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Comment by JSig | Hacker News Reader

The author has a serious chip on his shoulder. Lots of politicking in this article that distract from the point being made.

Take a look at what the market thinks of the chances for a California default.

http://www.economist.com/blogs/dailychart/2010/11/credit-def...

As of a week ago, "The state with the biggest budget problems, California, is seen as slightly less likely to default than Spain but slightly more so than Italy."

Note that Spain is a total mess with an unemployment rate around 20%.

It's hard to default when your can print your own currency. I think the California bond holders will never take a haircut. The US will just print more dollars.

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I will not argue against the case that the US will print more dollars, because I think that will happen, but will they print enough to refloat California's obligations without specific funds being allocated by Congress for a bailout. The Republicans control enough votes to determine whether this happens or not, and it would appear that the political benefits to them could outweigh the damage in the near term.

One of Spain's big impediments to getting themselves out of their economic mess is that they're on the Euro. In ways similar to the varying economic situations in US states. http://www.nytimes.com/2010/11/29/opinion/29krugman.html

  > Take a look at what the market thinks of the chances
  > for a California default.

This assumes that 'the market' is a rational actor. But it's proven time and again that it isn't.

The question around the [ir]rationality of markets is irrelevant. Markets determine the cost of borrowing. If California wants to lower the cost of debt, or maintain the current (low) cost, it must value the opinion of the markets.

The calculation of the author, with state debt costing $6billion a year, assumes a constant cost of borrowing into the future! Investors have been selling municipal debt in the past two weeks, which will result in higher borrowing costs [1]. The same thing happened and is happening with the PIIGS, where those in power have been complacent about their ability to service debt because of the assumption of constant debt servicing costs.

[1] http://search.ft.com/search?queryText=muni&ftsearchType=...

November 25, 2010 US muni bond funds lose another $2.3bn November 18, 2010 US muni bond funds see record outflows November 16, 2010 US muni bonds see biggest drop since 2008

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