I would have thought that local authority bonds would be highly desired in the current climate as safer than private banks, so finance would still be fairly easy. But in the U.S. States and Cities can go bankrupt, as New York City was close to in 1975 before being saved by a $2.5 billion federal loan guarantee. The Northern California city of Vallejo is currently in the bankruptcy court, demonstrating it can go that far.

The WSJ take on the reason for bankruptcy fears is:

local governments around the country have committed to paying (in present value) $1.7 trillion in retiree benefits beyond the ability of their tax bases to fund them. In California alone, the share of city budgets going to these costs has more than doubled in just the last eight years to 26%.

Reuters adds that the risk of sagging local sales and property tax revenues in a recession is the other concern.

The WSJ pretty brutally outlines the major economic choice as it sees it, from the perspective of the already rich:

There are two choices: Either we can boot-strap our way out or inflate our way out.

You won't be hearing about any of this from the presidential campaigns, of course. Boot-strap means stripped-down tax and regulatory policies that allow the economy to grow faster -- what Barack Obama and Joe Biden continually anathematize as "deregulation." It also means some brutal revoking of promises to workers and retirees -- as Vallejo is trying to do. (Can't happen? Ask airline and steel and auto workers.) What's the alternative to the boot-strap approach? To pile on taxes even at the cost of economic stagnation, with the Fed increasingly under pressure to run the printing press to create an illusion of rising incomes.

Of course WSJ doesn't want the inflation approach, which is against the interests of those with large assets and relatively better for the poor. This U.S. election could be even more significant than I had already supposed.