This seems to me to be the path that we (and Europe) are headed down. Spend, borrow, spend more, borrow more, max out your credit lines… Then throw up your hands and say, “I can never repay all this! You evil banks fraudulently ripped me off by extending me such generous credit!” Then smugly walk away, feeling like you’ve beaten the system.

There are two problems with this approach. First and foremost, it is immoral. If you borrow money, you should intend to repay it. Sometimes circumstances change, but a “change of heart” doesn’t qualify. Second, it becomes very difficult (and expensive) to borrow again once you have willfully defaulted. Once burned, twice shy?

The US can still at this time repay its debts *if* it takes them seriously. Would have been easier before we voted for the latest round of tax cuts, though, and I fear that we are nearing the point (if not past it already) where debt repayment becomes a political impossibility. Thus we are firmly set on the immoral and unethical path of planned default.

In that case, you execute the plan in two steps. First run up all the debt you can. Then aggressively balance your primary budget and declare that you will no longer recognize outstanding obligations.

Simple, no? I fear it may be the end to the dollar as a viable currency, though. Our trade partners accept dollars as payment, then invest the proceeds in Treasuries. If those Treasuries are worthless, they’ll likely insist on payment in a currency that they can spend/invest productively elsewhere. So while you are busy balancing the federal budget, remember to structure our domestic industry to be self-supporting without reliance on imports. Hmm… Might be trickier than my middle school teacher thought?

One feature of the housing crisis was that loans were made that would not have been made in the past. Similarly, I expect that bonds have been floated by towns and counties that never would have floated bonds in the past.

I like your observation of correlations going to 1 in a crisis. What we are seeing in Europe is a totally unsustainable situation where yields have been massively reset upward, with the already-weak nations taking the hardest hit. There is no reason why this can’t also happen in with states, cities and towns.

If states are held to the fire, it could get very bad in places.

By the way, I think Whitney could be right about ’50 to 100 sizeable defaults’ if we consider that there are thousands of counties and tens of thousands of towns and cities in the US. Take my state of Maryland for example. It will not default, but it has already axed much money that went consistently from the state to the local level every year. Now every locality is in the red. Good luck to every single one, especially the poor sections!

Be wary of bonds that don’t have the full taxing authority of the municipality behind them.

And as far as CA GO bonds are concerned, I believe they are second in line to education. But ahead of last-year-work-80-hours-a-week paycheck based pensions for 50 year old police and firefighters.

This is true, but failing to budget for debt service seems much easier than amending state constitutions. In a state like CA, amending the constitution is pretty easy, so that promise should be worth less. In states without referenda I’d take this difference to be an important one.