If "in debt" means "they can keep issuing bonds and people are buying them" then they're fine.
If it means "they cannot make payments on bonds and cannot issue new ones because nobody wants them" then the Feds will have to step in, or they'll have to liquidate state assets (including privatizing various governmental functions, selling land and leasing it back, etc), or raise taxes to balance the budget. They literally cannot print money.
This cycle has already destroyed a few cities (usually the city gets swallowed by the county).
The Federal gov't won't ever let California outright default on its debt. Why? It is the largest economy inside the US, it serves critical national security purposes, and being the biggest state debtor it will take dozens of other broke states down with it. A default would trigger a copycat landslide in the dozen other states who are also crippled with massive debt. If half the states default, all the dike holes the Fed has been filling with fingers over the past 2 years will have been for nought. It just can't be allowed to happen, period. At least in plain sight.
It's exactly like how the banks are keeping their 1+ years worth of "shadow" housing inventory off the market, so as to keep a floor on prices and prevent everyone from panicking and running for the exits at once.
And just like how the Federal bailouts were passed through back channels(i.e. Maiden Lane I & II, reserve swaps with foreign central banks, etc), and arcane accounting tricks that no congress-critter can comprehend, and the biggest political smoke & mirrors America has ever seen, so too will it go for the bailing out involvent states. It won't be Obama handing Schwarzenegger an oversized $30 billion dollar check on TV like a grinning Ed McMahon. No, it'll be a thousand tiny accounting tricks to prop up California, and keep the markets in perpetual doubt about the overall fiscal status of California.
Our entire Federal fiscal and monetary policy is a waiting game. They don't know what will happen, but the thinking is if we can all just hang on long enough for everyone to adjust to the economic new normal, then we can at least avoid an outright national collapse. Nobody on the planet can even know if this will work, but there are zero alternatives.
The debt (read: accumulated past deficits) isn't the only, or even main, issue; rather it's the future liabilities that are killers.
For example, California has unfunded pension liabilities of over $500 billion [1]. To put that number in perspective, it's almost seven times greater than all the outstanding voter-approved state general obligation bonds in California.
Not the same kind of money, though. This is money that is part of the problem. The money goes in and the debt goes up twice as much. Not the same as the California example above.
States are no more "immortal" than corporations. Plenty of states have either ceased to exist or repudiated their debts, leaving their creditors without recourse. If a state allows its debt to keep compounding, eventually it will find itself spending every cent of taxes it's capable of raising just to service the interest on that debt—and if anything should happen to shake creditors' confidence in its ability and/or willingness to repay those loans then the government becomes unable to borrow new money to repay its old debts and the entire Ponzi scheme collapses in on itself.
Oh, and issuing new currency to repay the loans is functionally equivalent to defaulting on the debt. Creditors will not lend to you if they expect that you may attempt to pay them back with money which is worth significantly less than what you originally borrowed. A smart creditor will just index the payments to something you can't easily manipulate.
They could increase taxes. If it's really more debt than they can handle the should be declaring bankruptcy, which is probably better than decades of stagnation anyway.
Eh, the thought is that revenues vary wildly with the state of the economy. If increased spending and/or tax cuts now can stimulate the economy, we'll have lots more money to pay down the debt next year, or so the theory goes.
Personally, I think it's pretty irritating that governments seems to think that the current revenue levels will continue forward no matter where we are in the business cycle. In the past, this has been most noticeable in state governments. Every time there is a boom, California goes and spends all the increased tax revenue and commits to spending it in the future. Of course, this is a problem when the economic boom ends.
I'm just suggesting that we tackle the debt problem when the economy is good. Doing so while unemployment is still 10+% is, I think, risking another downturn, which is going to make paying off the debt even harder.
Doesn't the government have to pay interest on the debt [1]? If it's "to itself" then that wouldn't be the case. So even if it can print the money to pay off the debt (or the interest) they could be forced to at an inopportune time. Such as when inflation is already elevated.
Increasing debt doesn't seem to be a guaranteed bad thing but seems to be a risk that's being taken. Other events such as defaults, wars, pandemics, etc... could push things over the edge.
Yes but that debt/printed money is interspersed throughout the economy in incredibly complicated ways and cannot easily be reversed. This does not necessarily mean the debt isn't real or can't cause problems.
The repayment of the debt for each year is usually by law a required set aside in budgeting before the rest of the revenue can be allocated. If there is less and less left for annual operation costs because we keep increasing our debt reliance, that will hurt people who rely on public services. If the laws are changed to make timely repayment on these bonds and treasuries optional, that will affect their credit rating, and the cost of borrowing, which means we have to pay more each year to get the same debt financing. It's not a good place to be.
The big problem is that most cities, states, and the US are bankrupt. The amount of money they are in debt is ridiculous and way out of proportion to the services they provide and the taxes that they can collect. For instance the city of cambridge, MA has over 1.2 Billion dollars of debt/unfunded liabilities for 70,000 people.
They are rating the chances of default. The bond purchasers will be paid, one way or another. Privatize the parking meters (like Chicago already did), the roads, the water utilities, etc. It's the people who live there that will pay for the deficit via increased taxes and fewer services.
If it means "they cannot make payments on bonds and cannot issue new ones because nobody wants them" then the Feds will have to step in, or they'll have to liquidate state assets (including privatizing various governmental functions, selling land and leasing it back, etc), or raise taxes to balance the budget. They literally cannot print money.
This cycle has already destroyed a few cities (usually the city gets swallowed by the county).
There's a step where they issue "warrants" like CA did a few times: https://taxfoundation.org/blog/california-issuing-state-warr...
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