Posts Tagged ‘california’

WHACK!! … (you feel whacked upside the head yet?)

June 20, 2010

If you read no other post on this blog, you must read this Globe and Mail article.

In a succinct and lucid report, Barrie McKenna outlines the end game that some of us have always maintained is inevitable and that now has become reality. There is no particular satisfaction in vindication. Not at this cost. Not when it is largely avoidable.

And still! Even though the report is lucid, it is but a picture of real life today. Mr. McKenna like most people, is unaware of the how and why and, like most people, gets lost in pointing the finger of blame at one court decision or a one administrative system. People are thoroughly unaware (blissfully?) that this is not the failure of a policy or the failure of some administrative system. This is a failure that is designed into our monetary/political system at the outset. This is human failure at the largest degree.

Excerpts with comments interspersed throughout:

Arnella Sims has seen a lot in her 34 years as a Los Angeles County court reporter, but nothing like this.

Case files piling up by the thousands, phones ringing off the hook, forced midweek courthouse closings and occasional brawls as frustrated citizens queue for hours to pay parking fines.

“People think we’re becoming a Third World country,” said Ms. Sims, 55. “They don’t understand.”

It’s a story that’s being repeated all across California – and throughout the United States – as cash-strapped state and local governments grapple with collapsed tax revenues and swelling budget gaps. Mass layoffs, slashed health and welfare services, closed parks, crumbling superhighways and ever-larger public school class sizes are all part of the new normal.
The epiphany

None of this would matter much to anyone outside the not-so-Golden State except that California’s budget crisis is a harbinger of a grim dilemma that all Americans will soon confront. The country has built an elaborate and costly government machine, tied to a regressive tax system that can’t generate enough revenue to pay for it all.

Guido here – The problem is just that – an elaborate and costly government machine. However, the problem is not that this costly machine is tied to a regressive tax system. The elaborate and costly machine has always been tied to a regressive tax system that everyone knows is regressive… but for as long as people have the impression that the economy is expanding, nobody cares. This a typical political dilemma of democratic societies. Even assuming that a politician should rightfully embrace the regressive tax system as his/her platform, he/she would stand very little chance to be elected because the electorate cannot and does not see a problem in advance. Our political system and, indeed, our educational system do not encourage the prevention of problems at national level. Certainly, democratic politics are not designed to offer the electorate solution to potential future problems because the problem is “potential”. Democratic politics are designed to offer the electorate what it wants now and offer solutions to what the electorate perceives to be a problem now.

“This is a classic American dilemma,” explained Peter Dreier, a professor of politics and director of urban and environmental policy at Occidental College in Los Angeles. “Americans expect a lot of their government. But politicians have convinced them they’re not getting what they want.”

Guido here – Of course this is not a “classic American dilemma”. It is the dilemma of all societies and countries and it is particularly a dilemma for societies based on democratic principles.

Experts say the U.S. government will inevitably have to come to the rescue, using its borrowing clout to save the state from near-bankruptcy or devastating service cuts. Do nothing, and the entire U.S. economy could be put at risk. California, like the country’s banks, may be too big to fail.

Guido here – And right there in that paragraph is proof that “experts”, like most people, do not understand that government is nothing but the sum total of the people of a country. If people have no money, then the state has no money and, by definition, neither does the government. The experts claim that government has “borrowing clout” which may be true. But even borrowing clout cannot be infinite. And this is where main stream economics of the past century differs from those that have a more realistic view of life. Politicians and economists of all stripes believe that the government’s borrowing clout is infinite and can heal all. Clearly though, borrowing has some very real arithmetical limits that we are now pushing against after almost 100 years of borrowing that today is counted in numbers that till very recently could only be found in Carl Sagan’s lectures.

And California isn’t alone in angling for a bailout. U.S. states are facing shortfalls totalling nearly $300-billion in 2010 and 2011; they also must wrestle with hundreds of billions more in unfunded pension obligations to their workers. “There are a few Greek crises brewing among the United States of America,” said economist Ed Yardeni of Yardeni Research Inc.

Soul searching

How California, the largest and once most-prosperous state, got in this mess is a story decades in the making. It began with middle-class angst and a property tax revolt in the sprawling suburbs of Los Angeles. The movement would eventually sweep the country in the inflation-ravaged economy of the late 1970s, leaving government unable to pay for many of the services and entitlements people now take for granted.

Guido here – It is correct to say that this mess was decades in the making. It is not correct to blame exclusively property tax law. The problem begins much further upstream than property tax law. The problem is the fiat monetary system.

In the years since Prop. 13, California has come to the rescue of local governments, taking on ever-greater responsibility for schools, low-income health care and welfare. And it has paid for all that with volatile sales and income tax revenue, making it tough to balance its budget when the economy stalls.

“A lot of people predicted doom and gloom in 1978. It just took a long time,” said John Tanner, executive director of Local 721 of the Service Employees International Union, which represents 85,000 government workers in Los Angeles and throughout Southern California.

