The Building Debt Crisis

John Moorlach's warning.

Moorlach was the only public official who warned in 1994 about Orange County's risky investments in derivatives until the county went bankrupt and the county treasurer went to prison. Now he has a warning not only for his own county, but most cities and counties in the state, and many in the nation.

Here's what he had to say, without hysteria and without political agenda, in a recent column in the Orange County Register: It is time to change public pensions not just for future employees but for those on the current payrolls.

That's not possible under current interpretations of state and local laws, but he believes it can be negotiated, and the results would benefit employees and taxpayers alike.

As he put it, California cities and counties are in a slow race to see which will be next to declare bankruptcy. The first to go bankrupt because of extravagant pensions was the city of Vallejo.

San Diego had a close brush with bankruptcy eight years ago, when its overwhelming pension crisis forced the mayor to resign and left the city with its credit trashed. Since then, the city has cut back severely on services, put a bigger share of revenue into pension payments, and persuaded voters to approve pension reform.

The result? Not much. San Diego still is in a financial mess. Its pension obligations are only 66.5 percent funded, compared to 65.8 percent at its lowest point in 2004. The city now pays $200 million (20 percent of its operating revenue) on pensions, and if it changes nothing, in 15 years it will have to pay $500 million a year.

That path leads toward services until the city or county no longer has enough left to cut, can't pay its bills, retreats into bankruptcy, and welches on its obligations, including pensions. This serves no one well: not the employees whose pensions and jobs are at risk, not bondholders whose own retirements also might be at risk, and not taxpayers who are left without services they thought they were paying for and with financial entanglements they didn't deserve.


America is not the only place with problems of misallocation of capital, consider the video clip from one of the world's largest malls that happens to be located in China:

As I have long argued, deflationary forces are increasing as the level of debt increases and has become unsustainable. Consider the first two points in my 2011 Forecast.

1) Ireland repudiates the austerity budget of Mr. Cowen and Mr. Lenihan after the 2011 elections.

2) Irish rejection of austerity measures after already receiving approval for the 85 billion Euro bailout from the IMF which triggers fear in stock markets and increased volatility.

In my view, Ireland, like Iceland, is likely to default within months as they realize that the level of debt they are carrying is impossible to repay.  Developments over the next couple of weeks may tell us whether this scenario is imminent as I suspect, or if another scheme to kick the can down the road succeeds.

Greens to decide next move

Green Party TDs and Senators are meeting today to discuss the ramifications of Brian Cowen's decision yesterday to stand down as leader of Fianna Fáil and to remain as Taoiseach.

Finance Minister Brian Lenihan has said the country needs to have the Finance Bill enacted now, adding that the Green Party and Fine Gael are anxious that that should happen.

Mr Lenihan said if the Finance Act is not passed by this Dáil, it would create a degree of uncertainty which would be 'dangerous' for funding arrangements for the country.

Mr Lenihan said the Finance Bill was an essential part of delivering international credibility to Ireland. He said the country needs to show it is in a position to conduct its business.


  1. Gold is at a critical support point. Very few if any other analysis methods would show this. The PRS177, which is a channel line extension, tells us something that very few can see, much less understand, much less act upon.

    We have got a nice 11% profit on a mechanical trading system [SHORT] on GDX from BreakPoint Trades, however this PRS channel line has caused me to close out that trade. That is good enough.

    The "Cable" British Pound / USD currency pair has 2 reasons to want to push higher. The 78 Fibo and the PRS 177. This would also push US equities higher, although the multi-year correlations may be now at risk of no longer working.

    Also, Expiry week is done. The Monday after expiry often finds some good size fireworks to correct the antics of Expiry week. Sunday futures will be interesting. We banked some serious coin last Sunday playing the futures, which seemed to move in perfect 5 and 3 wave patterns, almost like shooting fish in a barrel. Not that I will complain, any win is a win gratefully accepted.

    Bond Interest Rates are at a 61Fibo, also looking a near perfect bull flag. Choose your own poison on how to play this. Perhaps TBT or even JNK? However, one concern is that there is so much media coverage about muni bonds being risk, and States being allowed to declare bankruptcy--defaulting on pension obligations and bonds. I have to take this amount of media coverage (it is large) as a contrary indicator--when they pimp it out that much, there must be some opposite plan coming a TARP for borrowing for State Governments.

    This feeds back into my tin foil hatter theory of Fed Gov as the economic hit man, enslaving everyone, including State Governments with debt. What a great plan to consolidate power at the Federal Level. Time will tell.

  2. Thanks for your comment Steveo.
    I too am watching gold closely, and the US dollar as well. Some Elliott Wave followers believe we will see wave 3 upward targeting 99 on the USD index. An initial downward adjustment is also a possibility settling around 76 before moving upward. Either way, we may see considerable volatility in the gold, currency, and commodities markets in the next couple of months.


Post a Comment