On the Edge...

The Flow of Funds report came out today, some interesting data points. Consumers and businesses continue to de-lever at record pace but what's more interesting is the precipice local and state governments appear to be hanging over.

Source: Federal Reserve Flow of Funds Report, 3/11/2010.

Forced to deal with increasing unemployment and the associated benefits (see yesterday’s post) and a record drop-off in tax receipts (11% decline from October 2008 to September 2009 according to the Center on Budget and Policy Priorities), 2010 is setting up to be an ugly year. Governors and state legislators continue to prove they lack creativity. Rather than trying to increase the tax base by creating incentives for businesses and people to relocate (Nevada wooing Californians and Florida promoting film production are two examples that come immediately to mind) state-level politicians resorted to raising taxes and fees across the board. The lack of political entrepreneurs is startling.

"In 33 states, tax changes are increasing annual revenues, relative to what the state otherwise would have collected, by $31.7 billion. Even after accounting for a few states that lowered taxes, net tax changes for 2008-2009 total $29.7 billion in expected revenues, or 3.8 percent of total state revenues." -- Center on Budget and Policy Priorities 3/8/2010

The table below says it all.

Source: Center on Budget and Policy Priorities, 3/8/2010.

The $55 billion short-fall is being reflected in the municipal bond market, as credit default swaps (insurance against possible default) continue to rise which will only increase the cost (think interest rate) for issuing new municipal bonds potentially resulting in higher taxes to offset the increased cost of financing.

Source: ZeroHedge (www.zerohedge.com)

With the likelihood of Federal tax increases all but guaranteed (yes, letting tax rates "expire" to higher levels is the same as "raising" taxes) and with 33 states having already raised taxes, the noose around the consumer and small businesses is sure to get tighter. Deleveraging will continue and the prospects for growth given the current fact set and policy prescriptions are limited, at best.