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Wednesday, July 01, 2009


california goes broke

per clusterstock, california has declared a "fiscal state of emergency", creating yet another void-filling meme contextualized by of our culture of fear and perpetual panic.

minyan peter puts it into perspective.

Eighteen months ago, I wrote about "the end of the age of aspiration" -- that golden era when our lives appeared to be limited only by the size of our wants.

Since then, we've watched as Fannie (FNM), Freddie (FRE), and over 100 banks have failed: The "ground zero" of where our greatest want -- big, new houses - met our greatest excess -- leverage.

Then the second derivative hit, resulting in the bankruptcy of General Motors (GPM) and Chrysler, owing to that new car every 2 to 3 years, excess debt, and unaffordable retiree benefits.

But I would offer that today officially begins the third derivative: municipal finance. This is where our delusional desire for low taxes and extensive public services collides with an unreconcilable maelstrom of high unemployment, lower housing values, and truly unaffordable retiree commitments.

I don't profess to know how this one will resolve itself. As an interim step, California has announced that it will be meeting its obligations using script -- IOUs. I don't know how long employees and vendors are willing to work for nothing more than a promise. But I do know that it's entirely unsustainable.

But I can't emphasize how important it will be to watch this one. To date, as bank executives and auto industry leaders have thrown up their hands, the federal government has stepped in to fill the void -- albeit with unintended consequences.

How willing Congress and the White House will be to save California is unknown, but I don't think it's an exaggeration to say that "As goes California, so goes the nation."

And, not surprisingly, with unintended consequences.

california is trailblazing where a large minority (if not an eventual majority) of states are going.

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California may decide to simply declare their IOU's legal tender within the state of california. I would be interested to observe the effects if only from an academic perspective.

It seems likely, the the Federal Gov will opt to bail them out. But I wonder what the potential fall out from other less affluent states may be. If the act is interpreted cynically as financing rather generous public services voted to californians by californians in the interest of maintaining Obama's popularity in the state that regularly delivers the white house to his party would the rest line up to demand their "fair share" or would they revolt?

Interesting times we live in....

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"California may decide to simply declare their IOU's legal tender within the state of california. I would be interested to observe the effects if only from an academic perspective."

The consequences are simple for that experiment... Gresham's law. Why use "worthless" fiat Federal Reserve Notes when even more worthless California IOUs would suffice. Federal Reserve Notes would be hoarded while the California IOUs are circulated.

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A respect for greshham's law (and a will to power from on high) will ensure the feds prohibit california from that kind of experiment. I don't think even california politicians harbor hope for it, even if scrip becomes widely accepted.

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