New York is broke: Take it to the bank.
But it won’t matter
if we’re all stoned.
Contrary to what you might think, I did not pick a 2021 New York State bankruptcy date out of a hat. That was the date Jeffrey Gundlach gave as the date the 10-year treasury bond would hit six percent.
In economics, things don’t happen for a single reason.
They happen for several reasons, sometimes hundreds of reasons, cascading together. For New York though, it can be narrowed to a few.
1) New York’s economy is based on several bubbles that have created more bubbles.
There is, of course, the stock and bond market bubble which is the primary source for the giant $1.5 trillion GDP of New York City. This has led to a massive real estate bubble in NYC that has poured into Albany and Buffalo.
2) New York’s pension and state welfare programs are insolvent.
To be sure, the state’s pension is funded far better than most other states. The problem is, #1 above. New York, like most states, assumes it will earn 7.5% per year on its pension assets. Because of the bubble above, they’ve earned that in spades.
The problem is, (at least according to GMO) the next 20 years they will earn 2% per year. I’ll do the math. New York has $200bn in pension assets. They assume they will earn $15 billion a year. At 2% they’ll earn $4 billion. The other $11 billion will be made up by taxes.
That’s $11 billion – in new taxes – per year – for 20 years.
Certainly, other states have bigger problems, but other states don’t have as big a pension with such absurd payouts.
That’s $2,200 in NEW taxes for every family in New York. Which brings us to #3.
3) You can’t do business in New York.
New York’s tax, regulatory and political environment is so bad, businesses are leaving New York faster than you’d leave a burning hay loft. In New York, you can’t manufacture, frack, drill, mine and in fact, it’s so bad Amazon can’t even sell books here.
Amazon is only one fiasco. The Tesla plant in Buffalo is not economic after the state paid $247 million to build the plant. The biggest recipient of the Buffalo Billion was just incarcerated. Their huge milk processing plant in western NY, open less than 4 years is shut.
But it’s not just companies leaving, it’s people.
Even though technically, New York only loses 48,000 people per year, 190,000 leave and 140,000 immigrants move in. New York City has 3 million immigrants, 550,000 of which are illegal. 6 in 10 immigrants in New York are on welfare. This is 2 million people!
Welfare recipients do not pay taxes.
Contrary to the rhetoric, they do not add to the economy. Most get cash benefits, food stamps, medical are and the earned income credit. EIC is a refundable credit. That means you get credit even if you don’t pay taxes.
In other words, New York is replacing its taxpayers with welfare recipients.
None of these programs are, in and of themselves bad. They cost the US a little compared to what they spend, for example, on the Pentagon. The problem for New York, though, is demographic. They are losing productive people, people they pay to educate.
Bankruptcy isn’t the end of the world.
In fact, it’s not even a bad thing. But keep in mind, a calamity in the financial services industry will cause even greater problems in New York since they manage financial assets.
Furthermore, to get the 10-year treasury bond to 6%, (not a particularly high rate) interest rates would have to more than DOUBLE. With the 10-year at 6% mortgage rates would be above 10%. This means the average house would lose 50% of its value.
I can assure you when this happens no one will care about Global Climate Change.
They won’t care about gay marriage, what name is emblazoned on bathroom doors or how many vagina’s Donald Trump grabbed.
They will be melting tar and tearing apart pillows.