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Wow! That's a Lot of Debt!

NEW YORK (TheStreet) -- The markets are in turmoil because of the worry about the so-called PIIGS debts (Portugal, Ireland, Italy, Greece, and Spain).

In earlier writings, I opined that Greece is just the canary in the coal mine and that when we look homeward, we have our own huge debt issues which are not significantly different from those of the PIIGS countries. I believe that the only reason the European contagion has not yet spread to America is because of the dollar's status as the world's reserve currency. That era is coming to an end, and it would behoove America to get its house in order.

A May 14, 2010 Barron's piece We're Not Greece - Yet referred to a Royal Bank of Canada study which concluded that: Although the states of California, New York, New Jersey, Massachusetts and Illinois are comparable in terms of economic output and population to Portugal, Ireland, Italy, Greece and Spain, RBC finds that the states' debt burden are nowhere near that of the PIIGS. This, "even after including unfunded liabilities for the states' employees' pension and other benefits."

As you will see below, I take issue with the above conclusion, and the first half of this piece will deal with why. Basically, citizens of each U.S. state are responsible not only for the debt burdens of their states and localities, but they are also responsible for their proportionate share of the federal debt. As you will see, the combination of the two produces debt ratios far in excess of those of the PIIGS.

Table 1 shows the PIIGS data that the markets are concerned with.

Table 2 shows estimates (for fiscal year 2010) of the Population (1), State GDP (2), State Debt/State GDP (3), Local Debt/State GDP (4), Unfunded Pension/State GDP (5), Other Unfunded Benefits/State GDP (6), Total Debt/State GDP (7), and Per Capita Debt (8) for the states mentioned in the Barron's piece plus Michigan.

Using CA as an example, the population is rapidly approaching 40 million, the state's GDP is estimated at $1.87 trillion, the State Government Debt/State GDP is 7.4%, Local Government Debt/State GDP is 17.2%, Unfunded State Worker Pension Liability/State GDP is 27.8%, Unfunded Other Health and Benefit Liabilities/State GDP is 3.3% for a Total Debt/State GDP of 55.7%. Translating this into Debt Per Capita reveals that every CA citizen owes $26,000 for debt or liabilities contracted by their elected officials. Looking back at Table 1, this isn't too different than the Debt/GDP ratio of Spain. And looking down the Total Debt/State GDP column of Table 2, it becomes apparent that both NJ and IL have Debt/GDP ratios equivalent to that of Spain.

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