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WHAT STATE DEBT MEANS FOR THE PRICE OF GOLD AND YOUR PORTFOLIO

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WHAT STATE DEBT MEANS FOR THE PRICE OF GOLD AND YOUR PORTFOLIO

Dr. Kal Kotecha

Throughout the history of the United States, there was only one state has ever had to declare bankruptcy, and that was during the Great Depression.  All of that may be about to change, however.  Illinois is presently facing a challenging financial crisis, one so severe that even the lottery may be shut down in its wake.

The truly unfortunate part of this whole situation is that the problem didn’t just spring up as part of a single poor choice, but has been an oncoming train for Illinois for quite some time.  One of the biggest problems the state faces is their pension system, a system so poorly funded that it was directly responsible for the state having its credit rating cut so far it now has the lowest in the country.

How severe is this situation?  The state has $13 billion dollars in unpaid bills, and $130 billion obligations for pensions that remain unfunded.1  As if that weren’t bad enough, the state’s entire budget is consumed by court-ordered payments, leaving the state without an operating budget.  The inability to meet these and other obligations will result in the state lotto being shut down as there’s no way the legislature can meet its yearly payment requirement.  As of June 30th, there is no money in the budget to pay prizes that would be awarded by the state.2  (just IOU’s)

An Unprecedented Solution May Be Used: State Bankruptcy

The situation is bad enough that the state has considered declaring Chapter 9 bankruptcy, a move that will require Congress getting involved.  While this is refuted by Steve Brown, Press Secretary for Michael Madigan the Illinois House Speaker, it’s suspicious that both Dick Durbin and Tammy Duckworth, Democratic US Senators for Illinois, refused to comment when asked for a statement about whether introducing a state bankruptcy measure would be considered.

Their hesitation is understandable, given that states do not have the same rights as city and county governments as pertains to bankruptcy.  In spite of that, certain legal and government experts have suggested that, in spite of the potential drawbacks, a properly handled bankruptcy stands as the best possible option than bailouts from the federal government or taxpayers.  In fact, it may be the only way to protect pensions and healthcare alike from drastic cuts that could lead to difficulties for thousands of people.

“Bankruptcy lets you get ahead of the problem” says David Skeel Jr., Law professor from the University of Pennsylvania.  Skeel believes that federal bankruptcy protection should be extended to states, and that Illinois stands as the perfect opportunity to demonstrate why.

  • Debts that are unable to be recovered get canceled.  Pension liabilities are included in these potential debts, which could permit $130 billion of debt to be eliminated in spite of the pension clause in the state constitution.
  • All existing employment contracts can be canceled when a state declares bankruptcy, allowing only favorable ones to be kept.  Collective bargaining agreements fall into this area as well.
  • In Bankruptcy the debt gets sorted out in an orderly fashion.  Any entity that can’t meet its obligation tends to fall into a chaotic free-for-all where creditors start flooding into the court system trying to ensure they get a piece of the pie before it’s all crumbs.  Bankruptcy prevents this litigious chaos storm. 1

So while the constitution explicitly provides the power to Congress to create bankruptcy laws, there are a lot of differing opinions on whether or not this is desirable.  Seventy years ago this power was supported in courts as applies to municipalities, there are those who are skeptical whether putting state finances in the hands of a Federal Bankruptcy court would cause break the tradition of states being independent sovereign bodies from the federal government.

Skeel believes that the voluntary nature of bankruptcy would remove any concerns about states sovereignty being undermined.  Regardless, it’s entirely possible that the courts would simply ignore the established rules in the event of a major financial emergency like the one brewing in Illinois, a point agreed with by Professor McConnell 1

Illinois has a present per-household debt of $27,000 in unfunded pension payments.  This crisis was ticking time bomb, growing as government pension funds grew to over 660 individual funds.  This might have been avoided if the state had been required to fully fund the tax pensions, preventing an ever growing body of debt, instead the money was spent on schools and infrastructure, leaving these debts growing and unmet.1

“We have tough, urgent choices to make,” said Governor Bruce Rauner “the legislature must be present to make them.”   To facilitate this he ordered 10-day special session during which they will hammer out a budget deal to put an end to this situation that is due to drag on to its third year.  Particularly frustrating to Rauner is that he feels the majority of the Democrats have been ignoring his recommendations on how to handle the crisis.3

That meeting seems to have failed to have born fruit, while an agreement was reached throughout the month on a blueprint of how to handle it, cooperation has been lacking to make it into action.  Fewer than 60 of the 118 House members responded to quorum calls on the 4th and 5th of July.  Will Illinois be the first state in over 80 years to file for bankruptcy?  It appears the jury is still out.

For Gold Investors this news can only be a good thing, and for potential pensioners a warning.  Gold is a great investment to prevent vulnerability to ones supposedly guaranteed pension being siphoned away by poor fiscal management on the part of our government.  One cannot overlook for those already invested this is only good news as gold thrives in an economy in upheaval.

Gold has been a go-to investment against an unhealthy economy, as evidenced by the spikes in value following the Brexit decision, and preceding the election of Trump due to his policies.  Both of these examples have shown that when economies are anticipated to experience a negative impact, gold prices skyrocket.  However, when economies are expected to stabilize, the price of gold drops.4

For those looking at getting into gold investing now could be the time – if Illinois does pursue bankruptcy it will pave the way for 12 other states to do the same.  With that kind of instability in government funds, gold should rise quickly in value – do you want to miss out on this potential boom?

Happy Investing!

Dr. Kal Kotecha

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  1. http://www.zerohedge.com/news/2017-03-26/bankruptcy-illinois-answer

2.http://www.foxnews.com/politics/2017/06/20/illinois-careens-into-financial-              meltdown-and-not-even-lottery-is-safe.html

  1. http://www.cbsnews.com/news/could-illinois-be-the-first-state-to-file-for-bankruptcy/
  2. https://www.thebalance.com/gold-prices-and-the-u-s-economy-3305656

 

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