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7 comments

  1. Boonton says:

    A question.

    Yawn, more bankruptcy hysteria. Taking Dreher’s numbers:

    California’s state debt $68B. From wikipedia its population is 36.7M with an average income of $54,000. Its state domestic product is $1.812T.

    That works out to $1,852.86 per person. Quite a few people manage credit balances of that size with less income than $54K per year.

    The $500B number he cites second comes from adding together the state’s debt with all munipalities. This is probably a bit deceptive, though, because some projects have dedicated revenue sources…..for example NJ’s parkway and turnpike has bonds (debt). The money to pay this debt comes from the tolls collected on these two highways. In theory if everyone stopped driving on those highways and there was no toll money the debt would go ‘bankrupt’ but is that a reasonable fear?

    Anyway, even at the $500B level that works out to $13,623.98 per person. That’s a bigger amount than before but assuming 5% interest rates (which is kind of high for state/muni debt) that’s $681.20 per person per year. Now if the sales tax is 8% (I think CA might be a bit higher), simply spending an average of $8,514.99 per year on consumption would yield enough tax revenue to cover the burden of servicing the debt. Since the average income is $54K per year, I think its fair to say the land of “The Housewives of Orange County” manages to spend that much on itself in consumption. Of course that’s not even considering things like state income tax, property tax, tolls, fines etc.

    Again the lesson here, as in the previous link about the UK being bankrupt, is demand serious analysis from anyone hawking a doomsday scenaro. Tossing out scary numbers for debt balances says nothing if its not put into context of the income and assets underlying that debt.

  2. Mark says:

    Boonton,
    You didn’t give any evidence that you actually read the serious analysis of the UK debt offered, so don’t insist that you want serious analysis.

  3. Boonton says:

    I read it but I’m not sure I’m following it. I’m probably going to have to take some more time to learn what these various measures of debt are measuring..

  4. Mark says:

    Boonton,
    Well, I didn’t read it carefully either as it used a lot of terminology that I don’t really know … not having any business background. But the point is you were asking for serious analysis … but it took me some prodding to finally admit that some existed. Given Iceland’s collapse, we’ve heard of these budgetary problems in CA for years, but recently Greece, and now the UK have surfaced as possible problems.

  5. Boonton says:

    There’s a few reasons why we hear about CA’s crises for years. One is a political tool. Whenever a budget hole opens up there’s a ‘crises’ requiring a deficit to be closed. You don’t hear about this with Dubai or Greece because they are essentially maxing out their credit cards. People worry more about the UK and CA because people who are serious about saving their money (pension funds, big money management etc.) do so with their bonds. People playing with Greek bonds or Dubai are more like speculators rolling the dice at the casino.

    Which leads to an important point whenever someone wants to start going off on a ‘debt crises’. Every dollar of debt is someone’s dollar of savings. To say ‘we’ should save more is the same as saying someone or something else should borrow more.

  6. Mark says:

    Boonton,
    I would have thought that the problem with Greece/Debai etc is that as individual countries economies melt down that’s going to stress the global economy … not endanger domestic bond speculation markets.

  7. Boonton says:

    The actual amount of money Greece and Dubai owe is pretty small in the scale of the global debt markets. The stress their failures cause is two fold. First is that the people they owe money too are people who owe money to you (you being big shot global bond trader). Since no one really knows who owns this debt, it could be anyone. So you pull back your lines of credit across the board. For bond traders, the cost of borrowing goes up whether or not those traders had holdings in Greece or Dubai’s debts.

    The second is overall confidence….you know the saying bad things happen in threes? If Greece and Dubai went under, whose next? Maybe you should bet on some other country being next. If a lot of people start doing that it can become a self-fulfilling prophecy. Say some country X has $5B in debt due in a year or two. Country X has had a good record of payments but its a poor country and its a lot of debt. If you and a lot of people start selling the debt short, country X won’t be able to roll it over. It will force a default and at which point people with short positions make out good.

    In contrast, a non-spooked financial system is not as vulnerable to ‘irrational runs’ like the above. If Greece defaults the loss is adsorbed by holders of Greek debt. Other debt is not impacted unless, for some reason, it is linked to the Greek debt that defaulted.