Busted Flat

America’s budget difficulties and our massive deficit have combined with concerns about the Euro’s stability, becoming a dominant feature of news headlines for some time now.  With our total debt outstanding soaring well above $14 trillion according to the Treasury Department, worries surface suggesting we may go broke or that China will foreclose on us.  Though such comments smack of hysteria, how can they still be rationally addressed?  Let’s refer at an example from the recent past which may provide some clarification.

California, with a Gross State Product a bit over $1.9 trillion according to the World Bank, would qualify, if it were a nation, as a member of the G8 unlike smaller countries like Portugal, Ireland, Greece or Spain (the infamous PIGS causing such worries in Euroland).  In the middle of 2009 unemployment had hit a seventy-year high.  The Golden State found itself squeezed by falling revenue and rising costs, facing a fiscal dilemma.  Fitch downgraded the state’s credit to BBB, just a tad lower than the A- at which they had been rating it.  Governor Schwarzenegger and the state assembly were unable to agree on any way to resolve the enormous financial crisis.  In response to what the State Controller called “a massively unbalanced spending plan and a cash shortfall not seen since the Great Depression,” registered warrants, affectionately called California IOUs publically, were issued by the state in July.  While initially accepted by institutions, after a couple of weeks Bank of America, Wells Fargo, JP Morgan Chase and Citigroup decided to stop honoring them although others, including many credit unions, did not go along with this embargo.  The state was forced to begin slashing spending on major programs like education and healthcare in an attempt to rein in a crippling budget deficit.

Obviously, taken as a whole, our nation is much larger than a single component.  We have an economy with a GDP north of $14 trillion.  More importantly, the U.S. is a sovereign nation, giving it authority to set certain standards and influence some behavior, possibly like requiring banks to accept federal IOUs no matter what.  That was something California couldn’t do.  But certainly, while any comparison between California and the U.S. contains some huge flaws, we can see the state still remains in business.  Fitch restored its credit rating back to A- in April of 2010.  Arguably this does not address the larger questions centered around how we as a nation will ever pay off all our creditors foreign and domestic, but that is a question we don’t need to answer immediately or just by ourselves.  After all, as J. Paul Getty has been credited with saying, “If you owe the bank $100 that’s your problem.  If you owe the bank $100 million, that’s the bank’s problem.”