The Broken States of the Union

Farmers in Great Depression

For the first time in US history a handful of US states is teetering on the edge of bankruptcy. Illinois is about to be downgraded to junk bond status, which will turn its financial problems catastrophic overnight. Illinois cannot possibly pay its accumulated debt, its unpaid medicaid expenses and its future retirement obligations, so bankruptcy almost certainly will be its only way out.

Main, Connecticut, Kentucky and California are also caught in chronic budget deadlocks that may lead to bankruptcy as a solution for dodging their entitlement obligations. Bear in mind they’re called “entitlements” because it’s money promised to you that you already put in the work to earn. It’s your retirement. Illinois, for example, has over $200 billion in pension obligations that will never be paid … or that can only be paid at a greatly diminished level worked out in some form of effective bankruptcy.

That’s a problem that is only solved by turning it into a worse problem for others. Illinois will end its problems by making certain that for the next quarter century, a good portion of the now retiring baby-boom population is dirt poor and must be carried by the younger population as dead weight (if not exterminated) because the retirement they planned in order to responsibly carry themselves through their final years isn’t there.

Instead of the state not being able to pay its bills, bankruptcy means that hundreds of thousands of retirees won’t be paying theirs, which means the people they owe money to will be going broke, and so the problem trickles down. State bankruptcy merely shifts the burden so that legislators don’t have to deal with it but you do. And it’s inevitable because the alternative is that you pay for it through much higher taxes. The state is you.

The Federal government won’t be solving the state budget problems either because it plans on dumping heavier medicaid expenses back on all states as it repeals Obamacare to help solve its own budget problems amid its own deadlock. Like the states, its own Social Security funds are going broke, so it faces its own massive entitlement problems. And, if it bails out one failing state, it will be expected to bail out all others that face such problems.

With Illinois effectively reaching bankruptcy and a likely catastrophic credit downgrade this summer, the problem finally starts coming to a head where everyone is forced to see how decades of government debt accumulation end, and that end looks something like this in real terms:

Illinois, as the bellwether example, has already stopped paying the contractors who fix roads and other infrastructure. That means the contractors will now stop fixing the roads and won’t be paying their employees, and broken roads don’t get corn and beef to market. Illinois has stopped paying doctors. That means the doctors will stop fixing people. Illinois has refused to pay its lottery winners (even though it took the money from all the suckered ticket buyers). That means there will no more lottery to raise state money because there will be no more ticket buyers. That means the state’s budget problems just got worse, so Illinois soon won’t be paying state employees or pensioners.

It sucks when your entire state goes broke. You see, you can keep kidding yourself — as our entire nation has for the decades that I’ve been complaining about this — that you’re going to take care of everyone on welfare with endless debt spending or that you’re going to maintain huge military power to control the world with debt spending; but eventually you pile up state or federal debts so high that you wind up not paying anyone, including the welfare recipients or the soldiers in your military.

Like the US government, the State of Illinois has been operating without a real budget for more than two years, operating dysfunctionally during that time by court-ordered stop-gap measures because the legislature is deadlocked as politicians refuse to accept reality; so, Illinois has now reached the same financial status as Puerto Rico.


Illinois is grappling with a full-fledged financial crisis and not even the lottery is safe – with Republican Gov. Bruce Rauner warning the state is entering “banana republic” territory…. Reports have suggested the state could be the first to attempt to declare Chapter 9 bankruptcy — but under the law, that’s impossible unless Congress gets involved….. “Illinois is the fiscal model of what not to do,” Rep. Peter Roskam, R-Ill., told Fox News, while not commenting on the bankruptcy question. “This avoidance in behavior toward dealing with our challenges is what leads to the devastating impacts we are seeing today.” (Fox News)


And, for Illinois, the problem is that they cannot kick the can down the road any further because the next credit downgrade will make it impossible for them afford their current debt, which is really already impossible. Creditors will become much fewer and more expensive when Illinois becomes the first state of the union to hit junk-bond status and maybe the first to declare bankruptcy since the Great Depression, when Arkansas found itself “plain flat broke” and became the only state to ever default on its bonds (showing it can happen), effectively declaring its own bankruptcy, even if not sorted out through the federal courts. (Eventually, years later, Arkansas paid their bond holders.) Already, the Illinois ten-year bond yields are at 5.2%; but the world becomes exponentially worse when you hit junk-bond status and entire large institutions become outlawed from financing you.


“We have a very real deadline looming,” Senate Republican Leader Christine Radogno told Fox News. “The alternative to not finding a compromise will be devastating to Illinois.”


With or without bankruptcy, the state is already badly defaulting on its obligations. Bankruptcy is just a more orderly way of deciding who is not going to get paid and by how much. But the not getting paid part? Already here, and nearly a dozen states are falling into this kind of severe condition. The issue with state bankruptcy is that bankruptcy court is federal, putting state budgetary sovereignty under state’s rights under federal determination; but it can be done:


David Skeel, a law professor at the University of Pennsylvania … wrote outright that, “The constitutionality of bankruptcy-for-states is beyond serious dispute.” The key, as he sees it, is that bankruptcy would be entirely voluntary, which should eliminate any concerns about Federal intrusion on state sovereignty. (Zero Hedge)


And it has been done … long ago … and is now here again.

Economic denial is about to square up to economic reality, and reality always wins! Eventually, economic reality forces your hand in a catastrophic solution because of your profligate ways. Eventually, you end up as a truly cashless society. This summer, we get to watch that play out in Illinois to get a sense of what it will look like elsewhere.

