Tuesday, Jul 07, 2009
Will california start an avalaunch of USA Bond defaults?
Bloomberg: California’s Nightmare Will Kill Obamanomics: Kevin Hassett
Interesting article on the dowgrading of California's state bonds, this could feed through to other states and ultimatly UK bonds. At some piont the UK and US will run out of people willing to buy bonds and we will have to tax and cut. can governments do this before a crisis or are they incable until the they have run out of all other options.
Will the next Tory Government engineer a false crisis like this to allow them to cut public spending and allow the rich to keep thier assets intact?
Posted by the number cruncher @ 11:30 AM (1114 views) Add Comment
16 Comments
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1. japanese uncle said...
Some (Gerald Celente) started to call it Obamagedon!
http://www.youtube.com/watch?v=_18t2_XvZRA
2. Dunkindogdo said...
I'm a bit confused by the contradictory initial comment:
"At some piont the UK and US will run out of people willing to buy bonds and we will have to tax and cut. can governments do this before a crisis or are they incable until the they have run out of all other options.
Will the next Tory Government engineer a false crisis like this to allow them to cut public spending and allow the rich to keep thier assets intact?"
It's my understanding that nobody has engineered the current economic crisis (it would appear to be the result of the masses taking leave of their senses for the best part of a decade), and that the consensus of opinion across the political spectrum, already acknowledges that public finances are in a woeful state, which will require both spending cuts and tax increases to avert bankruptcy of UK plc, seemingly far in advance of the Conservative party needing to "engineer" an additional economic crisis.
3. icarus said...
Arnie, there's a right and a wrong way out of this mess.
The wrong way is what you're doing - issuing IOUs. What happens if people start paying their state income tax with them? If you accept them your tax revenue is down even further. If you don't accept them there may be a tax revolt. And what happens when state employees holding IOUs say they have no income tax obligation (State or Federal) because they haven't been paid (since )these IOUs aren't legal tender). And the banks aren't going to buy these 'toxic assets' in the expectation that the Fed will buy then back - Obama said he won't use Fed stimulus money to prop up California. Added to all this is that next quater's deficit is projected to be double the current deficit. There's going to be a downward spiral - California's credit rating will fall below the minimum required for most money market funds, which will sell their Cal bonds.
You could try turning the bonds into lottery tickets. The provinces of Argentina did that in 2001 but the bonds worked only in that province (other provinces had their own, competing lotteries). Another problem was credibility - the big winners were often mistresses of prominent politicians. Anyway the IOUs ended up with more and more zeros on them and the whole thing ended in chaos - bank runs, strikes, riots etc. Or maybe you could do something on the UK Premium Bonds model.
The right way is to form your own bank. Money is created by banks when banks make loans. Create a bank of California and extend credit (i.e. create money as loans). It's just old-fashioned fractional reserve stuff. For every $1 which people (or the state) deposit you create let's say $10 of chequebook money or demand deposits and lend it at interest. You multiply your revenues x 10 in loans. You can loan to the State of California at 0%. If your 2009 revenue is $130 bn you can deposit that in the bank and issue $1.3 trillion in loans. You could easily lend the state enough to cover the $23 bn deficit (that would require only $2.3 bn in deposits and $2.3 bn in capital).
This is precisely what North Dakota did during the Progressive era and now the state has a big surplus. The Bank of N Dakota was established in 1919 to free farmers and state businesses from the clutches of out-of-state bankers. The State deposits all its reneues in the bank and guarantees the deposits, and the bank's profits go to the state. It partners with other abnks in the state to make loans to state farmers and other businesses, buys municipal bonds, makes student loans etc. N Dakota is one of the very few states that are not only solvent but in substantial surplus.
California is big, its economy is bigger than all the BRICs apart from China. As the man said, you're like the airline that has everything it need to fly passengers except the tickets - and is grounded as a result.
Arnie, that advice will cost you $1 million - in legal tender.
4. debtfree said...
Is this the equivalent of a top 10 country going to the dogs? it has a BBB rating, 2 above junk..!
California surpassed France in 2000 to become the fifth largest economy in the world !!
My oh my, if this isn't a big enough warning about the USA/$ then I don't know what is.
5. icarus said...
N Dakota para read "revenues" and next para "needs"
6. uncle tom said...
This is really just a nasty, sour grapes, Republican rant.
Obama inherited the federal deficit problem, and a provision for public healthcare that was not only inferior to the rest of the developed world, but most developing countries as well. He needs to deal with both.
Yes California is in an appalling mess financially, and yes it needs to be sorted. But the current incumbent is a Republican, and the Republicans have been in power there for all but four of the last twenty five years.
For this writer to try blaming Obama is transparently disingenuous.
Bloomberg should know better than to publish this rubbish.
