More than 30 governors — Republicans and Democrats alike — supported the state aid bill, granting $26.1 billion in fiscal relief to local governments facing yawning budget gaps and signed into law yesterday. Yet only four Republicans — Sens. Susan Collins and Olympia Snowe of Maine, and Reps. Anh “Joseph” Cao (La.) and Mike Castle (Del.) — ended up voting for the deficit-neutral bill.
Was the State aid bill another bailout? Simply follow the money for the answer.
When States run out of money, they must issue debt or reduce spending. As credit ratings decline, debt issuance becomes less an option for States. The best option tends to be reduction in spending, usually in the form of massive layoffs and cutbacks in social programs. These cutbacks, however, curtail economic growth in a consumption driven economy, which in turn, translates into lower revenues for the State and Federal government.
A vicious cycle, described as "The Formula" by Jim, is born. The long-term cycle or formula is illustrated below.
US Federal Budget (Surplus or Deficit As A % of GDP, 12 Month Moving Average) and Gold London P.M. Fixed:
The infusion of money (stimulus) from the Federal level is intended to break this cycle. Unfortunately, the Federal government must issue debt to provide money to the State and local governments. This is nothing more than a shift in debt burden from State to the Federal sector. Moreover, money transfers without investment will do little to increase economic growth in the future. In other words, once the stimulus has been consumed, more will be required.
Source: washingtonindependent.com
Source: maciverinstitute.com
Source: online.wsj.com
Source: nj.com
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