Last week, a three-year ordeal came to an end as Jefferson County, Alabama, declared the biggest municipal bankruptcy in American history, a casualty of the rapid economic growth of the boom that ended so abruptly with the credit crisis of 2008.

Home to 660,000 people, Jefferson County was struggling under $3.0 billion in sewer-system debt. By a vote of four-to-one, the municipality voted on November 9 to file Chapter 9 bankruptcy, leaving JP Morgan facing the brunt of the loss.

But Jefferson County isn’t alone. Last month, Harrisburg, Pennsylvania, sought court protection. About a month earlier, Central Falls, Rhode Island, filed for bankruptcy. Again, both were courtesy of the credit crisis.

My message today is that repercussions of the 2008 credit crisis have yet to completely play out. Many cities and municipalities have simply “kicked the can down the road” for months and years. But, at a certain point, the Piper needs to be paid, as they say. Many states are also suffering, with all eyes on California’s budget, where tax revenue in the current year is down $1.5 billion from the state’s budget.

My biggest concern and what you will read about below is rapid inflation that leads to higher interest rates, which makes the credit crisis even more painful for cities, municipalities and states that have seen their revenue decline on lower property taxes and income taxes.

I believe that we will see more hard times for U.S. cities, municipalities and states…and those that can go bankrupt will. But just imagine an environment where these cities, municipalities and states are facing sharply higher interest rates on their debt. Such a situation would make the credit crisis look like a cakewalk.

Michael’s Personal Notes:

There is another crisis brewing in this country…

I’ve been writing in PROFIT CONFIDENTIAL through 2011 on how rapid inflation will become a big problem in America in the months and years ahead. I read very little about this in the mainstream financial media. The Federal Reserve says the inflation rate is not a problem right now.

But consider these simple facts…

According to the American Farm Bureau Federation, the cost of this year’s typical Thanksgiving dinner will jump 13% from the previous year—the biggest percentage jump in 20 years.

According to the United Nations, world food prices are up an astonishing 68% (talk about an accelerated inflation rate) over the past five years.

Even the U.S. government is predicting that the inflation rate this year will be between 3.5% and 4.5%—the fastest pace in three years.

To get us out of the credit crisis, the Fed opened the money taps in 2008 and has been expanding the money supply aggressively since then. There are those that believe the economy has simply been kept alive the past three years because the Fed’s proverbial printing presses have been running overtime.

And there certainly is a lot of money in supply. Corporate America has a record $2.0 trillion in the bank, as they prefer to conserve their cash rather than expand their businesses. The Fed has gone through two rounds of quantitative easing and may be getting ready for a third.

The more a country prints of its currency, the higher the eventual inflation rate in that country. I believe that the government and the Fed want the inflation rate to accelerate to reduce the risk of falling into deflation. But this massive amount of monetary stimulus could eventually lead to an inflation rate reminiscent of the early 1980s—which ultimately led to sharply higher interest rates.

It may be difficult for my readers to envision a sharply higher inflation rate and higher interest rates in 2012 and 2013, but that’s what I see. This is a similar situation to 2005, where it was difficult for people to understand that the real estate market would crash.

As I have written before, the 10-year old bull market in gold is screaming, “Higher inflation rate ahead!”

Where the Market Stands; Where it’s Headed:

The Dow Jones Industrial Average opens this morning up five percent for 2011. Add in a dividend of 2.5%, and stocks are up 7.5% for 2011, beating most investment alternatives for the year, except the precious metals (particularly, gold bullion).

I believe that we are in the final stages of a bear market rally that started in March 2009. This bear market will continue to bring stock prices higher.

Tags: bear market, Bear Market Rally, bull market, credit crisis, Economic growth, federal reserve, gold, inflation rate, interest rates, market view, quantitative easing, rapid inflation