7. dead spider said...
"Instead of cash, those who do business with California will get slips of paper."
New headline just in :
California creates it's own fiat money system .
8. debtfree said...
@5 uncle tom
Obama may have inherited the federal deficit problem, but all he has done is add more fuel to the fire.
His spending and stimulus packages are off the scale.
9. alan said...
@debtfree,
The USA is about to launch another stimulus (Reuters says) according to Laura:
"The United States should be planning for a possible second round of fiscal stimulus to further prop up the economy after the $787 billion rescue package launched in February, an adviser to President Barack Obama said. "We should be planning on a contingency basis for a second round of stimulus," Laura D'Andrea Tyson, a member of the panel advising President Barack Obama on tackling the economic crisis. said on Tuesday".
10. the number cruncher said...
This article starts of interesting then degenerates into a rant about making sure the plebs do not get free healthcare.
Interestingly California's economy is mostly build on Americas military spending and an article like this is helping to make sure that Obama does not do something amazing, like start spending America's money on and USA NHS instead on very expensive weapons.
We are seeing battle lines being drawn to find out who ends up paying for the mess we are in - the rich or the poor.
I will be fascinated to see if Obama is the next FDR. FDR changed America and made it into a much more fair and just society by introducing progressive taxation system and financial regulation that protected America for a generation. I do hope Obama can parallel FDR's greatness and put America back on track.
11. inbreda said...
@9
unlikely given his paymasters, but still possible
at least until he gets his grassy knoll moment
12. gone-to-colombia said...
The post war Attlee government managed to introduce the NHS in the teeth of national bankruptcy, austerity, and the opposition of much of the medical profession. It should be possible to introduce much the same in the US. However, having lived there for several years the health care problem is really another manifestation of the race divide. Blacks and Hispanics are most often without health insurance, whites generally have it.
The whites do not want to lose their excellent health care system and do not want to pay more for others to have any health care coverage at all.
This is how many whites see it but the reality is that the poor get health care, it's the working middle income that get the worst deal, they usually get no health care but still have to pay taxes to pay for the health care of others.
A real Gordian Knot to deal with, and dreadfully unfair.
13. drewster said...
Icarus - great post!
14. drewster said...
Interesting analysis of who in California gets paid in cash, and who gets paid in IOUs:
Reuters: California: The haves and have-nots
Paid in cash:
University of California
Public Employees’ Retirement System
Legislators, legislative employees, and appointees
Judges
Department of Corrections
Health Care Services payments to Institutional Providers
Paid in IOUs:
Grants to aged, blind or disabled persons
People needing temporary assistance for basic family needs
People in drug prevention, treatment, and recovery services
Persons with developmental disablities
People in mental health treatment
Small Business Vendors
15. easybetman said...
@. icarus - Actually, creation of a bank on franctional reserve banking only works if the faith is there - just like any other bank. If there is $130bn of deposit, and you issue $1.3tn of loan and people wire $260bn to Citibank, overseas etc, then the "BankOfCalifornia" needs to borrow the dollar from the Fed. Fed won't take those loans as collateral unless they are secured debt. Result - BankOfCalifronia is busted.
The other option California has is to repeal, or partially repeat Federal income tax, or restrict the Federal rates, and increase the state income tax by the same amount, effectively siphoning Federal money for its own use.
16. icarus said...
drewster @12 - thanks, though I haven't heard from Arnie yet. @13 - no mention of salaries for most State employees.
number cruncher @9. Not too sure about FDR. He was a Wall Streeter and the Austrian economists rather paint him as prolonging the depression by propping up the powerful interests behind him instead of allowing bankruptcies and clearouts of bad investments and enabling the making of a fresh start. The depression did take a renewed downward turn in 1937.
A better place to look for inspiration is the Progressive Era (1890s to 1920s) the essence of which was to minimise unearned income or 'economic rent' (where a factor of production receives an income above the amount required to induce that factor into the production process or to continue in that process if it's already there), which comes about through some kind of monopolistic privilege or privatisation of the public domain. They taxed capital gains and property rentals more, and labour and enterprise less, they kept natural monopolies in the public domain and passed antitrust legislation. They also organised the financial sector to fund capital formation rather than, as nowadays, lending against property or income streams already there, or against shares for purposes of M&A and corporate raids, or for speculation in derivative swaps, all leading to debt-leveraged asset price inflation, debt overhead for the productive sectors and the enrichment of the few.
The result of the Progressive endeavour was to make the US an economic superpower, a position that today's feckless, scheming incumbents have squandered. That dominance is now based on no more than the fading power of the fiat dollar, a military paid for to a large extent by China, Japan and the oil states and an exploitative financial sector.
@easybetman - California must have the resources to set up a properly capitalised bank.