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California the canary in coalmine of US economy

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State Controller John Chiang issued a stern warning Friday about California’s cash reserves, telling legislative leaders and Gov. Arnold Schwarzenegger they must act on nearly $9 billion in budget cuts the governor is seeking by March — or the state will run out of cash to pay its bills. — Denis C. Theriault Mercury News

Without making those cuts — which Chiang says will pump $1.3 billion into the state’s checking account — California would be broke by April 1, no fooling.

The state wouldn’t climb back to what’s considered a safe level of cash on hand, $2.5 billion, until later that month, when tax revenues are expected to begin flowing into Sacramento.

California is the US version of the “canary in the coal mine” for intelligent “small L” liberal voters about what inevitably happens to jurisdictions that:

  1. Heavily progressively tax the earning middle class, and wealthy massive government spending and wealth transfer to the throngs of undeserving amongst the poor.
  2. The thinkers, inventors, workers, earners leave, and take their businesses, taxes, skills, and job creating productivity with them.

California Fiscal Condition compared

Depending on the study and the year the study was done, California is placed somewhere between 5th and 10th as the largest economy on the Planet. California’s economic activity accounts for 13% of the entire United States yearly goss domestic product (GDP). Many other states are teetering on the same edge of insolvency as California. Florida and Arizona to name two.

Worlds largest economies: 1. United States 2.China 3. Japan 4. India 5. Germany 6. Britian 7. Russia 13. Canada

Although the list changes order from time to time the players are the same. The bottom line is that the U.S. is in serious financial trouble because the world is fast learning that “greenbacks” don’t really taste that good and provide no nutirtion whatsoever.

Americans are going to have to face the fact that governments have, like all of us do, two ways of getting rid of the deficit: earn more (ie. raise taxes) or spend less (ie. cuts to services). Those are the only means at their disposal. For the voting public, cuts to services are easier to bear than more taxes. Inevitably, taxes will have to increase in the US.

Another California yard sale?

California, the 7th largest economy in the world — larger than Canada’s — is bankrupt. Maybe a garage sale is a “feel good” idea but, if they are going to get their deficits under control people are going to have to take cuts to services and wages the likes of which they have never seen before.

Maybe next they’ll try a State wide Bingo to see if that helps. The bottom line is that ruthless cuts to their standard of living is the only thing that is going to reverse the mess they are in.

California’s tax revenues took a steep hit when the US economy melted down during the sub-prime mortgage fiasco. Investors , including the very affluent, lost billions in investments. California used to derive about one-quarter of its tax revenues from the very wealthy. When their incomes were cut in half by the investment market crash, the amount of taxes they paid was also cut by half. This meant California lost about 12.5%, or one-eighth of its total state tax revenue. Imagine losing one-eighth of your income and the resulting changes you’d have to make.

Californians, and their central banking overlords, are the ones responsible for their budget woes. The State is a classic example of the duality of the modern citizen: demanding services while refusing to pay taxes. California used to have an outstanding public education system and now it is one of the worst in the US. When Prop 13 was enacted, limiting property tax increases, the voters simply did not consider what the results would be: they just looked at their rising property values — partially because of the expectation that housing prices would keep going up because of central banking practices — and lower tax bills while cheering their lungs out.

The problem predates pretty much every administration most people could name. The State has been heading for bankruptcy for 30 years as they desperately attempted to find ways to fund the services people demand. The use of illegal labour simply exacerbated the problem as the exploited employees over burdened social services. It is comical how there is a large chunk of the population willing to enjoy the benefits of society but only accepting the need for taxes grudgingly.

California, the ultimate entitlement state, is a crippled and drooling giant relying upon massive importation of water, electricity and illegal labour to continue their ruinous path. Residents of the state largely live in their own dreamland, the structure of which depends on their location. California is the land of the pre-W Bush Republican and the bleeding heart Democrat with seemingly little middle ground. When the time comes to “rule by proposition” the swing voters love to show how liberal they are and also how much they hate taxes. The unfunded mandate is standard in California.

“While our current cash condition is marginally better than it was one year ago,” Chiang wrote to leaders, “it is still precarious.”

Even with the budget cuts, the state’s cash reserve would still be far below that cushion in March and April.

To that end, Chiang is calling for an additional $2 billion in cash-flow “solutions.” Looking at previous cash crunches, that could mean some payments, like income tax refunds, would be delayed for a few weeks to keep the cushion intact.

“Call it overdraft insurance,” said H.D. Palmer, spokesman for the state Finance Department. He stressed that officials are still huddling over specific solutions.

If the budget gridlock lingers all the way to July, then IOUs could come back into play.



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