CALIFORNIA JOINS THE HIGH RISK DEFAULT LIST
12 June 2010 by Cullen Roche
27 Comments
California joins the list of countries/states with the highest probability of default:
Source: CMA
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Comments
How banking works:
1. Banks create money from nothing backed by nothing and lend it out.
2. This drives up prices just as a counterfeiter would do.
3. At some point, the debt-money creation scheme stalls and the rate of new money creation cannot keep up with money destruction (debt repayment). The money supply then shrinks and prices fall but notice the ratcheted up debt DOES NOT fall.
Short term solution? Debtor and saver bailout which will also fix the banks in nominal terms and fix government tax revenues too.
Long term solution? Liberty in money creation, usage and acceptance. It turns out that there are smarter solutions to the problem of money. Let’s let the free market reveal them.
Or we can be barbaric and return to gold. It is wise to diversify so I suppose it is wise to be at least a little barbaric and own some gold. A return to a government enforced gold standard will not be anything to cheer about though.
Banks don’t actually cause a net increase in the money supply. The money they lend you is offset by the liability to pay it back.
Exactly. Banks do not create net financial assets. All assets in a fractional reserve system net to zero.
“Banks do not create net financial assets. All assets in a fractional reserve system net to zero.” TPC
Yes, credit money is actually much worse than true money since it goes back to where it came from, thin-air, when it is repaid. Sort of a virtual money supply. However, the damage it does is real. It steals purchasing power as it is lent from all money holders including the poor and savers who are deprived of honest interest rates. Fractional reserve lending is actually more damaging than a modest amount of pure counterfeiting would be since only the principle is created by FR loans, not the interest. The rats in the FR rat race are required to compete for their interest payments out of each others loan principle. Oh, and isn’t a contracting money supply combined with NON-CONTRACTING debt fun?
Bankers extend credit in OTHER PEOPLES good and services, not their own. That makes them counterfeiters. Yes, Assets = Equity + Liabilities, but the banks create the Liabilities (credit money) in an exchange for a promise to repay it as an Asset. Yes, it all sums to zero but it is still counterfeiting.
OK, the distinction between money and credit moeny is noted, I’ll be more careful in my usage. And since I hope we’ll replace a great deal of credit money with genuine debt-free legal tender to bailout the debtors and compensate savers, the distinction is important. Thanks.
I think you’re missing the point. Your whole argument is based on the misconception that the Central Bank has complete control over the money supply via reserve requirements and monetary ops. That’s not true and we’re finding it out in real-time as we speak. Banks only lend what there is demand for. Adding more or less apples to the shelves does not help the shopkeeper sell more apples.
And not to bludgeon the point, but a great example is that many banking systems around the world have ZERO reserve requirements. Why? Because these banks have learned that banks are never reserve constrained. In other words, the reserve requirement basically doesn’t matter. I believe Canada and Australia are both examples of such systems.
“And not to bludgeon the point, but a great example is that many banking systems around the world have ZERO reserve requirements” TPC
Did I even mention reserve requirements? Mish Shedlock calls them “fictional reserves” and I agree. No, the distinction to be made is between “credit money” and real debt-free money. Reserve requirements are a red-herring; a 0% reserve requirement allow pure credit money counterfeiting and a 100% reserve requirement allows none. Anything in between is just degrees of dishonesty.
“Banks only lend what there is demand for.” TPC
OK, I see your point. However, with a 100% reserve requirement, banks could not create (credit) money. The demand for money and the supply of it would meet at a given interest rate.
“And not to bludgeon the point… ” TPC
No, I appreciate a well made point. And if I seem to bludgeon a point, it is a learning technique of mine; please feel free to refute me.
“That’s not true and we’re finding it out in real-time as we speak. ” TPC
These are exciting times.
100% reserves? So you’re proposing a world without credit? That would be a very hard world to live in. Impossible in my opinion. Credit serves a great deal of good. Whether it is financing payroll or financing a car. A world without debt would sap a great deal of growth from the economy. The problem is not debt, but the levels of debt.
We have a financial sector that has become so large and powerful that they suck their customers of life via debt and fees. Combined with a govt that doesn’t understand the monetary system and we get what we have today. A private sector up to its neck in debt. This could be remedied to a large extent with tax cuts and regulation, but neither are really occurring (yet).
“100% reserves? So you’re proposing a world without credit? ” TPC
No, I propose two things:
1. A bailout of debtors and compensation to savers via the creation and equal distribution of a sufficient amount of debt-free legal tender to every adult in the US. Reserve requirements might have to be set to 100% to prevent hyper-inflation till reform is implemented.
2. Genuine, fundamental reform including alternative private monies, the abolition of legal tender laws, the abolition of the capital gains tax, etc.
Credit these days is essentially theft (or borrowing without permission) of purchasing power from all money holders including the poor. The free market could provide honest forms of credit and money. Common stock as money is one example.
So you’re proposing a bailout of everyone? Just credit everyone’s accounts. That would be disastrous. We’d have overnight hyperinflation.
Plus, a 100% reserve requirement implies no credit. Banks couldn’t lend. It wouldn’t work. How would the economy function in this world? It wouldn’t….
But what if the debt/liability can never be paid back, does it still sum to zero or is the equation essentially wrecked?
Well, banker’s equity should get wiped out but I doubt honest accounting is being followed. Also, defaults are good since they convert credit money bound for destruction to private debt-free money via the FDIC.
Thank you FB, I think I sort of get it.
“… , I think I sort of get it.” ilene
Banking is deliberately shrouded in mystery, imo. As far as I can tell, it is sort of competitive counterfeiting backed by legal tender laws and other government privileges.
