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California Economy Near Collapse

Economics / Recession 2008 - 2010 Jan 30, 2009 - 03:09 AM GMT

By: Oxbury_Research

Economics Best Financial Markets Analysis ArticleMSNBC: California 's fiscal future lurched yet another step toward oblivion on Friday as state Controller John Chiang announced he could no longer make payments for services to disabled and blind people who need the money to pay for rent and food .Chiang said payments would most likely have to be stopped by Feb. 1.

"Delaying these payments will hurt real families," Chiang said .About one million people would be affected by the non-payments, Chiang said. "People are going to be hungry at my house," said Shirley Magers, who receives a $900 monthly payment related to her disabilities. "(This is) not to mention the utilities. Personally I can't pay all the utilities right now."

Back in September I started writing about the inevitable bankruptcies that would ensue at the state and lower municipality levels. We discussed here at Bourbon & Bayonets the debacle of Jefferson County , Alabama 's budget in the first week of October. These articles looked at the funding issues as well as made claims about how the coming bankruptcies of some states ( California , Illinois , and New York were noted) was just a matter of time and how federal funding would be used to bail the states out.

As we approach the just mentioned inevitabilities, I would like to take a step back so we can revisit, in brief, the budgeting blunders made at the state level. After the recap we will look into just how bad things have actually gotten in the land of hippies and Compton. Put it this way, I'd rather run outside naked in the negative fifty degree wind chills we've been having here in Minnesota than live in California and watch state level blunders destroy my capital.

They Did What?

So how did it get to this point? The simple answer is sheer stupidity, but that doesn't quite cut it as we've learned over the past 18 months that there are countless kinds of stupid. The less damaging answer to this question would be fundamental flaws in the political system combined with the inability of regulators to foresee anything close to this economic mess.

Let's start with the latter of those two reasons and look a little deeper into the consequences of the economically ignorant clowns that run our states. For some reason, they, and the other 99% of Americans, expected home prices to continue to rise at double digit levels year over year. This comes despite home prices rising historically increasing a point or two above inflation.

When the state puts together a yearly budget, they do so with projected figures that were probably derived from some sort of econometric regression modeling. The models failed as Keynesian academics has no actual application to the real world, and to try and do so, as we have learned, is very dangerous.

So the states budgeted anticipating an economy that would be supported by more years of double digit growth in housing prices. Obviously the exact opposite has occurred as housing prices have declined by levels not seen in history. Then the snowball started rolling.

As property values deflate, revenues from property taxes decline respectively. We've also seen massive amounts of lay offs. That's less income tax revenue as well as increased payouts in social programs. Now we're looking at consumer expenditures dropping off a cliff resulting in less sales tax revenue. We could get into the details of these issues more extensively, but for the point of this article, I think you get the idea.

While all of this tax revenue is drying up, the state is still budgeted as if the party was just getting started. In other words, revenues dried up, but expenditures didn't budge, and now the state is broke.

Backtracking to the initial paragraph of this sub-section, the other reason the situation regarding states' budgeting has gotten so extreme has to do with a fundamental flaw in our political system. I just want to touch on this briefly.

The flaw is simply that elections are held every two and four years. Both state and federal regulators want to spend as much money as they can to please as many different social groups as they can. This gives them the best chance at reelection. In other words, these officials use the budget as a tool to buy themselves reelection.

So when the worm began to turn economically, state regulators all but refused to make the necessary budget cuts that would sustain self solvency. This doesn't work and directly results in liberal Keynesian economics. I don't care if you voted to elect a Republican or a Democrat. They are all economic liberals save a very select few.

California has set the bar high in enacting the above mentioned practices. Regulators there have run that state, which by itself would be the 7 th largest economy in the world, into the ground.

“Obama, we need your checkbook!”

California regulators have budgeted $145 billion in expenditures through fiscal 2010. In that same period, they are expected to only bring in revenues of $100 billion, marking a $45 billion shortfall. That's assuming current economic conditions. I tell you what, if California pulls $100 billion in revenue this year, I'll wear a dress for a month. There's absolutely no way that state regulators in California , or regulators anywhere for that matter, have priced in the economic realities of what's to come.

For now, let's just use the $45 billion deficit for the sake of argument in looking at what this number really means. The Trumpet reports that if the Governator fired all the 149,000 legislative aids and people working in the courts and universities that the budget deficit wouldn't be eliminated. Alternatively, California could close all the state prisons, fire all the staff there, and eliminate all state health care funding and still not eliminate the budget gap.

Hopping off the theoretical train, California is being forced to make some very difficult decisions. The MSNBC article at the top of this article mentions cuts in social programs that help the blind and disabled pay for food and rent. That's going to affect a million people.

Now tax refunds are going to be delayed and instead paid with IOUs. That's exactly what I want: A worthless IOU for a bunch of other worthless IOUs. Did I mention that Minnesota winters aren't that bad?

When it's all said and done, what does it matter? California legislators aren't thinking about balancing the budget at this point. Why should they? They are going to get a big federal bailout regardless of the size of their deficit. All state officials there care about is LOOKING like they are trying while they wait for their glorious savior to come to their rescue.

California won't be the only story told when it comes to state bankruptcies. There will be others to follow, especially when the free checks start coming from the federal level. This is a mockery of the system and eliminates the whole reason for having the state AND federal governments. Soon, you, me, and everyone else in this country will be paying for California 's blunders.

By Nicholas Jones
Analyst, Oxbury Research

Nick has spent several years researching and preparing for the ripsaws in today's commodities markets.  Through independent research on commodities markets and free-market macroeconomics, he brings a worldy understanding to all who participate in this particular financial climate.

Oxbury Research originally formed as an underground investment club, Oxbury Publishing is comprised of a wide variety of Wall Street professionals - from equity analysts to futures floor traders – all independent thinkers and all capital market veterans.

© 2008 Copyright Nicholas Jones / Oxbury Research - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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14 Mar 10, 15:27
Budget Revolt

As California goes, so goes the nation. I recommend that Tea Party activist at the national level focus all energy on fixing California. Need to educate CA citizens about the need to trim back at least 15-20% of all government expenditures as part of fixing the private ecomomy. Need to force most current politicians out of office...this is not longer about Democrats vs. Republicans. It is about the Government vs. the people. Government waste, abuse, fraud, excessive pay, excessive pensions, abusive union practices, redundant programs, marginal programs an so. The government needs to be dramatically trimmed just as the out-of-control weeds in a garden must be cut back.

15 Nov 10, 18:51

Right-wing types only focus on California and like to pretend this is all about "government programs" - but guess what? - it isn't just California: Texas - one of the most republicans States in the nation, with a big lack of Government programs, suffers an 18 billion dollar budget deficit too. Yes, Texas.

The cause of this is clear: decades of constant tax-cuts, out-of-control wage gaps (worst in the 1st world), half of all corporations paying no taxes at all, and importation of illegal immigrants paying no taxes at all (which by the way, Texas is only 2nd to California for this...interesting, eh?). Fix these things, and you'll fix your problem.

16 Nov 10, 15:53

Bailout- do not bet your rent money on it.

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