California: Entering Inflationary Depression

I was surprised to see the following headline in yesterday’s Wall Street Journal: Oil Price Rise Poses Little Threat, Yet, To Economic Recovery. The piece was stitched together with many quotes from economists, saying that oil’s advance to 80.00 was not yet a problem–though it could present a problem if we went any higher.

I suppose that in a multi-year data set, and looking at the world in a rather static way, this might be true. But I thought economists at least shared the view that weak economies were more vulnerable to shocks? 80 dollar oil in the Autumn of ‘07 was a very different overlay, than 80 dollar oil right now. And besides, I’m also not sure about the Journal’s use of the phrase economic recovery. From yesterday’s article:

Estimates vary as to when oil prices become a major drag on the economy, but several economists said crude at $90 to $100 a barrel and gasoline above $3 a gallon was the edge of the danger zone. December crude futures were recently up $1.05, or 1.3%, at $79.75 a barrel on the New York Mercantile Exchange. Prices at the pump for U.S gasoline have risen over 6% in the past month to average $2.671 a gallon, according to data from the American Automobile Association. “Eighty dollars a barrel is not a showstopper,” said Brian Bethune, U.S. economist with IHS Global Insights in Washington. “We need to be at $90 to $100 a barrel before things get more serious. The problem is underlying consumption spending is not strong.”

Since my last update on California in mid October, BLS has produced fresh, state by state data on the broader (U-6) measure of unemployment. At the end of Q2, California was recording around 12.0% unemployment in the conservative measure, but had risen to 17.7% unemployment in the broader U-6 measure. BLS has just produced Q3 data, and California has now risen again, this time to 19.6% in the U-6 measure. Meanwhile, although gasoline fell yesterday on higher inventories, the lagged effect has been very much in play the past 8 weeks, and California petrol prices have made their way back now, and are very close to 3.00 dollars a gallon.

You might have seen the headline yesterday that the Bay Bridge in San Francisco had to be closed, on account of falling debris and structural concerns. A vast collection of mid-century infrastructure needs to be upgraded there and most of it is automobile related. Given that the state is broke, that office vacancies in Silicon Valley are approaching 20%, and that Central Valley unemployment is easily at depression levels, I don’t think Californians see “economic recovery.” While 5.00 dollar petrol certainly was crushing in 2008, it seems a lay up that 3.00 dollar gasoline is still quite rough under current conditions, in a state over-leveraged to the automobile. True, the United States is not California and here on the East Coast we have more choices in public transport.

One question I’ve started to ask people is whether they use the word depression, when referring to the country’s situation. And if not, why not. A lot of the recent data suggests that no sustainable recovery in housing is imminent and, that structurally, unemployment has some permanent qualities to it now, in the sense that many industries in the US are simply not going to return to credit bubble levels. Housing, Automobiles, and Finance just to name the big three. But while housing and wages are deflating, food and energy prices are about to go positive again on an annual basis.

My view is that oil in the previous era, before the peak of Non-OPEC supply, would be trading around 15-20 dollars a barrel right now in the midst of this depression. But oil can’t trade there. And it won’t trade there.

The reason is partly the situation with the US Dollar but mainly that 60% of global supply–Non-OPEC supply–cannot really produce oil anymore with prices in the teens. Non-OPEC oil, which is mostly free-market, Western oil, needs prices nearer to 50 just to maintain production, at minimum. The implications of this are not pleasant, for the United States. And in particular California, with its 32 million vehicles. Worse, the California state labor department is now reporting even uglier unemployment numbers than BLS, with the broad measure now rising to 21.9%. 80 dollar oil and nearly 22% unemployment? Feel free to use my own phrase: inflationary depression.

Further Reading: gregor.us has covered California quite alot this year, with more to come.

Comments

[bbro:]

The only fly in your ointment is net corporate cash flow is flush.....

Oct 29 04:25 AM

[Ricard:]

California leads the nation yet again...

Oct 29 04:44 AM

[chris coonan:]

Yes, I moved from MN to CA and saw all of my assets disappear in 2 years that I had built over 18 years of work in the midwest. California was not kind to me.

CA in a depression means that 37 million people are not in recovery, in one of the biggest engines of the US....so the fact that Nebraska is recovering doesn't mean that much given the population and impact. CA is over a Billion over budget already on the new fiscal year, and that is a reflection on what is going on there.

