California, The Guinea Pig

In our worsening economy it appears that California will be the guinea pig for the US by issuing IOU’s. This is the 8th largest economy in the world and the state boasts 53 million inhabitants which has been reduced to, basically, being bankrupt. The state cannot pay its bills, but has some of the highest tax rates in the country. This is on top of a downgrade by some ratings agencies on its debt.

There is an argument that this is a test to see how cash strapped states handle their debts, as Obama turned his back on California a month or so ago. The state is now issuing IOU’s that pay 3.75% interest and will mature in October, presumably at least. Again, this is the 8th largest economy in the world, not the US, but the world. I guess this is another green shoot we keep hearing so much about.

Here is the larger issue, California is the most progressive state in the union and now it is broke because of government mismanagement and social programs. Could this be the fate of the US which is embarking on similar programs? The senators and assembly representatives, according to the governor, are more interested in their own projects than the well being of their overall state, sound familiar?

I fear this is the path that the US is bound to follow since there are so many similarities between California and the US. we cannot spend what we do not have, but that is not deterring our own government from trying this fruitless effort. Instead they want to leave the debt to our future generations who will have a much lower standard of living and much higher taxes, just to service the debt.

This is, of course, under the assumption that the rest of the world would continue to fund our spending. We think the rest of the world will eventually stop funding us and we will be left with 2 options:

1. Tax our way out which guarantees that politians will not be re-elected; or
2. Print our way out, the preferred method of paying debts off.

Everyone is worried about a country keeping a AAA rating when the reality is that is just dumb. Very few countries ever default, unless we pressure them to, they simply just print money to pay off the debt. The rating doesn’t matter at all, what does matter is the value of the currency when you pay it back to the creditor. Frankly, the US would be the largest beneficiary of either massive or hyperinflation and based on what we see one of the two is certainly in the cards.