Experts say tax reform is the only option for California, short of a massive and unprecedented shrinking of government. And that requires an “open conversation” between voters and their elected leaders, and almost certainly higher taxes, according to Ms. Ross, the economist.

Guido hereThe experts are wrong again. It is not the tax system that needs reforming. What needs to change is our spending habits. Democratic politics ensures that state expenditure will always follow a positive slope. In a fiat monetary system, democratic politics guarantees that spending will always and everywhere exceed what the underlying economy otherwise justifies. Fiat money and democracy guarantee and inflationary blow off phase followed by a deflationary bust. The only unknown variable is how long government intervention can stretch out the time line of the cycle. But bust it will and busting it is.

“We have tried to be all things to all people and we can’t afford to do that any more.”

Guido here – That’s a ding-ding-ding cigar moment for the comment. Trying to be all things to all people is the hallmark of democratic politics. And how can you be all things to all people? You spend money of course. Spend money on programs, spend money on projects, spend money on adventures… spend, spend, spend…. and when the tax base is not sufficient to finance your ambitions? Go on… borrow…

Borrow and spend… borrow and spend…

And it all works as gradually all countries around the globe get onto the same policy…

But once everyone has borrowed beyond their limits and has spent grossly in excess of their income and when global GDP stalls…. then what?

Today the “what” is whacking us upside the head.

California as bell weather… (deflation at work)

December 12, 2009

This is what deflation does. It forces you to sell assets to cover your liabilities.

Trouble is of course that in a deflationary environment, sellers have trouble finding buyers and, when they do, sellers find that their property fetches far less then they estimated and hoped for.

It will be interesting to see how California fares because all other US States will have to follow suit as, indeed, will all Western countries.

Oh! California (curtailing public spending)

October 5, 2009

Curtailing public spending as precursor to war II

September 25, 2009

As laid out here, here or here and elsewhere on the blog, this is the stuff revolutions are made of.

As unemployment rises, the loss of tax revenue means that public expenditure must be progressively curtailed. When you have large segments of the populations that are out of work and your are unable to provide the services they thought they were entitled to, civil unrest follows in short order.

Western governments cannot afford civil unrest of any degree because in light of the economic devastation we have suffered in the past two years any social uprising will not only bring down government but it will also spread to other countries like wildfire.

So far, we are still on track for a world war. The “reason” for war will not matter in the least. We just need a war not only to absorb the unemployed but also to destroy global industrial capacity so we may restart the inflationary cycle.

California university protests

Thousands line up for utility bill assistance

[California is] less than 50 days away from a meltdown of State government

June 11, 2009

As stated here (bottom of essay), California will be the preview to what is about to happen globally.

What is important to understand here is that the evolution of economic dynamics is not linear but, rather, exponential. Once California goes, the dynamic will accelerate markedly. California is one of the five largest economies in the world. THE WORLD folks. The implosion of California will leave a gaping hole in budgets everywhere. Fasten your seat belts.

Mike Shedlock digs out this official report:

My prediction stands. 15% average official unemployment across the board in Western industrialized countries by the end of 2009. That will put us at real unemployment of anything from 25% to 30%. That’s a whole bunch of angry, hungry, probably homeless people with a lot of time on their hands to ponder who to blame. And let me tell you that the political and corporate scandals that have broken out so far and those that are about to be revealed, are really going to piss off a whole bunch of citizens everywhere.

Unless someone, somewhere should be able to re-start inflation at anything approaching the rate of the period 2004/2007, we are in for a world war.

Merkel mauls central banks

June 3, 2009

Finally some common sense from main stream politicians.

Though for the wrong reasons, Merkel finds the stones to tell the world that central bank monetization is not the solution. Of course, Merkel here is afraid of a hyperinflationary bout if/when the economy should pick up. Merkel of course is German and memories of Weimar are still vivid in her knowledge of history.

Of course you all know what my position is. In a situation where we have to sustain a mountain of obligations estimated by the BIS at US$500Trillion with a global GDP of some US$40Trillion, I’d say that the best we can hope for is hyperinflation.

Here is the truth. The GDP of the USA is around 40% of world GDP. US GDP is (or was) 70% consumer expenditure.

Now, keep those figures in mind.

The truth is that in 30 years of aggressive credit and monetary expansion in the high double digits, GDP in Western countries has put in growth of 6% annually in a good year but more often 3%. The truth is that after a steady decline over the past thirty years, today the velocity of money has finally fallen below 1. . The truth is that despite having dropped interest rates to the lowest level in living memory, the Western authorities have not been able to revive credit creation thus they have not been able to revive consumption….

… without consumption, US GDP is pretty much dead…. and by extension, world GDP is not going to be too healthy either…


… all outstanding debts remain…

Debt must inherently and by necessity be paid off or written off. Not recognizing debt (i.e. bypassing that pesky accounting rule called mark to market) can momentarily help a bank or a government give the appearance of being financially sound… momentarily… but debt will inevitably and most certainly be paid off or written off by either the debtor or the creditor. There is not alternative to that dynamic. None.