CA typically leads trends, and so, perhaps, this is just the tip of the iceberg for the USA.

Oct 29 05:28 AM

[User 353732:]

The combination of great liquidity ,almost free, but highly concentrated in a very few sectors and focused on a few very big but value destroying companies and a fake dollar must lead to :
1. Inflation in the prices of certain favored assets
2. A rapidly deteriorating exchange rate between the dollar and globally traded real assets such as energy, minerals, agricultural commodities and nuclear technology. Thus there is accumulating inflationary pressure in foundational goods: energy, raw industrial materials and food which will spread to virtually every part of the California economy within a 2 to 3 quarters.

In addition, California has its own particular forms of Bad Govt, social pathologies and self perpetuating, callous , and entrenched elites. In California every bad public policy, every undeserved entitlement, every twisted political trope found in the rest of the US(and there are many and varied in 2009) is magnified. The self destructive things the US does, California does worse. The combined effect is to make California one of the most hostile places in the world for risk capital, small businesses and true wealth creating talent. Combine that with a middle class under financial, political, social and cultural siege from above and below with falling after tax discretionary income and there will surely be a depression: both economic and psychological .

Paradoxes and contradictions abound in California as a consequence: inflation in some things, deflation in others, especially middle class income; great wealth and rising income for a few but imploding after tax income and rapidly eroding net worth for many; tremendous endowment of native energy resources but a miserable and enervating dependence on imported energy; exploding entitlements and transfer payments for the parasitic but compressing opportunities and incentives for the productive. Expanding appetites but shrinking means.

The dark spells the rest of the US weaves, California makes even darker. Many in California are on a descending trajectory of first world to old world to third world.

Oct 29 05:42 AM

[a fat panda:]

"Oil Price Rise Poses Little Threat, Yet, To Economic Recovery. The piece was stitched together with many quotes from economists, "

There is a statistical bias here. They only talked to employed economists. If you talk to unemployed economists, they have a different view on rising oil prices.

Oct 29 06:11 AM

[Dave Wrixon:]

Come on guys, The Administration is about to 3% growth in GDP. Surely, it is time to burst out with the chorus from " Happy Days Are Here Again."?

Oct 29 06:43 AM

[Moon Kil Woong:]

The oil price rise is almost 100% due to dollar weakening. Thus their argument is that dollar depreciation is not a threat to the economy. This is a misnomer in the fact that many people view GDP as the absolute standard of economic growth which is being forced into the positive solely through dollar depreciation. No more goods and services or jobs are being made. The author is absolutely correct that this is not a recovery in any sense of the word.

Without dollar depreciation and commodity inflation (they like to say non-core inflation or a rise in commodity asset prices) the US would still be showing contracting GDP. Just because you pay more for food and gas doesn't mean the economy is better does it? Just look at the Q3 financials. In total revenues declined once again. Recovery my ass. You are getting less bang for your buck and less of everything else as well.

Oct 29 06:53 AM

[Leftfield:]

The place California, and most of the US finds itself is the result of decades, at least, of decisionmaking which has departed from real-world, private economy producers and strayed to a dismally familiar list of rent seekers: Government employees, entitlement recipients, academics, professionals who feed off the excess of rules, restrictions and laws produced by and for government employment and last but not least, the financial sector.
Influence peddlers all, the lid is lifted to the results of their rule in this financial meltdown, and, unbelievably, the insanity of their policies has actually been redoubled! Americans willing to reject this path of servitude and squalor for ourselves and worse, our children and beyond, must awaken soon.

Oct 29 07:58 AM

[Plan B Econ...:]

There are small boosts from government stimulus, but it is so inefficient and unproductive that we'd be better off if they simply paid off our mortgages...or just dropped money from a helicopter.

Cash for clunkers...$24,000 cost for each incremental car sale. It would have been cheaper to buy 125,000 Ford Fusions and simply give them away. www.planbeconomics.com.../

Government has the right intentions...but they're poorly executed.

Oct 29 08:09 AM

[bindlepete:]

True California has it's problems but it is not alone.The State Pension plans are turning into omnivorous beasts which unlike many private pensions plans can not be covered by the, now broke but still liquid, Pension Benefit Guarantee Corp. of the Federal Government.

