another $1 TRILLION per year, bringing my estimate to that $2 trillion/year figure.

Offsetting this is only the puny, Obama “stimulus package”. However, the Obama regime itself has admitted that only a little over $250 billion of this money will actually be spent in the first year. Thus, the “stimulus” is only a little over 10% of the lost spending-power in this consumer economy. Calling this “stimulus” is nothing more than a bad joke.

The worst part of this is that these trends are self-sustaining, in a downward, vicious circle. This huge drop in spending has sent U.S. retailers into “survival mode” (i.e. cost-cutting), as they prepare for a “generational change” in U.S. consumer spending (see “The Death of the U.S. Consumer Economy”). About the best “plan” these retailers can come up with is to switch to much more online retailing.

This leaves millions more (if not tens of millions) Americans facing the loss of their retail-sector jobs, during an epidemic of store-closures. This, in turn, will drastically reduce the revenues of U.S. retailers and state governments even further. This can only lead to more drastic reductions in employment.

The only way to stop this downward spiral is to inject enough new spending (i.e. “stimulus”) into the economy to completely offset the lost spending power.

Thus, not only is another “stimulus package” totally mandatory, but unless it's at least 5 times as large (and added onto existing “stimulus”) as the first Obama “stimulus package”, there is no possible way it can put the brakes on the U.S. economic collapse.

Keep in mind that even with the current, puny “stimulus package”, the Obama regime will be racking up a deficit in excess of $2 TRILLION this year (not including the trillions in additional “unfunded liabilities”). Thus, with federal revenues also plunging lower, this would imply a deficit of over$10 TRILLION, next year aloneif the Obama regime wants to get serious about stopping the U.S.'s Greater Depression.

However, as I've written previously, going down that road must lead to hyperinflation (see “Rising U.S. interest rates signal Hyperinflationary Depression”). The Obama regime (and the Fed) are already having great difficulty holding down interest rates and trying to find buyers for trillions in U.S. Treasuries.

If (next year) the Obama regime were to dump five times that amount of Treasuries onto the market, then the inevitable consequences to the U.S. economy are far higher interest rates and a crippling plunge in the U.S. dollar – as the severity of the U.S. economic crash finally sinks in with the U.S.'s foreign creditors.

The crash in the U.S. dollar (and the countless trillions of “liquidity” injected into the economy) can only lead to U.S. hyperinflation, while the spike in interest rates which must accompany this guarantees a worsening of the U.S. depression.

The bottom-line is that U.S. state governments are in a no-win situation. Cut spending too little and they destroy their credit ratings with unfunded debt. Cut spending too much, and they accelerate the downward collapse of the U.S. economy through further reductions in employment and spending power.

What this means is that the budget hardships (and stalemates) which we are seeing with state legislatures this year, is only a small taste of the real crisis in state budgets which will begin next year.