California Comes to a Cowardly Compromise

California governor Arnold Schwarzenegger and the idealogues in the state legislature proclaimed they have “solved” California's budget-gap impasse. In reality, all they did was postpone dealing with the problem by creating a much bigger shortfall next year.

State Democrats had vowed not to allow California's mediocre educational system to be completely gutted with budget-cuts. State Republicans vowed not to allow one penny of tax increases. In this exercise in self-delusion both groups essentially caved-in – while pretending (to fellow idealogues) that they had “stood their ground”.

When it comes to the California educational system, a brutal, $11 billion was cut from this year's educational budget – except the state will pretend that this is just a “loan” which will be repaid from higher revenues (?) in the future. There is zero possibility of California's tax revenues rising any time in the forseeable future. Thus, this $11 billion has been permanently cut from the budget.

When it comes to taxes, state Republicans decided on a similar sham. By “accelerating” the state's “withholding tax schedule” by 10%, the state is pretending that taxes have been raised by 10% - and collecting taxes accordingly. Thus, what this is supposed to be is an 'involuntary loan' from Californian taxpayers – which will (supposedly) be 'repaid' next year via a large tax refund.

The problem is that thanks to this gutless compromise, the state's budget crisis will be twice as bad next year (i.e. a budget-gap of at least $50 billion). This means that by tax-refund time next year, there will be no money to pay out those large, tax refunds. At best, those who pay 10% higher taxes this year will get more California I.O.U.'s from the government.

However, with a much worse budget-gap guaranteed for next year, nervous banks will be very reluctant to touch state I.O.U.'s – since by then it will be totally obvious that there will be no way to solve next year's much worse budget-crisis. Thus, state I.O.U.'s are destined to become essentially worthless, although to start with, they will only “trade” at substantially below their par value. The bottom-line being that there has effectively been a tax increase somewhere below 10% - with legislators simply lacking the intellectual honesty to acknowledge this.

As for why next year's budget-crisis in California will be much worse than this year's crisis, I dealt with that in detail in a commentary a couple of days ago. To begin with, the U.S. economy has lost about $2 TRILLION in spending-power. This incomprehensible drain from the U.S. consumer-economy has created a self-fueling downward spiral where less spending leads to retail sector lay-offs, which leads to even less spending, and then many more lay-offs.

In turn, rapidly increasing job losses, and reduced spending will result in dramatically lower tax revenues next year, meaning much worse budget problems (and many more government lay-offs). All that is opposing this financial implosion is the puny, Obama “stimulus package” which (by the government's own admission) is only injecting a little over $250n billion into the U.S. economy this year.

Obviously, when you only replace a little more than 10% of lost spending power, in a consumer economy, there is zero possibility of even significantly slowing the U.S. economic collapse. America's “leaders” (at both the state and federal level) are responding to the worst economic crisis in U.S. history with a mixture of self-denial and wishful thinking.

Ultimately, much of the blame for the extreme disconnect between state spending and state revenues must be directly attributed to that compulsive liar, Ben Bernanke. According to “Helicopter” Ben, the U.S. economy should have “recovered” five times already – with a new “prediction” for a recovery (now starting next year) due out in a few weeks time.

Like the “boy who cried wolf”, Bernanke has told state legislators (and everyone else in the world) that there would be an “economic recovery” every six months, for more than two years. Foolish enough to believe Helicopter Ben's lies, most U.S. states postponed dealing with current spending problems – because they were assured (again and again) that “happy days” were just around the corner.

Now with state revenues hurtling lower, state governments must catch-up for many years of grossly excessive spending – at exactly the same time that revenues are headed for multi-decade lows. Instead of the U.S.'s economic problems being “solved” or even addressed, every decision being made today only creates worse problems tomorrow.

Meanwhile, politicians and bureaucrats alike are patting themselves on the back for their “decisive” actions to “save” the U.S. economy. Much like the Soviet Union, it looks like U.S. leaders will continue “saving” the economy – right up to the day the entire economy implodes.

Comments

[semperpax:]

Question: Why do we keep electing these fools to public office? It's our own fault for the mess we're in. You get what you pay for ... or in this case, vote for.

Jul 21 12:44 PM

[Wesley Mouch:]

Don't you guys know that deficits don't matter? The answer is simple. Financial engineering.

Lets find a way to bundle the California debt in a manner that totally obscures the original commitment. The more complicated, the better. Walla! Sell it on the open market as a AAA rated obligation to some retired folks or to someone who wants to suppress their currency (you know who you are). Tell them not to worry, as they don't have to mark their new investment to market. When they get nervous, say that pricing during this downturn is foolish. Tell them to wait a while, and the price will recover. Situation solved, problem averted, time to build more residences in the valley!

Jul 21 01:11 PM

[Whippet:]

LOL- I don't know if I like your handle or your solutions more!

Kalifornia is violating Article One of the Constitution in a back-alley fashion by printing its own money (of course, so is the Fed, but we'll let that one slip...) We can forgive this oversight by doing as Mr. Mouch has suggested- tranching the IOUs, securitizing them, selling them to the Fed, and giving freshly printed dollars to the defrauded citizens of Kali. This eliminates any bureaucratic interference from Congress and the Kommissar of the Treasury- it is a direct sale. No pie on Pelosi's face (although it might help.) Comrade Bernanke would be more than happy to create some more liquidity in this oppressed People's State. Premier Obama could claim the glory for Kalifornia's glorious recovery...


