Saturday, 10 September, 2011

Illinois is Broke, with a capital B - Is USA next?

Illinois is Broke, with a capital B - Is USA next?

The state of Illinois, USA is broke. Bankrupt. Kaput. It has stopped paying bills. Not yesterday. Not last week. Not last month. At least from May 2010.

Take a look at this link:

If you thought that the above is a stray example picked up from the past, think again. The situation has not improved. On the contrary, it has obviously worsened. Take a look:

Why am I bringing your attention to the above articles in a blog on personal finance with a focus on Indian readers?

Two quick reasons:

  1. When the US catches a cold, the world sneezes. When the US sneezes, the world develops pneumonia.
  2. When people or governments (howsoever rich or resourceful,) fail to follow principles of fiscal prudence, the end result is financial ruin.

We've been hearing about problems of countries like Greece, Iceland, Italy, etc.

Occasionally, we've been hearing about the US at a macro level. The extent of financial troubles at the state level within the US is relatively unknown to the majority of us.

However, the problems of the states is not merely their own problems. It will certainly, over a period of time, result in:

  • Either higher taxes or lower welfare benefits or hyper-inflation, or a combination thereof
  • People, Industries WILL move out of high cost, high-tax, low-infrastructure states to low-cost, low-tax, high-infrastructure states.
  • Ditto for countries. If the US as a whole does not pull up its socks, it will become increasingly uncompetitive in the world markets and it will proceed towards bankruptcy as a nation. That would be a disaster with unimaginable and unforeseen consequences to the rest of the world

If that's the situation for the nation which has the luxury to print the reserve currency of the world, imagine the plight of a country like India.

Our fiscal deficit is a pathetic reflection of the overall financial mess that we are in. This is despite the fact that we haven't had much of government spending on developing infrastructure in recent years. Reasons are many. I hope to cover it in future posts.

Remember the basic principles of fiscal prudence. Take care.

We're living in dangerous times.

Regards,

N


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