The battle for the public sector is on. The Governor of Wisconsin just announced what amounts to be the abolishment of public sector unions in his state. What an incredible contrast of the health of the private sector x/banks, reflected is in higher equity prices, and the sickness of the public sector reflected in huge budget deficits and collapsing bond prices.
Some macro traders are having difficulty making this distinction and have missed the equity move. There is a tipping point, however, where the public sector crisis does spillover into a general risk aversion. Ms. Whitney thinks it is close. We’re not so sure and think it will probably start with concerns over the Federal government’s budget imbalances.
The California Legislative Analyst’s Office (LAO) really nails the issue with the below quotes, which embodies what is going to create real political conflict between those with defined benefit pensions versus those who don’t and the younger generation who has to pay for them. The sad thing is that it’s not the fault of government retirees but the political leaders who set up the system. Their incompetence has sown the seeds for the coming ugly war between generations. The LAO is correctly reading the political tea leaves, “We doubt the substantial disparity….can be sustained much longer.”
We just read a report of a retired county employee in Northern California who will receive his highest year’s pay for life, $208k, and in eight years will be eligible to collect social security benefits. Seriously, should this guy be able to collect SSI when his all in private pension will probably exceed $250K per year at the same time the Feds are cutting veteran benefits? We have nothing personal against the guy, but come on? Henry Blodget also made promises to retirees dependent on 401Ks, who now are their playing golf on muni courses rather than Pebble Beach.
How do think the young teachers who are getting their $32K salaries cut feel? Or citizens who feel less safe because counties are gutting their sheriff department budgets? Even worse, we’re cutting classroom education budgets to finance these types of pensions, while the Chinese doubles, triples, and multiplies their education budget. A spectre is haunting the public sector and his name ain’t Phil! (click here if chart is not observable)