There is more open talk about U.S. states filing for bankruptcy.  Although I don’t see the Republicans in the House of Representatives doing any great things, it does seem that a Republican majority in the House makes it less likely that state governments will get a bailout from Washington DC.

The states that are the worst off financially are blue states (perhaps not coincidentally).  Some of the states that are in real trouble are Illinois, California, New York, and New Jersey.  Why would the Republicans help in a bailout for states that usually vote Democratic?

It is hard to say which state is the worst.  New Jersey has a Republican governor now and he is actually somewhat fiscally conservative, at least compared to others that we hear the term used for.  New York, while in trouble, did not get as big of a bust in the housing market.  New York City is still a place where a lot of people want to live and work and there isn’t much land there.

I think the two leading contenders for bankruptcy are California and Illinois.  Both state governments are in massive debt and they have almost kicked the can down the road as far as they can.  They are in severe debt.  They are both in a situation similar to Greece or Ireland.  State governments cannot print money to hold off the problem.

This is why state bankruptcies will be a precursor to any implosion in DC.  The federal government can continue to kick the can down the road until it faces massive inflation or hyperinflation.  It can continue to run massive deficits because of the Fed’s monopoly on the money we use.  The states do not have this privilege.  The states will truly run out of money and will be unable to pay the bills.  The only choice will eventually be bankruptcy and dramatic cuts in spending.  Overall, while it will be painful for many, it will be a good thing for the long-term.

If you own any municipal bonds, get out.  If you are dependent on a state or city pension, start saving more money and be prepared for this money to be cut.  If you are in a college pre-paid fund for your child, you might want to consider pulling the money if you can, especially if your child is years away from going to college.

All of this talk of states filing for bankruptcy would have been unheard of just a few years ago.  It just tells us how dire of a situation things are in.