A Crisis Gone Worse: Many Municipalities
Consider Bankruptcy

Federal ReserveThe plight of municipalities here in the U.S. and their struggles under the weight of enormous pension budget deficits are reaching the critical phase.

In fact, many municipalities are contemplating bankruptcy, forcing me to conclude that jobs growth in the U.S. will remain under pressure because of the layoffs that would inevitably come from trying to balance local and state budget deficits.

In 2009, the U.S. government provided a stimulus fund to offset lost tax revenue for state and local governments. That money has been used up and, with pension budget deficits too large and deteriorating, states are telling municipalities that they have no money to help them with their budget deficits.

As most homeowners are aware, municipalities get a large portion of their tax revenues from property taxes. With more homes empty since the credit crisis and with property values significantly lower since 2007, municipalities are taking in less tax revenue, making their budget deficits even worse. With no help from the state, the only way to meet the budget deficits is to lay people off, and that trend has not stopped.

According to Reuters, the last three years of job losses at the state and local government level has been the worst since the Labor Department first began keeping records in 1955.

In a recent report, the Economic Policy Institute noted that, in the three previous recoveries from recession, public-sector employment jobs growth was significant. The Institute estimates that, if this recovery were like the previous three, we would have experienced jobs growth of 1.2 million in the public sector by now. Instead, since the beginning of 2009, 482,000 municipal jobs have disappeared, while 150,000 state jobs have been eliminated.

Moody’s estimates that states could cut a further 15,000 jobs in the remainder of 2012, while municipalities may lose between 150,000 and 175,000 jobs in 2012, providing significant headwinds to jobs growth. These jobs cuts are all a consequence of trying to close those enormous budget deficits.

Moody’s may be proven right, as the State of Florida just announced that it will have to cut 4,000 state jobs in order to meet its budget deficit.

As I’ve been suggesting, and as these numbers now prove, dear reader, public-sector job losses are going to make strong jobs growth very difficult in 2012 in this country. I didn’t mention the other avenue municipalities have for meeting their budget deficits: raising taxes.

In this economic environment, how well will higher taxes sit with people when municipalities explain it is to meet their budget deficits?

If this country doesn’t find economic growth and jobs growth soon, these budget deficit pressures are going to build to the point where more and more municipalities will declare bankruptcy and states will in turn run to the Federal government for help. (Also see: Serious Financial Trouble at U.S. Municipal Level Mount.)

Watch that stock market rally, dear reader.

Michael’s Personal Notes:

While one has to give China credit in its quest for accumulating gold bullion, the country is taking its approach to another level.

China is home to very large gold mining companies that produce 390 tons of gold bullion every year, which China is keeping for itself—not allowing the gold mining companies to export this gold bullion.

Zijin Mining Group is the largest of China’s gold mining companies. It has just offered to pay a 46% premium for Norton Gold Fields, one of Australia’s gold mining companies.

Zijin also owns a 60% stake—controlling rights—to Altynken, a major gold mining company based in Kazakhstan. And Zijin has said that it is setting aside 5.5 billion yuan ($880 billion) of cash that it has on hand for acquisitions overseas.

China’s Mining Federation is studying different ways it can make capital more available to its gold mining companies, so that acquisitions overseas will be that much easier.

In response to the Federation’s plan, one exchange has created a 10-billion yuan ($1.6-billion) venture capital fund that gold mining companies can access specifically for mergers and acquisitions overseas—to make the money available to Chinese gold mining companies and to help with logistics, to make the process easier.

There is no question that Chinese gold mining companies face opposition to buyouts overseas, as many countries want the commodities—and especially gold bullion—to remain within the control of the country itself.

However, offering premiums of 46% from what a gold mining company is currently worth can simply be too good an offer to resist. China is less concerned about price, and more concerned about securing gold bullion to back its currency.

The People’s Bank of China—equivalent to the Federal Reserve here in the U.S.—has been busy attempting to acquire gold bullion wherever it can find it. China has banned all exports of gold bullion and ordered its gold mining companies to sell all of their gold bullion to the People’s Bank of China.

It seems as though the country is also helping to fund its gold mining companies with capital, which is enabling them to buy gold mining companies overseas, mine the gold bullion, and return it back home where it can sell it to the People’s Bank of China.

As the saying goes, there is more than one way to skin a cat. It looks like China, in its desire to increase its reserve of gold bullion, which is just of fraction of what Europe and the U.S. holds, is using its gold mining companies to help with the confiscation of gold bullion worldwide.

So if you are thinking about selling your gold bullion, dear reader, there is a smart willing buyer who will be more than happy to take it off your hands. (Also see: China’s Appetite for Gold Far From Subsiding.)

Where the Market Stands; Where it’s Headed:

There is no doubt; the stock market rally that started in May of 2009 is losing steam each passing day. The Dow Jones Industrial Average fails to stay above 13,000, while more cracks in the economy appear each passing day.

No, we did not reach that speculative phase we would traditionally see at the end of rally. But even if it does happen, the five-percent upside potential left in the market may not be worth the risk for the majority of my readers.

What He Said:

“Prepare for the worst economic period ahead that we have seen in years, my dear reader, as that is what I see coming. I have written over the past three years how, in the late 1920s, real estate prices fell first before the stock market and how I felt the same would happen this time. Home prices in the U.S. peaked in 2005 and started falling in 2006. The stock market is following suit here in 2008. Is a depression coming? No. How about a severe deflationary recession? Yes!” Michael Lombardi in PROFIT CONFIDENTIAL, January 21, 2008. Michael started talking about and predicting the economic catastrophe we began experiencing in 2008 long before anyone else.