Monday, December 7, 2009

Without Recourse Against the State

What really has me worried about the next leg down in the Great Collapse is the speed in which so many things can go catastrophically wrong.

The next excuses that the coming resurgence in negative mood will use almost certainly will include some of the following:

State and Local Revenue Crises

Will it be New York? California? New Jersey?

Think about the calamity in spending that will occur if/when states and localities suspend payments and cut staff. Next time you are out and about, take notice of just how many state and city employees there are in your area. Then think about all the small businesses and contractors that won't get paid if the states retrench. Then think about the services that will get cut or scaled back (snow plowing comes to mind as we move into winter).

Now think about the follow-on effects - the lawsuits, the secondary crises in things like property transactions, getting your vehicle(s) licensed in a timely manner, calls for major tax increases, etc. The lawsuits seem to be especially fertile ground. Here is a nice quote out of New Jersey from Paul Mulshine at The Star Ledger (h/t Karl Denninger):

"There exists the real possibility that a future Legislature will not make an appropriation for the payment of principal or interest on one or more of the contract bonds. In such a scenario, the bondholders would be without recourse against the state or its assets."

No recourse. Uh oh.

Now, the above quote is from a budget crisis that occurred back in 2001. This time around, we will get to find out which debtholders do have recourse and which don't. And does it matter if you are a holder of New Jersey state debt and they can't pay you back so you wind up part-owner in a state park or a local water system? And think of the crap rolling downhilll from there.

Infrastructure Hiccups

Just in Time Inventory systems, LEAN manufacturing and other logistics ideologies that require cheap and rapid transportation are incredibly vulnerable in times of anger, violence and negativity.

Petroleum supply disruptions will occur should war break out in the Middle East (especially now that Chavez runs Venezuela) and cause cascading failures in trucking and eventually rail transport. This is a known vulnerability and things could be patched together as long as the disruption wasn't for an extended period of time. That said - most big box store shelves would be bare inside of a week. Here's hoping some sort of plan is in place to determine who gets fuel when.

A bigger long-term concern to me is that of low-level violence against absurdly vulnerable infrastructure targets. Attacks on infrastructure (key bridges, the electricity grid, etc.) can create those one or two day delays that, when you get enough of them in various places, can cause a highly efficient system to destroy itself. Inefficient as inventory might seem in the current tax regime, we will learn the value of having "stuff" on hand in the coming years.

War

My festering worry is that Israel will attack Iran and that Iran retaliates by striking out at the petroleum distribution facilities in Saudi Arabia, as well as mining the Persian Gulf. I swing back and forth on this issue - some days I regard it as a very low probability and that it is being used as a fear meme by those who try to shape public mood to their ends. Other days I think the Israelis really consider the Iranians an existential threat and that they'll hit them with all they have - including nukes.

War in the Persian Gulf - especially one that goes badly for perceived U.S. interests could cause enough destruction and disruption to create months, if not years, of petroleum shortages. Without gasoline and diesel, you have no transportation and no farming. No farming, no food. No food - angry rioters with guns.

Have a good week.

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