The PBGC can live, by selling capital and then on freshly printed money but can the States meet future generous contracts to their employees? Not without hideous and publicly unacceptable new taxes.

California has a responsible outfit in CALPERS but even here the State Comptroller see it as a huge problem down the road. Most other states do not have well managed pension plans. New York's system is a disaster and who has done an honest review of the rest .

As has been said no one makes it out alive.

Oct 29 08:16 AM

[TruthSayer:]

Let us not forget the failure of the California Energy Policies....They have ignored available indigenous fossil fuel opportunity e.g. offshore production. They dont want cheap fossil fuel from other regions to enter their grid e.g. coal. They have chosen to push forward into renewable - which only a fool/dreamer could tell you its cheaper excluding the externalities.

The huge solar push they have is DOA. Natural gas prices climbed due to it was the only nearterm demand choice for states like CA. So without letting the market settle and develop towards the demand they used it as an excuse to venture into the renewable space by extrapolating cost figures of nat. gas not wanting to understand market dynamics and behavior for renewables also apply to fossil fuel in that mankind in the states would develop and nuture the advancement of technology when given a demand and/or price signal. Now we have a plethora of new supply - shale gas with a proven technology and know how.

So CA resident go ahead and develop and procure your $200/MWh power....ignore the $4-$10/mmbtu gas supply which produce $28-$70/MWh power.....even worse residents can buy a microturbine and run gas power for $60-$150/MWh and disconnect completely from the electric grid - solar wont be able to say that.....

Now to the externalities which a significant portion of society is pushing on to the public for which the public has little internalization of the issues at hand. We will save the planet from change......change for the better or worse irrelavant (net it maybe for the worse but not necessarily for you)....oh and you wont tangibly know this until 2100 and beyond....its for your kids and grandkids....I can buy this I just dont see the general public buying....Goodluck selling this when you have double digit unemployment and your concern about living the next day beyond your means.....

CA is a debacle please let us learn not follow like lemmings.....

Oct 29 08:45 AM

[chap08:]

bbro, I think that many corporates can continue to do well, even in the environment described. Those with overseas earnings will gain from a devalued dollar. There will be few new competitors being launched. Costs (workers) will continue to be driven down. Unemployment and inequality will increase, standards of living will fall. We will be a country of "have"s and "have-not"s ... until the "have-not"s figure out they've been screwed.


On Oct 29 04:25 AM bbro wrote:

> The only fly in your ointment is net corporate cash flow is flush.....

Oct 29 08:52 AM

[sethmcs:]

California has to fail in order to reach the next phase. Political backlash to big government, regulation, and anti business practices. One article that blow my mind is Chevron wanted to invest a billion top upgrade a refinery to use heavy crude. The upgrade would have resulted in 1,000 new jobs. Rejected by the clean air board and scrapped by Chevron. Inflationary depression? I thought we called that Stagflation. Anyhow. Watch California for the next Reagan Revolution.

Oct 29 09:13 AM

[mavericks:]

"You might have seen the headline yesterday that the Bay Bridge in San Francisco had to be closed, on account of falling debris and structural concerns. A vast collection of mid-century infrastructure needs to be upgraded there..."

Umm...actually, they are upgrading the eastern span. The old span, which is where the debris came from, will be demolished afterward.

Oct 29 09:29 AM

[Fred W:]

I hope your are kidding.


On Oct 29 06:43 AM Dave Wrixon wrote:

> Come on guys, The Administration is about to 3% growth in GDP. Surely,
> it is time to burst out with the chorus from " Happy Days Are Here
> Again."?

Oct 29 10:27 AM

[Fred W:]

Unfortunately, with Obama at the helm, those that would have stood up will simply assume the "great one" has it covered. Special interest continues to hold the reigns of government.


On Oct 29 07:58 AM Leftfield wrote:

> The place California, and most of the US finds itself is the result
> of decades, at least, of decisionmaking which has departed from real-world,
> private economy producers and strayed to a dismally familiar list
> of rent seekers: Government employees, entitlement recipients, academics,
> professionals who feed off the excess of rules, restrictions and
> laws produced by and for government employment and last but not least,
> the financial sector.
> Influence peddlers all, the lid is lifted to the results of their
> rule in this financial meltdown, and, unbelievably, the insanity
> of their policies has actually been redoubled! Americans willing
> to reject this path of servitude and squalor for ourselves and worse,
> our children and beyond, must awaken soon.

