How the US succeeds as a monetary union while Europe doesn’t, and why Greece is in a debt crisis while California isn’t:
1. The California banking system’s creditworthiness is not linked to the state’s.
>California’s banks are not heavily exposed to the California government’s credit risk because they are not the government’s principal source of funding, due to the tax-exempt nature of California’s debt.
>California has no responsibility for the solvency of the California banking system; instead the federal government is responsible for the solvency of all banks in the dollar zone.
>Bank deposits in the dollar zone are guaranteed by the US government.
>Because of the excellence of US bank accounting and regulation, dollar zone bank financial statements are credible.
>The American states have no control over their banks, and can’t order them to buy state debt.
>The Federal Reserve does not condition the provision of bank liquidity on the fiscal performance of the California government.
>The federal government does not condition state-level funding on state government fiscal performance.
>The Federal Reserve does not buy state government debt.
2. California’s market access is unrelated to its credit rating
>Because of the Constitutional accident of tax-exempt state debt, most of California’s debt is held by California residents and not by foreigners.
>Because California has a monopoly on the issuance of debt that is tax exempt in California, her access to the bond market is unimpaired despite her volatile credit risk.
>The California bond market is entirely domestic. It is neither national nor international.
3. The government of California is a small part of California’s economy
>Most government spending in California is federal, not state.
>The California economy would survive the bankruptcy of the state, because it would not bring down the banking system, and federal spending would continue.
>The US government does not condition its California spending on the state’s fiscal performance.
>Most California residents are not employees of the state, and the California public sector is small compared to that of Greece.
4. California bank deposits have no convertibility risk
>There is no risk of a California currency redenomination because, pursuant to the US Constitution and the outcome of the Civil War, California cannot exit the dollar zone, nor can she be expelled from it.
>California cannot impose currency or capital controls.