That Lurking Eleventh Amendment....

I've had a great day lurking with friends around a nasty three-way murder trial at the Old Bailey. Afterward, over drinks, we fell into conversation about American state debt, which as my one demented reader knows I think a critical element of the present crisis.

Several dozen States in the USA are now in theory insolvent, and are basically deferring the moment when they will have to confront this fact. When they do, the federal government will find itself constrained from coping.

States are already rolling out all the tricks in the book; California, for instance, is kicking down on the poor and vulnerable, taking over county, city, and school credit capacity, and issuing a sort of scrip in the form of IOUs.

Not to go all 'eternal recurrence' about this, but it has happened before. Except not in the context of the sort of global overcapacity and vast debt, equity and income imbalances that is leading even Ambrose-Evans Pritchard to toy with the idea that only socialism can fix things.

My friends pointed out that States regularly get into debt. They directed me to a tradition not invalidated which was institutionalised when State bosses protected their capacity to repudiate debt with the eleventh amendment to the American Constitution;
The Judicial power of the United States shall not be construed to extend to any suit in law or equity, commenced or prosecuted against one of the United States by Citizens of another State, or by Citizens or Subjects of any Foreign State.

What happens if a State tests the waters and decides not to pay back its bonds? What does the USA do with its debt? What do Asia and Europe do with any investments they may have in American debt, or any new designs for investment?

All of this as journalists and markets begin to work out that the sucker-rally, 'prosperity is just around the corner' line of this strange summer is nonsense. You know something is up when the Exile, Martin Kelly and Conservative Cabbie are all turning their eyes to the same oncoming storm. Talk about full-spectrum warnings....

Once again, and with feeling; if gold rust, what will iron do?


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