Illinois is the latest financial crisis. Speculation is that it will file for bankruptcy, even though it is not possible without congressional approval. Congress granted Puerto Rico authority to file for bankruptcy. Why not Illinois? Why does it matter?
Illinois is much like Greece. It has a bloated government with massive pension obligations. Austerity measures are counter productive. The day to day expenses exceed revenue. The lottery, although profitable, will be suspended because the state can't pay for prizes. It is in a downward spiral, and all the feedbacks are positive, which means that everything it does to increase revenue increase instability.
Illinois already has one of the highest tax rates. The Democrats, as usual, want to raise taxes to kick the can down the road. The Republican plan is Democrat-lite. Neither Democrat nor Republicans are willing to make the hard choices. They just hope to kick the can down the road long enough, so the crisis won't happen on their watch. Increasing taxes on property will lead to people losing their land. More people will flee the state. Revenue will continue to decline.
Illinois is not the only state in trouble. It is not even in the top 5 in debt per capita. My concern is the domino effect. Once one state fails, a dozen others will follow. Any bailout will cripple the entire nation. Its effect won't be limited to the US. The European countries like Greece will fail. Once it fails, Italy and Spain will follow. China? Who knows? Maybe there is still power in its magic wand. But, there is a good reason why the Chinese have been investing in US real estate. It is a lack of confidence in its state of affairs.
The bailout would have been a sure thing under a second Clinton administration with its close ties to Chicago. I am less sure with a Trump administration. Trump does have much experience with bankruptcies, so, he may be able to help. Is Illinois too big to fail? Already, we see JP Morgan Chase making loans to keep the school system afloat. Does anyone think this is out of charity? JP Morgan will be made whole; make no mistake about it.
At the beginning of the 2007-2008 economic crisis, I saw this as a major catastrophe looming. But, I listened to all the experts. They said it would blow over in 6 months and be limited to the US. They were wrong, dead wrong. The world is yet to recover. This crisis is similar in scale. Imodium can slow down diarrhea, but it can't stop it. Likewise, the government can delay the collapse, but there is little that can stop it. All the state governments can do and have been doing is to kick the can down the road. The day of reckoning is here. The center can no longer hold. I've taken my $1,000 retirement fund out of the market as a precaution. I'm not listening to the experts this time.