muses of the moment

April 4, 2012

Gold moves a little lower

Filed under: Gold and Silver Investing — totallygroovygirlfriday @ 10:58 am

Looking at buying a little more physical gold to hold long-term since the prices are so low. Silver still needs to be below $30 for gg to consider buying. This is what groovygirl is doing, you are responsible for what you do with your money. Groovygirl no longer trades gold or silver, she buys physical on dips to hold long term.

pension obligation bonds

Filed under: Odds 'n ends, Taxes, The Banking Crisis, The Dollar Crisis, The Financial Crisis — totallygroovygirlfriday @ 2:51 am

Credit Derivatives took down the mortgage industry (almost the banking industry, except for the gift from US taxpayers) and the US housing market.

Pension Obligation Bonds will take down state, county, and local governments and all related pension funds.

Click here for the full story.

Pension obligation bonds are a type of derivative.

Struggling to pay employee pensions, local governments are increasingly borrowing money to cover their obligations — exploiting a loophole in federal law that allows them to issue taxable bonds without seeking voter approval.

Oakland took a bet on its pension fund that ended up costing the city an estimated $245 million — nearly a quarter of its annual budget. That hasn’t stopped the city from looking to try its luck one more time.

POB will take down every city, county, and state, that the US government chooses not to bail out. Pensions will go under or be severely reduced and then infrastructure (not financed by the Feds) will slow or cease.

The bets are being made using an exotic but increasingly popular financial instrument known as a pension obligation bond. Cities, counties and states use the bonds to take out high-interest loans from private investors to plug shortfalls in their employee pension funds.

More here.

POBs are on top of general obligation bonds that local government and state governments issue on a regular basis to fund infrastructure. GOBs usually require voter consent and are tied to property taxes.

Remember Meredith Whitney and her dire prediction of collapsing municipal bond market? She is concerned about all the debt between infrastructure, regular expenses, and pensions that the local governments are obligated to make payments on. This is the same thing that happened in the 70’s, but then we were only dealing with general bonds, not pension funding issues.

This will not end well.

Here are some possibilities:

  • Local and state governments get bailed out by the Feds like the banks did. More QE, more taxes, and now states are obligated to the Feds. When push comes to shove on federal laws, states will lose any bargaining chip they might have had.
  • Private investors and banks lose money from non=payment and default. May cause another bailout.
  • Systemic collapse of US state and local bond market is like the PIIGS crisis in Europe, but bigger.
  • Pension funds gone or reduced. (Retired city workers can not eat.)
  • Infrastructure ceases because there is no new debt available. (Water main breaks and takes 3 mos to get fixed.)
  • Local services are reduced because there is no new debt available. (Police and fire forces cut in half. Already seeing this.)
  • Local taxes go up because investors demand their money back. (This could be property taxes, sales taxes, or special levies on consumables. Any way, your monthly expenses go up.
  • Cities reduce boundaries (sending obligations to counties) instead of expanding boundaries for more tax revenue.

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