Friday, June 25, 2010

The Coming Inflation

As reported by Bloomberg:
Forty-six states face budget shortfalls that add up to $112 billion for the fiscal year ending next June, according to the Center on Budget and Policy Priorities, a Washington research institution. State spending is 12 percent of US GDP. “States are going to have to cut back spending and raise taxes the same way Greece and Spain are,” says Dean Baker, co-director of the Center for Economic and Policy Research in Washington.... State leaders won’t be able to ride out this cycle the way they have in the past. The budget holes are too large. For the first time since 1962, sales and income tax revenue fell for five straight quarters, through December 2009, according to the Nelson A Rockefeller Institute of Government at the State University of New York at Albany.... If they fail to act, state fiscal positions will steadily erode and hurt the US economy through 2060, according to a March 2010 report prepared for Congress by the US Government Accountability Office.
Of course, the US cannot turn its back on its states the way that the EU can turn its back on its members. Assuming budget cuts fail at the state level (as I predict they will), the US will have no recourse but to rout government spending and indebtedness through monetary expansion and inflation. In my opinion, an inflationary economic surge is a foregone conclusion regardless of which political party is in power.

Source: Robinson, E (2010, June 25), States of Crisis for 46 Governments Facing Greek-Style Deficits, Bloomberg.

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