At the end of the day, a broken state is a broken you.

The motto of the State of Illinois, Land of Lincoln, who held this great national union together, is “”State Sovereignty, National Union.”

Illinois is all of us.


[amazon_image id=”0615682561″ link=”true” target=”_blank” size=”medium” ]National Bankruptcy: Why the Middle Class Is Doomed[/amazon_image][amazon_image id=”B00CXL907I” link=”true” target=”_blank” size=”medium” ]When the World Breaks[/amazon_image][amazon_image id=”0060936428″ link=”true” target=”_blank” size=”medium” ]The Forgotten Man: A New History of the Great Depression[/amazon_image][amazon_image id=”B01KWXIBQO” link=”true” target=”_blank” size=”medium” ]No One’s Watching[/amazon_image]


  1. Ping from Bill Smith:

    “…dead wait…”

    Really ?

    • Ping from Knave_Dave:

      Would you believe I meant the younger population died waiting for the baby boomers to take responsibility for their own debts? No, I didn’t think so; so, I went back and corrected it.

  2. Ping from Auldenemy:

    A brilliant article David and one that left me feeling extremely sad.

  3. Ping from Chris P:

    For the past decade the rating’s agencies have been in the govts back pocket. If they rated federal , state and corperate debt the way it should there would be very few AAA rated bonds. We saw what happened to S&P when they tried to downgrade the US bonds.

  4. Ping from Kim:

    Speaking of California, I remember a few years back there was a post at Zerohedge about how the Monterey Shale formation was supposed to have been the Jesus Christ of all shale formations and a savior for California’s fiscal problems. It was supposed to have generated some $25 Billion in tax revenue and 2.5 million jobs. Turned out the firm making the claim was a big phony baloney and the EIA downgraded Monterey to zilch (pretty much). Point is, you gotta wonder how much Sacramento leveraged that oil play before the EIA pulled the rug out from under it. A lot of this fiscal trouble comes down to all kinds of fraud, fakery and Ponzi just like this. Now look at them. It’s time to pay up.

    On another note, it looks like the Illinois governor caved to raising taxes. A little too late- if he was going to raise taxes he should have done so. Why posture until the 12th hour just to cave anyway? Bunch of idiots running the place.

    • Ping from Knave_Dave:

      I would imagine there is something to your guess that California politicians would have said at points along the way, “Don’t worry about this year’s deficit; we have a huge oil play coming along in a couple of years, and we’ll have a surplus.” It’s the same baloney that politician play when they say (as they have in congress for decades now). We’re going to decrease taxes now, and we have budgeted for spending cuts down the road.”

      The now is, of course, immediately real; but the down-the-road part is pure fantasy because no congress down the road is ever going to hold itself to some former congress’s budget. They, too, will kick the spending cuts further down the road when their years come along so that they and their constituents don’t have to endure the pain. So, the future cuts that promise a more balanced budget is developing are always just smoke and mirrors. No congress today can tie the hands of some future congress as to what it will spend.

      • Ping from Kim:

        Yep, you hear it every election cycle- the enormous basket of bull**** about taxes and spending, and yet very few of these promises come to fruition. I don’t see how Moonbeam can’t not keep raising taxes to fund all those perks of being a California citizen- but there’s always someone else to pay for it.

        I’m sure MB couldn’t wait to get his greasy hands on all that oil revenue. Can you just imagine the hopes dashed and utter disappointment when the EIA swooped in and said nope? Turned out much of that tight oil is trapped in rock along fault lines. Aww, Jerry but who really cares about a little earthquake here and there and who cares about the massive amounts of water fracking requires in a desert zone when you’re swimming in $$$$?

        But you’re exactly right, we hear it every year. All the free sh** (excuse my zh language) all the false promises, the excuses, the lies, preying on hard-working, middle-class folks. How these politicians keep getting elected is anyone’s guess- Maxine “the Bottoms” Waters, Nancy Pelosi and Moonbeam? The inmates are running the asylum and the groundskeepers are electing them.

        I do enjoy chatting with you, sir!


  5. Ping from steven Fortin:

    I just took a look at the debt clock site for Illinois and saw something very telling. In the space of time that the in-state revenue drops by $1000 the spending increases nearly $8000!

  6. Ping from Kim:

    This brings the subject of Modern Monetary (Money) Theory up (again), to wit, can state government(s) print a fiat currency of its own to fund state government activities obviating state government bankruptcy/insolvency?

    If the FED used a MMT fiat system to bail out the states, the only way it would work would be for the fed govt. to openly acknowledge its currency is in fact a fiat; it would immediately lose world reserve currency status, but it would wipe out state and federal debt, and govt bills would get paid. But those under-funded/unfunded pension entitlements and other entitlements, i don’t know about those. And the stock market isn’t going to respond well to a fiat system. I would think if the govt. printed fiat money to fund itself, there would be limits to what it could fund.

    And you’re right, if the FED bails out Illinois, it will have to bail out New Jersey, Connecticut, California, et cet.

    • Ping from Knave_Dave:

      That’s an interesting question, Kim. I’ve never thought about that. I would suspect federal regulations were put in place upon the creation of the Fed that barred any bank or state or local government from creating its own money; but I don’t know.

  7. Ping from GonzoTheBurner:

    You will not be saved, there is no top-down solution coming. You are on your own as the “leaders” sneak out the exits and lock everyone else in side. Only the free market will prevail. Ancap for life!

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