It’s Starting

6 months ago, I wrote that you can’t solve a debt problem by accumulating more debt which was the Bush, and now the Obama administration’s approach to solving the financial crisis. I believe taking this approach will not work – and nothing has changed my mind.

Tax revenues are falling while government spending is increasing creating a crisis situation in many states. This crisis could potentially cause traditionally safe investments such as muni-bonds to default, or at the very best, reduce their ratings.

California is a prime example. This from the state controller’s office:

State Controller John Chiang today released his monthly report detailing California’s cash balance, receipts and disbursements in May and through the first 11 months of the fiscal year. In May, revenue was $827 million below the latest projections found in the Governor’s May Budget Revision.

“Without immediate solutions from the Governor and Legislature, we are less than 50 days away from a meltdown of State government. This presents a terrible threat to California’s economy and to the State’s delivery of basic public services,” said Chiang. “A truly balanced budget is the only responsible way out of the worst cash crisis since the Great depression.” (Emphasis mine)

The Controller has met with Governor Schwarzenegger and Legislators in the past week to brief them on the State’s immediate cash problem. He also sent a letter to State leaders this morning with new cash projections – updated to reflect May actuals and final May Revision numbers from the Department of Finance – that continue to show the State exhausting all available cash by late July. The State is now projected to run $2.78 billion into the red on July 31.

The State started the fiscal year with a $1.45 billion cash deficit, which grew to $19.8 billion on May 31, 2009. That deficit is being covered by a combination of Revenue Anticipation Notes (RANs) and internal borrowing from special funds. Borrowing from special funds is expected to provide enough cash to fund State operations through the end of the fiscal year on June 30.

The controller is right in my opinion. The only responsible way out of this mess is to deal with the problem; live within our means and deal with the consequences NOW, not later. Pumping the economy full of newly, printed money will eventually make the landing harder than if we had just dealt with the problems now.

Yet instead, on a federal level, where the printing presses that make money reside, we’ve elected to take exactly the opposite approach. And, mark my words; the landing may be much harder than it needs to be.

From the rumblings out of California, that may be where the hard landing begins. Think about it, when is the last time that you’ve seen or heard a state controller use the terms ‘meltdown’ and ‘terrible threat’.

Some wise folks are choosing to keep their powder dry, raise their cash holdings on rallies and use absolute returns* investment strategies.

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· Absolute return portfolios ideally look to generate positive returns whether the overall market is up or down. No investment strategy is 100% accurate. Investing in market related securities involves a risk of principal loss. Prior to making any investment decision, the services of an appropriate professional should be sought as investment related recommendations are dependent upon the personal financial situation of each individual investor.