Oct 29 10:30 AM

[mbkelly75:]

I grew up in Southern Cal but refuse to live there now simply because their politics are so weird. I am not surprised Nancy Pelosi and her buddies have been at the head of the state's crash. On the other hand, my sister (who loves the state and still lives there) just got a new job that pays more than her old job. Her husband is still working at the same job he has had for well over a decade. It is not all bad and progress does seem to be happening in at least some places there.

Oct 29 10:43 AM

[anarchist:]

So what do you think that McCain would have done that would have made things better?


On Oct 29 10:30 AM Fred W wrote:

> Unfortunately, with Obama at the helm, those that would have stood
> up will simply assume the "great one" has it covered. Special interest
> continues to hold the reigns of government.

Oct 29 10:47 AM

[Jimbo:]

Anarchist : I held my nose and voted for McCain because I feared "The One" would be worse. The problem is bigger than the President. The entire Congress should be taken out. Both parties have sold out to Wall Street and "Government Sachs".If you are interested in possibly raising the anxiety of members of Congress, go to: pink slips. com. For $29.95 they will send a pink slip to every member of congress instructing them they are fired.

Oct 29 11:20 AM

[sidekick:]

Remember McCain suspending his campaign and rushing to the rescue in Washington? Totally hilarious.


On Oct 29 10:47 AM anarchist wrote:

> So what do you think that McCain would have done that would have
> made things better?

Oct 29 12:01 PM

[bob adamson:]

In a continent wide nation of over 320 million people one must expect that not all regions will do well economically (or badly) at all times. Historically the Great Plains and Southern States have lagged but are now, relatively speaking, on the economical upswing (the focus here is on general trends, not the impact of the recession). By contrast, California has boomed since the end of WW II until recently. Other regions have waxed, waned or remained steady economically.

The impact of the current recession is particularly harsh in California as it compounds and speeds up recent downward trends in its economy. The US as a whole just managed to avoid falling into a deflationary depression during the October 2008 to March 2009 period and it should not be unexpected that certain regions actually did. The Old North West did in the late 1970s and has again now. Parts of California and Florida may also be in deflationary mode. Other regions of the US are doing better or quite well. One advantage enjoyed by a large and advanced economy is that when on part falls behind it is supported and assisted to recover by the good economic health in other parts.

It is always tempting to read political cautionary mythology into these ups and downs; this is a temptation to be avoided for the most part as it obscures underlying patterns from view. In other words, political choices play their part but they don’t explain economic outcomes fully (or, in many cases, significantly).

Oct 29 12:11 PM

[Valley Boy:]

That is when it was guaranteed that he lost the election.


On Oct 29 12:01 PM sidekick wrote:

> Remember McCain suspending his campaign and rushing to the rescue
> in Washington? Totally hilarious.

Oct 29 12:25 PM

[SeekingTruth:]

A penchant for B grade movie actors injected into positions of great responsibilities both by a state and nationally may not lead to the eventual improvements that some seem to have expected.
Of course its a lot more complicated than this , but it all adds up , doesn't it?
Some well written and lucid comments stated here, but I suspect there are some even better ones lurking out there.

Oct 29 12:25 PM

[metalpipe:]

Lest we forget, the road to hell is paved with good intentions.


On Oct 29 08:09 AM Plan B Economics wrote:

> There are small boosts from government stimulus, but it is so inefficient
> and unproductive that we

Oct 29 12:40 PM

[flow5:]

The quirk is stagflation, business stagnation accompanied by inflation (i.e., the political economy). And as long as the exchange value of the dollar continues to decline, inflation, however defined, will prove intractable (e.g., energy dependence).

One of our founding fathers, Thomas Jefferson, said that we should "have a revolution every 20 years". But now we have passed the point of no return.

Oct 29 02:01 PM

[ryanclarke:]

If you recall in the summer of 2008, the U.S. refinery industry was not very profitable ... they gave gasoline away in order to keep the price at the pump under $4. If the refiners are forced to do the same in the summer of 2010 don't be surprised if the industry is "nationalized," much as the auto industry was in 08-09, in the spring of 2011.

