by Charles Hugh Smith
Of Two Minds
We can anticipate a federal bailout of pension funds and one-time aid to state and local governments, but bailouts won’t repair the eroding foundations of tax revenues.
As we all know, the federal government can “print” money but state, county and city governments cannot. The Treasury can sell bonds to fund deficit spending, and the Federal Reserve can create currency out of thin air to buy the bonds, so federal spending can increase even as tax revenues crash.
State, county and city governments do not have this printing press. Yes, states and counties can sell municipal bonds for infrastructure projects, but they can’t sell bonds to support General Fund (i.e. everyday government services) expenditures.
As a result, massive declines in State, county and local tax revenues are already baked in as sales and payroll taxes drop and capital gains taxes–an essential source of revenues for many states–are set to collapse along with the stock market.