Guest Contributor – Bill Bonner’s Diary (United States) –
Editor’s Note: After decades of financial mismanagement, the pension troubles in states like Illinois are turning into a full-blown crisis. Today, colleague Nick Giambruno shows how America’s pension crisis will unfold, and how investors can profit as states turn to unconventional strategies…
Public pensions are a financial time bomb… and I see two ways to profit from the explosion.
In the U.S., unfunded public pension liabilities have surpassed $5 trillion. And that’s during an epic stock and bond market bubble.
Predictably, the government’s go-to “solution” is already making matters worse.
At first, distressed states simply increase taxes.
The state comptroller of Illinois—the most financially troubled state thanks to its pension crisis—summed it up well.
He said: “We can’t go bankrupt and we can’t print money. Taxpayers are going to have to pay this bill.”
State governments always squeeze property owners the hardest.
Last year, Americans paid over $300 billion in property taxes. In Illinois and other states, property tax bills exceeding $10,000 per year are not uncommon.
Most governments continually raise property tax rates, especially governments in bad financial health. It’s easy to simply ratchet up property taxes to bring in more revenue.
Case in point: Greece, where the country’s bankrupt government has made owning property a burden.
The following excerpt from The Guardian shows just how far Greece’s government has gone (emphasis mine):
The joke now doing the rounds is: if you want to punish your child, you threaten to pass on property to them… Greeks traditionally have always regarded property as a secure investment. But now it has become a huge millstone, given that the tax burden has increased sevenfold in the past two years alone.
It’s happened in Greece. It’s happened in Illinois, which has some of the highest property taxes in the U.S. (and rising). And it will happen elsewhere, especially in states struggling to meet pension obligations.
Here’s an excerpt from a local Chicago news outlet. The telling headline reads “Cook County property tax bills cause outrage”:
“Our taxes increased fivefold,” said William Phillips of Rogers Park. “I was expecting it to go up maybe twice as much but not four to five times as much.”
“My tax bill increased almost $1,200 dollars,” said Cornes King of Chatham.
“More than tripled. The city’s piece more than tripled,” said Logan Square resident Janelle Squire.
Fleecing Taxpayers Won’t Fix This Crisis
Politicians don’t seem to realize (or care) that it’s mathematically impossible—and counterproductive—to try to solve the pension crisis by raising taxes.
Even if tax rates double in places like Illinois, it still won’t solve the problem. And that’s assuming the overall tax collected stays the same—which it wouldn’t.
Higher taxes would make more people leave the state and actually decrease the amount collected.
This trend is already underway. More than half a million people have left Illinois over the past decade.
That includes over 3,000 millionaires who’ve fled Chicago in recent months.
Many left for a simple reason: rising taxes.
Nonetheless, raising taxes is exactly what politicians are doing. And they’ll continue to do it, even though they’re long past the point of diminishing returns.
The Other Easy “Solution”
Ultimately, the Federal Reserve will paper over the pension crisis by printing more currency.
Politically, it seems impossible that the government would default outright on its promises to millions of its own employees when the Fed can simply print more currency.
Ultimately, this will turn a local debt crisis into a national currency crisis. And many states will effectively default on their pension obligations anyway, since those payouts will be made with depreciated currency.
The pension crisis has clear investment implications for gold.
When the government tries to “solve” the pension crisis with the printing press, I expect investors to rush into gold.
Gold has been a reliable safe-haven asset for thousands of years. Unlike paper money, it has intrinsic value. That value does not depend on a politician’s promise.
I think gold will reach not just multi-year highs, but all-time highs.
That’s why you should position yourself now.
I think everyone should own some physical gold. Gold is the ultimate form of wealth insurance. It’s preserved wealth through every kind of crisis imaginable. It will preserve wealth during the next crisis, too.
Gold Isn’t the Only Way to Profit
The pension crisis is making states desperate for every penny they can get.
That desperation is making them open to new ideas. Necessity has a way of quickly changing people’s minds.
Because of that, I expect many states to further soften their marijuana laws as they look for more sources of revenue.
In many of the states that have or will legalize cannabis, the tax revenue will exceed that of alcohol and tobacco. That’s not something a cash-strapped state can turn away from.
Just look at what’s happened in Colorado, which legalized recreational use in 2012. Last year, its marijuana industry generated $1.3 billion in sales and $200 million in tax revenue.
A decade ago, Colorado was receiving zero in marijuana taxes.
The industry has also generated over $250 million in taxes for Washington state already.
In California, a recent study estimated that cannabis taxes would bring in at least $1.4 billion dollars each year.
Soon, cannabis tax revenue will become a permanent part of many state budgets. This will encourage other states to follow suit.
Cannabis taxes will generate a lot of money. Still, legalizing and taxing marijuana won’t solve the multitrillion-dollar pension crisis. However, for our purposes as investors, it doesn’t have to.
We’re betting that the pension crisis will boost the U.S. marijuana industry.
It’s already forcing states to look for new sources of revenue. Inevitably (and probably soon), they’ll find the economic benefits of legalized marijuana too good to pass up.
Legalized medical marijuana has already been approved in 29 states, plus Washington, D.C. And eight states (plus D.C.) have approved recreational use.
It’s only a matter of time before other states start cashing in on this trend, too.
And the best way for investors to cash in on the coming U.S. legal marijuana boom is through select publicly traded cannabis companies.
Those who get into these companies stand to make a fortune in the months ahead.
Editor, Crisis Investing
P.S. We recently released a new exclusive video that has all the details on how you can get in ahead of the herd. As you’ll see, this boom is set to be seven times bigger than the first pot mania… And it will kick off on October 31, when a new law passes.