Professor Elam

Thursday Feb 4 2010

Our class subject this week is the bond market. The bigger picture is this. 

State budgets are losing revenue due to decreased sales taxes and property taxes, hard to collect on an empty house. And of course the hardest hit are the states with the worst real estate crisis, California and Nevada followed by AZ and FL, and then there is New York. 

Mish has a list of alternatives that a state officials have laid out, and finally I see one that I had predicted to other faculty members in the fall of 2008. They looked at me as though I was suggesting the Martians had landed, and it was, that sooner rather than later, govt salaries will be cut. Sure enough the Nevada Education Chancellor is suggesting closing entire schools, my personal favorite is the UN Law School or perhaps all education salaries 20%. The reason is that states cannot engage in deficit spending. 

This problem has to be addressed before this summer. This is the backdrop for market interest rates spiraling higher. The market is worried about possible default and falling bond ratings. 

As I said at the start of the semester, this is a particularly interesting time to be studying the liability side of balance sheets.