California Nightmare

Often, people will flippantly claim that the federal government will just print up some money when they need it. No one really seems to know exactly how this works, but everyone is pretty sure that it is true. More importantly, everyone seems to reluctantly accept that this is somehow legal, and marginally acceptable. But what if we were talking about California printing up a bunch of California Bucks instead of the federal government printing dollars? That could never happen – right?

According to various reports, California – which is at the epicenter of the housing collapse – may start doing just that. More than a little short on cash, the state may start paying its bills in IOUs. No, seriously. Since the state expects to be completely out of any and all cash and credit in weeks, the state will either “delay payments” or issue IOUs (presumably not on post-it notes).

How did this all happen anyway? No, I don’t mean how did they get into so much debt – that’s the easy part. What’s interesting is that only California seems to be in such severe trouble that S&P downgraded some of its debt another notch just today. Fortunately, most states are forced to balance their budget – courtesy of the guy on the ten dollar bill.

You see, after the 13 colonies won the Revolutionary War, it was time to start paying back the enormous amount of debt they had racked up while fending off the British. Each state had its own debt for which it alone was responsible. Everyone was content with this situation, except for Alexander Hamilton, who seemed to have visions of the United States that few were to understand in the 18th century.

Hamilton, however, eventually got his way (in return he agreed that the capital could be near Virginia instead of in New York), and the federal government took on all of the remaining debt of each of the states. The precendent was then set: each state would balance its own budget dealing with its own internal affairs, while the United States as a whole would share the debt brought about the things it did as a nation. Neat idea – in a centralizing, power-grabbing kind of way.

Even today, 43 states must (by their own state laws) balance their budget each year and are virtually debt free. California has never quite played by these rules though, and now it’s being forced to pay the price.

Ever since Alexander Hamilton’s plan to shift the debt burden to the federal government, the United States has enjoyed an endless supply of foreigners willing to loan it money. Ironically, as a few states get into trouble and near “bailout territory”, the official credit rating of the United States may fall to lows not seen before Hamilton’s plan in 1790.

I think we’ll be fine, though. I don’t see why we would need foreigners to loan us money when we can just print our own.