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Now, let's see. According to the state treasurer, who should know, California (population 36.4 million) has sovereign debt of $60-billion (U.S.) - $1,650 per person. Investors rate California's 10-year bonds as slightly less risky than Croatia's. Reputable academic analysts anticipate bankruptcy. (As Bill Watkins, director of the Center for Economic Research and Forecasting at California Lutheran University, put it: "California is now more likely to default than it is not to default." )

On the other hand, Ontario (population 13 million) has debt of $220-billion (Canadian) - $16,900 per person - an economy with roughly one-third the people and roughly 10 times the per-capita debt. California would need more than $600-billion (U.S.) in debt to equal Ontario. So why does no one appear fussed by Ontario's record-setting accumulation of debt?

Investors require a risk premium on a 10-year Ontario bond only marginally higher than they require of a Government of Canada bond: 50 basis points or less. (A basis point is one-hundredth of one percentage point.) The comparable risk premium on a 10-year California bond is 450 basis points - or 100 basis points higher than on a Portugal bond or an Ireland bond.

There are a number of explanations for the apparent indifference to Ontario's debt (though the province's bond rating has been cut in the last year) compared with that of California. The simplest one is the least plausible: that California's books are crooked. How could California, so heavily audited, conceal significant debt? When The Sacramento Bee newspaper endeavoured to document California's total debt obligations (including municipal debt), it stopped counting at $500-billion - more than eight times the debt officially reported by the state treasurer.

Here at home, Canadians know without equivocation that Ontario is far too big to fail - far more so than a couple of big U.S. banks or, for that matter, the state of California. By itself, California is the world's eighth-largest economy but it represents only 15 per cent of the U.S. economy. Ontario represents 35 per cent of the Canadian economy. A bankrupt Ontario is a bankrupt Canada.

In any serious economic crisis, the federal government would assume Ontario's debt (as it would similarly assume Quebec's debt). This is moral hazard, of course, the kind of insurance policy that encourages Ontario and Quebec to borrow excessively - and, indeed, recklessly.

The U.S. government might well bail out California, too, in case of default. But California does not have the heft, in relative terms, of either Ontario or Quebec. Like tiny Rhode Island, California has only two federal senators. Congressional power has been migrating for years to lower-taxed southern states. (Based on the current U.S. census, for the first time, California could lose one or more congressional seats.) Furthermore, California is required by its own constitution to balance its books. Thus the state can't go bankrupt; it must - sooner or later - either increase taxes or cut services. It can only issue so many funny-money IOUs of dubious constitutional validity.

Another possible explanation is simply that California's debt is now in play, a gambler's game. In this scenario, by aggressively trading insurance policies (credit default swaps) on California's debt, investors have made it the most-insured debt in the U.S. - and, in the process, have momentarily exaggerated it.

Investors buy 10-year Venezuelan bonds - provided they get a return of 14.7 per cent. They buy Greek bonds for a return of 10.7 per cent. They buy California bonds for a return of 6.8 per cent - only somewhat less risky than corporate high-risk "junk" bonds (average yield: 8.7 per cent). In contrast, they buy Ontario debt for a return of only 3.3 per cent. This California-Ontario gap remains resiliently irrational. In one of these economies, the fear-factor calculation has gone wrong.

Although California's economic policies (high spending, high taxes) are destructive, this is mainly a political drama. Democrats will not cut spending. Republicans will not raise taxes. As messy as this left-right struggle gets, California will almost certainly pay its bills, one way or another, in the fullness of time.

Will Ontario? The province has a distinctly different problem: It must now borrow more and more to accomplish less and less. It takes some sophistication to conceal this divergence. Ontario's effective interest rate - the rate it pays, on average, on all of its debt - is 4.5 per cent. Interest payments will thus cost the province $10-billion (Canadian) this year on its $220-billion debt. Ontario needs half its deficit to make its interest payments.

In 2000, Ontario's effective interest rate was much higher (8 per cent), its debt much lower ($114-billion). In 2000, interest payments cost $8.8-billion. Ontario, in other words, has used low interest rates to finance higher debt. Any increase in interest rates now will have profoundly disturbing consequences. Ontario Premier Dalton McGuinty conceded the other day (in another context) that his government has made "some mistakes." Really? D'ya think?