California as National Trend Setter? In This Case, Let's Hope Not

by: Craig Pirrong

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.