Sometimes the light at the end of the tunnel means the worst is over. But yesterday's news made it clear that any light investors see right now could be an oncoming train. Just within the past 24 hours, for example ...
Moody's announced that it has begun to re-evaluate the states' debt more realistically. From now on, it will include the amount they owe to their pension plans before issuing credit ratings — an approach that is similar to the one it uses to rate corporate debt.
Considering the enormity of the pension catastrophe at the state level, this new, more honest method of rating state debt is virtually guaranteed to trigger mass downgrades of state debt.
Already, Moody's has found that the list of states with the biggest total indebtedness extends well beyond the usual suspects — California, New York, New Jersey and Illinois. Connecticut, Hawaii, Kentucky, Massachusetts, Mississippi, New Jersey and Rhode Island plus Puerto Rico have now been added to the list of states in danger.
Also yesterday, at the first hearing of the House Financial Services Committee, experts warned that the government will have to make deep, severe, painful cuts in the weeks ahead.
In written Capitol Hill testimony, one leading economist warned the committee that Social Security, Medicare and Medicaid must be cut. "I will be blunt," he said, "We cannot save Medicare in its current form."
Tens of millions of seniors — and future seniors — are now in danger of losing critical financial benefits that endanger their lives as well as their standard of living.
At the same time, the Congressional Budget Office (CBO) dropped its bombshell, announcing that the federal deficit for this year will be the highest on record. This makes it abundantly clear how Washington's hands are tied when it comes to bailing out failing state and local governments:
Washington will be flooded with a staggering $1.48 trillion in red ink this year — that's nearly 15% more than last year's $1.29 trillion deficit!
This is another huge setback: Previously, CBO had said that America's debt-to-GDP ratio would not hit 70% until 2020. With yesterday's report, it's expected to hit those levels THIS YEAR — nine years ahead of schedule!
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