The LA Times is reporting that San Bernardino became the third city is less than a month to seek bankruptcy protection. Two other California cities, Stockton and Mammoth Lakes, filed bankruptcy in recent weeks. Although this is another example that bankruptcy is not just for individuals, it falls in line with the prediction of more government bankruptcies.
In his recent book “The Real Crash,” Peter Schiff points out that in Fiscal Year 2012, more than 40 states were in the red, and 27 states were running deficits of more than 10%. This presents a much more difficult problem for states, as compared to the federal government, because states cannot print money like the federal government. In addition to bankrupt states, Schiff predicts what he calls a “government bubble.” Schiff, who in 2004 accurately predicted the “housing bubble” that occurred in 2008, says that the government bubble is going to be the result of increased federal spending and the increasing of the money supply by the federal reserve, also known as printing money.
The federal government can print money as a temporary measure to delay financial problems, but state and local governments cannot do that, which is why we are seeing the first of several other government bankruptcies. The ability to print dollars as a way to delay a crisis only works as long as the dollar is the world reserve currency. Schiff contends that, in order for the dollar to remain the world reserve currency, the federal government must do a “sovereign equivalent” to a Chapter 11 bankruptcy, then pay off only a fraction of its debts to China, social security holders and other debt-holders – and then reorganize. If it is not done, then the dollar will ultimately lose world-reserve-currency status, and overnight the US will have to make drastic budget cuts. Overnight. Forty one cent of every dollar spent by the federal government is done with borrowed (or printed) money. At the very moment the dollar loses world-reserve- currency status, that forty one cents of every dollar spent by the US must stop. Imagine the chaos that will cause.