Oct 29 02:25 PM

[2houndz:]

Wow, these comments are negative. While reading them I couldn't help but imagine the Joad family loading the truck and heading back to Oklahoma. Actually, they may have better luck finding a job in OK.

This is one of the better summations of the CA situation that I have read. Thanks for putting it together.

Oct 29 04:58 PM

[bullshitdet...:]

How would things be different under McCain?

1. I doubt the stimulus would have been nothing but pork and payoffs to unions.
2. I doubt we would see deficits in the Trillions as far as the eye could see
3. I doubt we would be having a debate over ruinous health care reform which will only add to the deficit
4. I doubt we would still be talking about what to do about Afghanistan
5. I doubt we would be pursuing cap and trade during this recession
6. I doubt there would be lots of other things of a less dramatic nature like 27 czars, thug like assaults on news organization, planes buzzing New York, etc, etc, etc.

Oct 29 06:00 PM

[Gary A:]

I agree with what you say except that Cali can take the big banks down. Cali can destroy the financial system. Your other places that are doing well could come to a grinding halt unless something causes Cali to get this deleverage over with more quickly. Keeping housing inflated will only cause this process to take longer,making recovery longer.


On Oct 29 12:11 PM bob adamson wrote:

> In a continent wide nation of over 320 million people one must expect
> that not all regions will do well economically (or badly) at all
> times. Historically the Great Plains and Southern States have lagged
> but are now, relatively speaking, on the economical upswing (the
> focus here is on general trends, not the impact of the recession).
> By contrast, California has boomed since the end of WW II until recently.
> Other regions have waxed, waned or remained steady economically.
>
>
> The impact of the current recession is particularly harsh in California
> as it compounds and speeds up recent downward trends in its economy.
> The US as a whole just managed to avoid falling into a deflationary
> depression during the October 2008 to March 2009 period and it should
> not be unexpected that certain regions actually did. The Old North
> West did in the late 1970s and has again now. Parts of California
> and Florida may also be in deflationary mode. Other regions of the
> US are doing better or quite well. One advantage enjoyed by a large
> and advanced economy is that when on part falls behind it is supported
> and assisted to recover by the good economic health in other parts.
>
>
> It is always tempting to read political cautionary mythology into
> these ups and downs; this is a temptation to be avoided for the most
> part as it obscures underlying patterns from view. In other words,
> political choices play their part but they don’t explain economic
> outcomes fully (or, in many cases, significantly).

Oct 29 06:26 PM

[untrusting ...:]

No need to even give them away. They could have run a bunch of lottery's and even got most of the taxpayer money back or even made some money for the taxpayers.


On Oct 29 08:09 AM Plan B Economics wrote:

> There are small boosts from government stimulus, but it is so inefficient
> and unproductive that we'd be better off if they simply paid off
> our mortgages...or just dropped money from a helicopter.
>
> Cash for clunkers...$24,000 cost for each incremental car sale. It
> would have been cheaper to buy 125,000 Ford Fusions and simply give
> them away. www.planbeconomics.com.../
>
>
> Government has the right intentions...but they're poorly executed.

Oct 29 06:52 PM

[Satisfied:]

Sooo happy I live in Texas which is thriving with jobs, low taxes, and a very upbeat and polite populace.

I just wish Cali(Mexi)fornia would just sink inward into the LaBrea Tarpit taking all the mentally ill filth like moviestars, demofacists, RE-Flippers, and suck them and all the other assorted freaks down into the primordial ooze. Future geologists, paleontologists can find their bones and wonder. Hahaha

Oct 29 06:56 PM

[Gregman2:]

Too soon to tell.

Oct 29 08:41 PM

[Fred W:]

What does McCain have to do with what Obama is doing today?
Answer = NOTHING
Stick to the topic and leave out the politics if you want to be taken seriously here--otherwise there are plenty of Yahoo message boards out there that would better fit your agenda

On Oct 29 10:47 AM anarchist wrote:

> So what do you think that McCain would have done that would have
> made things better?

Oct 31 02:27 PM

[svkoho:]

Gregor, did you mean "deflationary" depression. Rising gas prices are not enough to call it inflation.

Nov 11 01:09 PM