January 30, 2013 at 10:40 AM EST
Is the U.S. Ready for Another Credit Rating Downgrade?

Mark my words: the U.S. budget deficit will continue to increase and it won’t be too long before the national debt soars to $20.0 trillion.

And if the federal government’s deficit isn’t a big enough problem unto itself, my concerns grow when I hear stories about cities and sates struggling with their deficits.

Take the City of Detroit for example. Detroit has run out of money, as the city continues to post an annual deficit, because spending outweighs revenue. The city council has been working to make spending cuts so that the city’s finances won’t be taken over by the state.

During a public hearing, the Detroit City Council President, Gary Brown said, “We’re in a crisis, and if we do nothing to save $90 million, the state’s going to come in and do it and it’s going to be a lot worse with respect to our employees.” (Source: Reuters, “Detroit council approves cost cuts to stave off state takeover,” January 16, 2013.)

Similarly, Illinois has troubles of its own. The Standard & Poor’s credit rating agency just slashed Illinois’s credit rating one notch lower to a credit rating of A-. The main reason for the credit rating cut: the unfunded public pension of its cities. (Source: Reuters, January 25, 2013.)

Minnesota’s government employee public pension is unfunded by $16.7 billion, $4.0 billion more than its shortfall in 2010. Out of 12 state public pension funds that are open for new members, 11 of them have deficits, meaning they don’t have enough money to pay for what they have promised. (Source: St. Cloud Times, January 24, 2013.) The pension funds with the largest gaps include those of state troopers, local police and firefighters, and public safety workers.

If states and cities continue to suffer at this rate, at one point down the line, they will not be able to cope with their deficits and they will need bailouts from the federal government. Will they get their desperately needed bailouts? That’s another question. (I still remember the 1970s and President Ford telling troubled New York citizens that they couldn’t count on Washington for a bailout and that they needed to figure things out on their own.)

The federal government bailing out states and cities will result in our national debt rising significantly, because our government will have to borrow more as it increases its own budget deficit. We have already seen one credit rating downgrade for the U.S. economy; if Washington starts bailing out cities and states, get ready for another credit rating downgrade.

Where the Market Stands; Where it’s Headed:

It’s quite remarkable. The stock market goes up almost daily, while revenue growth at the S&P 500 companies comes crashing down to the low single digits after years of double-digit growth. I have to give credit to the Federal Reserve; it has certainly created another bubble within the stock market. We are inching closer and closer to a top for the market. And when it comes down, it won’t be a pretty sight.

What He Said:

“I see the coming recession being deep and difficult because U.S. consumers do not have the savings to spend their way out of the recession.  The same thing happened in Japan. The Japan example proved that when consumer confidence is shattered, even zero percent interest won’t spur consumer spending. The same thing could happen here.” Michael Lombardi, Profit Confidential, August 23, 2006. Michael began talking about and predicting the financial catastrophe we started experiencing in 2008 long before anyone else.

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