So, if debt will be extinguished one way or the other, if we assume that only 10% of global obligations will be extinguished, that is good to wipe out global GDP for one year and then some.

If that doesn’t seem too bad, think about what a year of zero contributions to all social programs will do to a country like the UK, Spain, Ireland …. or the USA…

Merkel is right. Monetizing debt only makes things worse but at the end of the inflationary cycle, monetizing debt has far scarier consequences than inducing a bout of hyperinflation which, at this stage, is actually what would save us.…&nclick_check=1

Incidentally, you’ll be well served by observing what is happening in California. The state of California by itself is an economy on par with most Western countries like France or Germany. California is a microcosm of what is happening globally. The debt implosion dynamic will play out in California much more quickly than globally and will provide an accurate road map of the consequences of the end of the inflationary cycle and the implosion of credit markets.

Kabooooommm!!!! California…

May 31, 2009

In typical fashion, the rating agencies show up after the fact. Nothing unusual here folks.

Fitch Ratings on Friday changed its outlook to negative from stable on California’s long-term general obligation bond rating of A, citing growing concerns with the state’s widening budget and cash-flow deficits.

If the state legislature fails to act quickly, other actions …

California’s day of reckoning is a warning for Europe

May 26, 2009

Not just for Europe.

Is California too big to fail? Depending on how you count, California is the fourth or fifth largest economy in the world. That is the entire world. California by itself is on a level with countries like France, Italy, the UK and Germany.

We were told that Bank of America was too big to fail. AIG was too big to fail. Citibank was too big to fail. And yet, anyone with a passable knowledge in accounting would have seen that all these companies did not need to be handed taxpayer money because they all had a sufficient cushion of funds if only they allowed their bond holders to absorb the losses as they are supposed to do by law in a functioning, liberal, market economy.

California on the other hand is out of cash. That is, the state’s expenses have been an order of magnitude of state revenues for a good many years. The shortfall had always been made up with larger and larger loans. However today, in an economic environment characterized by the implosion of credit markets that leads a severe contraction of economic activity, debtors cannot scrape together enough funds to service their current debts. Thus borrowing even more would not only be irrational but it would be stupidity of the highest order if not down right criminal negligenge. But I digress.

What matters here is that California just like the Federal Government or any government of any country in the world, does not have wealth or revenue of its own. Government derives its income from the citizen via taxes, licences, fees and duties.

Thus, the basic difference between a corporate entity like Bank of America and a government entity like the state of California is that even if California should decide to let the bond holders absorb the losses as they should, California is still saddled by a mountain of public expenses that were not sustainable during boom times and are certainly not viable now.

California’s choices right now (and by extension the choice available to governments anywhere on planet earth today) are few and well defined. They must cut public spending. All public services starting with the salaries of politicians and civil servants, going through police, health care, education, public transport, road and sewer maintenance, driver license and passport administration, mail delivery, fire fighting, highway patrols and so on and so forth must be curtailed.

Of course; there is always the possibility that some bright bulb somewhere on planet earth might find the way to re-start inflation in some asset class somewhere at a rate exceeding the latest inflationary rates of the period 2005/2007. In this case, all will be made good again and we can all go back to living our lives in the manner we’ve grown accustomed to in the past decade.

So, the question of the day remains: is California too big to fail?

If California should be given access to TARP or any of the other alphabet soup programs dishing out money to companies presumed in distress, then where to we stop? Are they also going to give money to Michigan, Florida, New York and all other  states that have run out of money? How about Spain? Ireland? Ukraine? After all, all countries in the world today are running on a monetary system based on the US Dollar. So, where do we draw the line? Do we draw a line?

On one hand, the precedent is set. Thus, why not bail out California and all the others too?

At what point will it become evident that giving US$100K to every household would have been a better and less expensive option with better prospects of  generating a degree of inflation?

But on the other hand, where do we get the money from?

California as bell weather

May 14, 2009

This is important to the extent that, depending on how you count, California is the fourth or fifth largest economy in the world. That is “the” world folks; including Japan and China, California by itself is the 5th largest economy in the same league as China, Japan, Germany or the UK.

This is what deflation brings about when you are in debt.,0,5928252.story

Ho, ho, ho

May 13, 2009

Who’d have thunk it could happen…
U.S. Posts First Budget Deficit for April Since ‘83

Schwarzenegger Tells Lawmakers Deficit May Swell to $21 Billio: ” […] At a town hall meeting in Culver City yesterday Schwarzenegger said budget cuts he’s considering if the measures fail include cutting the state firefighting budget by 10 percent; releasing 40,0000 non-violent, non-sex offender inmates; laying off either 51,000 teachers or 90,000 janitors, cooks and bus drives; shutting down public schools for 18 days a year or boosting class sizes by 17 percent; and siphoning $2 billion meant for local governments to pay for services such as firefighters and police officers.