Streetwise Professor

August 7, 2009

Trendsetter? I hope not

Filed under: Economics,Politics — The Professor @ 1:18 pm

California prides itself as being the trendsetter for the nation.  Hopefully this is one California development that will not be a harbinger for the country:

Russia Beats California as Default Swaps Favor BRICs

Investor demand for emerging-market bonds is driving the cost of insuring against debt defaults below industrialized governments for the first time.

Credit-default swap prices from Turkey to Indonesia are falling as bonds rise amid signs that their economies are recovering faster than developed nations. As the U.S. and U.K. borrow record amounts to fund bank bailouts and stimulus, Brazil, Russia, India and China have $3 trillion in reserves, up 19 percent from January 2008 and now 43 percent of the worldwide total, data compiled by Bloomberg show.

The annual cost of protecting holdings in Turkey’s bonds fell by half to $200,000 per $10 million for five years, or 200 basis points, sinking below New York City swaps for two weeks starting July 22, Bloomberg data show. Indonesia debt insurance dropped below Michigan the next day.  Brazil swaps just had their biggest four-month slide ever. For  China, protection is near the cheapest in a year. Eleven years after Russia defaulted, investors want less to insure its debt than California’s.

. . . .

Swaps on California have risen more than three-fold in the past year as its credit rating was lowered two levels to Baa1 by Moody’s, the same level as Russia, which reneged on $40 billion of sovereign debt payments in 1998. Russian default swaps are near a 10-month low of 255 basis points, about 20 basis points less than contracts linked to California. The former Soviet state’s 7.5 percent, 2030 dollar bonds are at a 2 1/2-month high of 101.74 cents on the dollar.

“If California is issuing their own dummy currency in the form of IOUs, that’s not a good sign,” said Augustus’ McNamara.

I pray that the rest of the country will take heed of the literal and figurative bankruptcy of the “progressive” California approach to government and regulation, and put a screeching halt to the Obama administration’s campaign to bring it to the rest of the nation.  For if the administration succeeds, we may be reading headlines like “Russia Beats US as Default Swaps Favor BRICs.”

This is said only half in jest.  The California model is unsustainable, and provides a chilling example of how the most vibrant economy and polity in the world can be undermined by spendthrift behavior and regulatory excess.  Indeed, California’s very bounty makes it most able to withstand such lunacy.  The rest of the country, as favored (relative to the rest of the world) as it is, has less of a margin for error.

Adam Smith said there is a lot of ruin in a country, and there is more ruin in California than just about anywhere in the world.  But the governing class in the state is testing just how much ruin there is.  Extending the California model to the nation at large will almost certainly ruin us.  But Obama is delegating implementation of virtually his entire vision to the Pelosis, Waxmans, and Boxers of the world.  That is, to the poster children for the mindset that is driving California into penury.  That cannot end well–unless it ends by their failure to achieve their dreams (i.e,. my nightmares).

But there is hope.  They are encountering resistance that they never expected.  The next two months–the August recess, and the days after Congress’s return after Labor Day–could be among the most historically important period in the country’s recent history.

When deciding whom to support, I suggest taking a close look at California,  America’s Ghost of Christmas Future.

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  1. One good thing in my opinion is that both Cap n Trade and now Obama’s healthcare plan are dead in the water. Obama and congress lost control of the healthcare plan narrative. It’s falling apart. It’s slipping away in poll after poll.

    As far as Obama “delegating implementation of virtually his entire vision to the Pelosis, Waxmans, and Boxers of the world”, what else can one expect of an Empty Suit.

    Comment by penny — August 7, 2009 @ 4:04 pm

  2. I’m not surprised. No matter the institutional differences, the macroeconomics trump everything and here Russia is far better off than California or the US in general.

    Comment by Sublime Oblivion — August 7, 2009 @ 5:52 pm


    SAN FRANCISCO (CN) – Small businesses that received $682 million in IOUs from the state say California expects them to pay taxes on the worthless scraps of paper, but refuses to accept its own IOUs to pay debts or taxes. The vendors’ federal class action claims the state is trying to balance its budget on their backs. …

    Sadly, you’re completely right on California. A pity really since in many ways its the best state, both warm AND socially progressive.

    Comment by Sublime Oblivion — August 9, 2009 @ 5:43 am

  4. Seems to me that the only California model to be avoided is the one conservatives implemented, mostly through citizen referenda, starting way back with angry man Howard Jarvis. You can have all of the government you want, including all of the regulation citizens voted for, but no one has to pay any of the costs. Definitely not a model to be followed.

    Comment by Dennis — August 10, 2009 @ 2:55 am

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