For the past several years an increasing number of economic commentators have been warning about the “looming bankruptcy” of the state of California. Well, we can stop writing such commentaries, because California’s bankruptcy is no longer merely imminent, it is here.
Once again I will make my case by beginning with definition of terms. “Bankruptcy” is defined (by Wikipedia) as “a person or an organization that cannot repay the debts it owes to its creditors”. Some will seek to define bankruptcy in more stringent terms, specifically that formal “default” is required to confirm such bankrupt status.
The fact remains that a debtor who can’t repay his debts will default, all that is uncertain is the timing. Thus to suggest that California is “not bankrupt” simply because formal default has not (yet) occurred is merely an exercise in both circular reasoning and semantics. To make my case that California is “bankrupt” all that I need to do is demonstrate that default has now become inevitable. That will not be difficult.
The starting point here is to (once again) shatter the utterly ridiculous myth that U.S. states and municipalities run “balanced budgets”. For those who have not yet abandoned this nonsensical fantasy, here’s a question for you: if California’s state and municipal governments have been running “balanced budgets” year after year, how can it be that they collectively owe more than $100 billion in debts (not counting countless billions more in “unfunded liabilities”)? Indeed, how could we even be discussing “bankruptcy” with entities which supposedly balance their budget each year?
Being able to borrow as much as you want to spend is not a “balanced budget”. It is nothing but the most painful example of “deadbeat math”, and it can be traced to another popular American misconception: that the U.S. “sells bonds”. A bond is nothing more than a category of loan. When the U.S. claims it is “selling bonds” this is every bit as absurd as a new “homeowner” claiming that they “sold their mortgage” to a bank. Claiming that one can “balance a budget” by “selling bonds” is in fact a double oxymoron (or “moron squared”)...
Read the rest: