On July 10th most banks will refuse to accept the script (IOU's) of the world's 8th largest economy (California). California also generates 12% of U.S. economy. Obviously, California cannot pay it's bills. But neither can the federal government which currently borrows $1 for every $2 that it spends. Of course, the Feds can print more fiat paper for it's spending needs.
Question. What is the difference between fiat paper and script? Isn't it the same animal with different stripes? So much paper being created...so little time left on the burning fuse of the debt bomb. Just what will the banks do with all this paper which is stacked on top of their mountains of declining mortgage paper?
Next question. How do you define an insolvent bank?
"Fitch lowered its rating of California’s general obligation bonds by two steps to BBB from A-, placing the debt two ranks above so-called high-yield, high-risk junk ratings, and said the state may be cut further. The credit-rating company last lowered its assessment of California on June 25.
California, the largest issuer of municipal bonds, last week began issuing IOUs for the second time since the Great Depression as Governor Arnold Schwarzenegger and lawmakers remained deadlocked over the budget cuts needed to make up for revenue lost because of the recession. California Controller John Chiang said the step was needed to conserve cash.
“The downgrade to ‘BBB’ is based on the state’s continued inability to achieve timely agreement on budgetary and cash flow solutions to its severe fiscal crisis,” Fitch said in a statement.
California, with the world’s eighth-largest economy, was already the lowest-rated U.S. state. Standard & Poor’s gives the state it’s A grade, the sixth-highest of 10 investment levels. The firm reaffirmed that assessment on July 1. Moody’s Investors Service rates the debt A2 and placed it on watch on June 19."