I suggest Murray N. Rothbard’s “The Mystery of Money” available as a nice hardcover or a free pdf download from mises.org.
The more people understand money and banking, the sooner we will get needed reform. The battle has been raging for centuries and many very famous people have been involved in it so it is well worth understanding.
Hi Pragcap, could you tell me what mid spread is and cpd? thank you! – Ilene
MS is the midpoint between bid/ask spread. CPD is cumulative probability of default.
Thank you TPC.
Question for TPC and the board: If CA defaults on its G.O. debt, and subsequently is bailed out by the U.S. Federal Govt via their full faith and credit backing, should citizens from all 50 states then get to vote CA elections?
Will never happen. We would write a check to CA. This is the great difference between the USA and the EMU. The EMU could literally write a check to Greece, but they won’t (and shouldn’t). The Federal govt writes checks to CA (and other states) every year. It just so happens that CA is in a particularly nasty rut right now mainly due to their being the epicenter of the real estate debacle. They could learn quite a bit from Texas and the S&L crisis. Lending standards and regulation could do a great deal to help CA avoid this sort of a problem in the future. Texas is literally the blueprint for this.
So, it’s not really a realistic question because CA will never be allowed default without some insane political folly.
We all know bondholders would be made whole, but, TPC, that is my point. Yes, a check would be written to cover all coupon payments to make it look like they were paying their debts. But the reality is they couldn’t and wouldn’t without that Fed check. That Fed check comes from everyone in the country.
Thus my question. If business as usual in CA leads directly to bankruptcy (which apparently it does) then why should they be allowed to continue to do business as usual on the backs of the other 49 states?
Without then letting everyone in the country vote in CA it would be nothing less than TAXATION WITHOUT REPRESENTATION.
Could any state survive without any govt funding? Is there a state in the nation that doesn’t receive federal funding?
I am not advocating bailouts, but if it came down to it we should provide them with funding. I am not an expert on the CA budget situation, but I don’t think any state should complain about receiving federal aid. They all get it and they all should. The real crux of the issue is how they spend this money. Obviously, CA needs to cut some programs and eliminate a huge portion of its spending, but that doesn’t mean the govt should not allocate funds to them.
Wouldn’t the check to CA increase US debt? Doesn’t the increased US debt require increased taxes to service it? And isn’t there a limit on how much can be raised in the form of taxes (realistically)?
“Wouldn’t the check to CA increase US debt? Doesn’t the increased US debt require increased taxes to service it? ” Anonymouse
I say no. Lincoln fought the War against the States with debt-free, legal tender (Greenbacks). The US Treasury could do the same thing to bail-out the states. However, a much more effective, direct solution would be to bailout the debtors and compensate the savers in California. That would fix the state’s budget woes too AND the banks.
Of course fundamental reform is needed in money and banking too to prevent this problem from reoccurring.
What debt? The USA is a monopoly issuer of currency in a floating exchange system. Taxes fund nothing. Take a check to the IRS next year and see what they do with it. It doesn’t go get deposited in a bank. It gets thrown in a paper shredder unless its pretty and new in which case it goes back into circulation. Govt doesn’t spend your taxes.
The bogey is inflation and we are in a highly DEflationary environment. Everyone thinks we need higher taxes to finance the deficit. I caught a second of Cramer on Friday saying we need to “refinance our debt at these low rates before they go up”. It’s laughable. These people have no clue how the system works.
Bond yields continue to hit “record lows” and yet the deficit hawks and inflationistas still rule the day because they have convinced everyone that the US govt is the next Greece and that we live in a gold standard world and that their household is just like the US govt. Easy to understand, sure, but totally dead wrong.
Anyhow, with inflation VERY low we can afford to write a check to CA if we have to. I would prefer it not come to that, but the CA budget is already very nasty for the upcoming year and is unlikely to solve their problems. It’s very similar to Greece at the state level. The govt writes checks to states every year. We dont call these annual payments “bailouts” so why would we not write a check to CA if they needed the funding? In my opinion, any patriotic American should be in full favor of helping drive the recovery of America’s largest state economy.
Your taxes will only increase if Obama and the crew continue to view the deficit as a potential solvency problem which is entirely insane. Unfortunately, that looks like the path we’re headed down and that means the paper shredder at the IRS will be mighty busy in the coming years….
“So you’re proposing a bailout of everyone? Just credit everyone’s accounts.” TPC
Yes
“That would be disastrous. We’d have overnight hyperinflation.” TPC
How? I can see a one time burst of price inflation but with a 100% reserve requirement (temporary) how could new credit money be created to drive inflation?
“Plus, a 100% reserve requirement implies no credit. Banks couldn’t lend.” TPC
Correction, banks could not create new credit money. They could however lend their own capital and funds deposited for the purpose of being lent. Remember, there would be a lot of new, debt-free bailout money in the system to lend. The banks would not need to multiply it. Essentially, credit money would be replaced with debt-free legal tender.
“It wouldn’t work. How would the economy function in this world? It wouldn’t….” TPC
The 100% reserve requirement need only apply to government monopoly money and only temporarily till the bailout is over and reform is achieved. After that we’d have free banking and alternative private money supplies in addition to government issued, non-legal tender monies for tax and fee purposes.
“So you’re proposing a bailout of everyone? Just credit everyone’s accounts. ” TPC
Wouldn’t a bailout of everyone be a bailout of no one except in nominal terms? Isn’t everyone suffering from a shortage of debt-free money; borrowers, savers, banks and governments?
ben will push a button and TPC notes will take out the minuses in their balance sheet.
it will be pyschologically/economically unsettling…….but a drop in the bucket.
the other states will line up…..gold will go up out of fear….