what exactly would happen if that occurs? in layman’s terms.
I think, like he talked about, the federal government will find a way to bail them out (either like TARP or a print-frenzy stimulus). Or, hopefully, they won’t. And the economy will grow like normal. Maybe taxes would get lower once the government hypothetically gives up and new/continually-successfully businesses will flourish there.
California will get a bail out. The US Federal Reserve will simply purchase California debt the same way it purchased the “Toxic” mortgage assets right in front of the media and then told the media that the TARP made money. Reporters and those dependent on govenrment will believe anything.
I don’t think any government on earth has enough fund to bail out . Even if the manages to do that, it will only hasten its own demise, perhaps bringing it about within the decade. From than on, banks will be forced to default, with the next BIG crisis in the making. With no government to reinflate the money supply, the crisis could eradicate a large portion of the (unneeded) capital stock. Form then on, it will all depend on whether a foreign government will step in to prop up the failed government (I’m looking at feat. Brasil).If not, perhaps e return to city-states would not be unthinkable.
If I remember correctly the largest holders of US municipal and State funds are pension funds and Asian (not just Chinese) investors. While Asian investors can be dumped without too much cerimony, pension funds are another matter completely. If California defaults, hundreds of thousand if not millions of US citizens could see their retirement benefits and life savings wiped out. Even if the Federal Reserve or the Treasury stepped in it could not be enough: California bonds have relatively high yields and if C-bonds were swapped for T-bonds, yields wouldn’t be enough to give investors guaranteed-by-contract returns. This would lead to another “subprime fiasco”, with ad personam legislature again benefitting financial institutions against individual “citizens”. But like just the “subprime fiasco”, the Federal Reserve and the Treasury have a big ally: we, the people. Let’s be honest: all is take is some Leftist going on Youtube using 1890 vintage language to blast “capitalists” and some “Tea Partier” going on Youtube using 1980 vintage language to blast “Big Government” and the crisis would be defused. Just like in Europe people don’t realize deficits have grown so massive because of all the “free stuff” they have grown accustomed to. I suggest you pay a visit to town meeting to see for yourself: people sound like a pack of obnoxious brats sitting on Santa’s lap and pestering him for presents.
Alexis de Tocqueville said “The American Republic will last until the Congress realizes it can bribe people with their own money”. Post WWII world has gone a step further: people are bribed with money that doesn’t exist!
The best part of this new California debt story is that it was broken after the elections. Oh, how things would have been different if the data were released a week before the elections.
So California is a banana republic.
It means that the State of California’s credit rating will go through the floor. Afterwards, no one will want to invest in the State of California. That’s a good thing, if you ask me.
If you thought the Tarp was big, that ain’t nothing compared to the bailouts for CA, NY, Il, etc. These will be true whoppers. The Federal Reserve is supposed to buy 600 billion of treasury bonds, it will simply buy CA bonds or maybe it already is. As long as the Fed exists, CA and these other bankrupt states will get watered down Federal Reserve Notes to keep the bankruptcy in perputity.