On Jul 21 01:11 PM Wesley Mouch wrote:

> Don't you guys know that deficits don't matter? The answer is simple.
> Financial engineering.
>
> Lets find a way to bundle the California debt in a manner that totally
> obscures the original commitment. The more complicated, the better.
> Walla! Sell it on the open market as a AAA rated obligation to some
> retired folks or to someone who wants to suppress their currency
> (you know who you are). Tell them not to worry, as they don't have
> to mark their new investment to market. When they get nervous, say
> that pricing during this downturn is foolish. Tell them to wait a
> while, and the price will recover. Situation solved, problem averted,
> time to build more residences in the valley!

Jul 21 02:34 PM

[Al-USA:]

Wesley Mouch wrote:
"
Question: Why do we keep electing these fools to public office? It's our own fault for the mess we're in. You get what you pay for ... or in this case, vote for.
"

Wesley Mouch is still under the illusion that we have a democracy in the USA. I refer Wesley Mouch and others of likewise persuasion to read the article, "The Quiet Coup", below.

More information below:
The Quiet (American) Coup
www.theatlantic.com/do...

Banks Counted on Looting America’s Coffers
tinyurl.com/bkezmt

"The Fed's War on the Middle Class"
mises.org/story/2983

"Economic Fascism and the Bailout Economy"
mises.org/story/3333

Jul 21 02:48 PM

[John Galt:]

Who cares, American idol is on... they kicked the can down the road until next year. Pay workers on the 1st of next year instead of the 30th of this year, problem solved.

Just HOPE that things will CHANGE by next year... Maybe the other 49 states can pay for another stimulus of Cali.

Now excuse me while I go throw up.

Jul 21 02:49 PM

[dybydx:]

lol paying ppl later instead of when it is normally due? doesnt that sound like an IOU (but non interest bearing)?

Jul 21 04:11 PM

[jack kreg:]

Democrats not to allow California's mediocre educational system to be completely gutted";
An amazing statement, given that CA teachers are highest paid in country, working about 9 months, or 3 months less than the rest of us,
CA education system spends over $300,000/year running each classroom, the teacher gets less than $100,000 including benefits, and the state bureacracy wastes much of the rest, funding personnel who barely support our childrens education.
The state school budget could be cut by a 1/3 and still have funds to raise the salary's of teachers, and their aids. Further, still leaving over $100,000/year to fund NON classroom expenses.

Jul 21 05:43 PM

[nova:]

semperpax wrote:

"Question: Why do we keep electing these fools to public office?"

Let us be honest:
1. They are no fools. They do take very good care of themselves. Like blood-thirsty vampires, these politicians and their oligarchy masters are sucking out every single drop of blood from America taxpayers.

2. We do not elect them in honest and fair elections. The system is rigged. It reminds me old Soviet system when the Party bosses compiled lists of candidates and nobody else could be elected.
The present election finance system allowed out-of-state money to support specific Democratic and Republican party elite-chosen candidates.
The only choices allowed in America are inner-parties elite realignments reflecting the balance of power dynamics between of American political & economic oligarchy.

Jul 21 08:16 PM

[John Bowman:]

By the time they get to the congressional level, they are utterly compromised and drained of any integrity.

The singer Sting in one of his early songs commented that politicians are like game show hosts to him.

How sadly true.

Jul 21 11:27 PM

[Old Trader:]

One positive result of the spending cuts is that they make any future tax increases more palatable. Here, in Illinois, that was a key argument against the increase in the state income tax that Gov. Quinn is pushing; they wanted to make certain that all possible reductions were made before any taxes were raised. Given the waste for which government agencies are noted for, this approach makes more than a little sense.

Jul 22 09:12 AM

[swaps:]

Kalifornia has shown it is too big to manage.
How will the globalists manage a 5 billion population world, even if they kill off a billion or so first?
Kalifornia has been operating under delusions of grandeur, but it was the easy money, inflationary expansiveness of the Federal Reserve that made this delusion possible.
The Golden State has been been given a lump of coal by a Santa Claus Fed that changed direction and began fighting inflation four years ago under Greenspan.
Kalifornia's crisis is exactly what The Fed ordered in the first place. How quickly the short sighted Congress forgets..

Jul 22 12:05 PM

[Gregman2:]

The state pays more for its prisons than its universities. Because of the state prison guard union. All this new plan does is 'borrow' from the cities and counties...by issuing them IOUs'.

Jul 22 12:28 PM

[5142152-337:]

It really DOES NOT matter who one votes for, since the SYSTEM already well entrenched GUARANTEES that whomever is elected just fills the slot and the graft, lies, etc., continues.

As for California, lets sign it over to the Mexican drug cartel. Simple. Now we are 50 states again. Nice number, anyway.

Jul 22 12:53 PM

[snagglesnarf:]

The big problem here in California is the unrealistic budget projection which is far too high. I guarantee you in a few months, if not in a few weeks, the budget director will announce that because revenues are lower than expected, the defecit will be even bigger. This budget will not make it to the new year.

Jul 22 08:00 PM