Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Stocks, Bitcoin and Crypto Markets Breaking Bad on Donald Trump Pump - 21st Nov 24
Gold Price To Re-Test $2,700 - 21st Nov 24
Stock Market Sentiment Speaks: This Is My Strong Warning To You - 21st Nov 24
Financial Crisis 2025 - This is Going to Shock People! - 21st Nov 24
Dubai Deluge - AI Tech Stocks Earnings Correction Opportunities - 18th Nov 24
Why President Trump Has NO Real Power - Deep State Military Industrial Complex - 8th Nov 24
Social Grant Increases and Serge Belamant Amid South Africa's New Political Landscape - 8th Nov 24
Is Forex Worth It? - 8th Nov 24
Nvidia Numero Uno in Count Down to President Donald Pump Election Victory - 5th Nov 24
Trump or Harris - Who Wins US Presidential Election 2024 Forecast Prediction - 5th Nov 24
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24
At These Levels, Buying Silver Is Like Getting It At $5 In 2003 - 28th Oct 24
Nvidia Numero Uno Selling Shovels in the AI Gold Rush - 28th Oct 24
The Future of Online Casinos - 28th Oct 24
Panic in the Air As Stock Market Correction Delivers Deep Opps in AI Tech Stocks - 27th Oct 24
Stocks, Bitcoin, Crypto's Counting Down to President Donald Pump! - 27th Oct 24
UK Budget 2024 - What to do Before 30th Oct - Pensions and ISA's - 27th Oct 24
7 Days of Crypto Opportunities Starts NOW - 27th Oct 24
The Power Law in Venture Capital: How Visionary Investors Like Yuri Milner Have Shaped the Future - 27th Oct 24
This Points To Significantly Higher Silver Prices - 27th Oct 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

California Leads Way For the US Consumer Bust

Economics / Recession May 18, 2008 - 07:55 AM GMT

By: Mike_Shedlock

Economics

The International Herald Tribune reports Californians leading the way to consumer bust .

As it did when the housing bubble began to burst, California is leading the way in the next leg: a consumer bust.

Squeezed by rising unemployment, inflation in food and energy costs and plunging home values, Californians are cutting back on spending. Besides causing woes for state and local government, the cutback is giving California's economy another knock and makes further job losses, home repossessions and banking problems more likely.


The figures are pretty bad. The median home price has fallen by 29 percent in the year to March, according to the California Association of Realtors, and repossessions are increasing.

Unemployment hit 6.2 percent in March, up 1.2 percentage points from the same month last year.

But most important, in the 10 months to the end of April, sales tax receipts in California are actually down in absolute terms. Gasoline tax receipts are essentially flat. When you factor in that there would have been considerable inflation during the period, and that some essentials like gasoline would have risen sharply in cost, the picture is clear: Californians are tightening their belts.

And California matters. It accounts for 13 percent of the U.S. economy. It was also where more than a third of the non-mainstream home loans, like subprime and Alt-A, were made in 2006 and 2007, making it very important to the health of the banking system.

"California is big enough that it is going to drag a lot of the nation down with it," said Christopher Thornberg of Beacon Economics, a consultancy in Los Angeles. "You can't have collapsing consumer demand in California and not expect it to have an influence."

"People have racked up a phenomenal amount of debt, savings rates have been at zero and the piper has to be paid," Thornberg said.

Vallejo, a city in Northern California, said last week that it would file for bankruptcy, prompted by rising costs and falling tax receipts due to the housing slump.

Governor Arnold Schwarzenegger is expected to unveil plans for $15 billion in bonds backed by lottery revenues to help plug a state budget hole.

Insanity Continues In California Budget Proposals

Arnold is back at it again, thinking that borrowing can fix budget problems. Please consider Schwarzenegger Considers Lottery Bonds to Fix Deficit .

California Governor Arnold Schwarzenegger will propose that the most-populous U.S. state borrow $15 billion against lottery revenue over the next three years to help fill a budget deficit, his press secretary said.

Schwarzenegger will detail the proposal later today when he unveils his updated budget for the fiscal year that begins July 1, spokesman Aaron McLear said. The plan would require voter approval in November. If it's rejected or falters, Schwarzenegger, a Republican, will seek a temporary, 1 cent increase of the state's 7.25 percent sales tax.

Schwarzenegger, 60, has seen state finances deteriorate amid the worst housing slump in the U.S. in 26 years. In January 2007, he boasted that the state's ongoing deficit had been erased. Within 12 months, he was forced to declare a fiscal emergency as the global credit crunch slammed California's housing market, curbed tax revenue and left him with a $17 billion deficit.

"We feel the proposal offers the long-term solutions to the budget problems that we have," said McLear, referring to the lottery bonds, in an interview.

Under the plan, Schwarzenegger would use $5 billion of the bond proceeds for the deficit in the coming fiscal year. The remaining $10 billion would fund a budget reserve, McLear said.

The reserve is part of a constitutional amendment Schwarzenegger also wants to put before voters in November, requiring the state to set aside a portion of surplus revenue during flush years that could stabilize the budget in lean years
.

Borrowed Reserves

Schwarzenegger wants a constitutional amendment to hold reserves and he wants to borrow the reserves. This is fiscal insanity at its finest.

Schwarzenegger calls it a long-term solution. Long term? The proposal is for 3 years. Six months ago the deficit was $10 billion, four months ago it was $14 billion, one month ago it was $16 billion. Today the budget deficit is $17 billion and growing.

Every time I look, the numbers get worse. I expect California's budget problems to triple in the next three years at a bare minimum. A factor of 10 would not surprise me if Schwarzenegger continues to pass the buck by floating bond issues rather than slashing spending and raising taxes.

You cannot balance a budget by borrowing. All that does is postpone the problem.

Schwarzenegger is threatening a "temporary", 1 cent increase of the state's 7.25 percent sales tax if voters do not approve the bond issue.

I have news for California voters.

1) An increase in the state's sales tax is coming whether or not the lottery bond issues is passed.
2)That increase will not be temporary.

Flashback March 2, 2007
Schwarzenegger wants $500 billion to rebuild California .

Sound Bytes

  • $42.7 billion in general obligation bonds issued last year is " only the foot in the door, to whet the appetite. "
  • It will take $500 billion to " rebuild California the way it ought to be ".
  • $500 billion is " too big for people to digest, so you don't talk about that " even though he is talking about it.
  • California needs $500 billion even though it has " done tremendously with the revenue increases ".
  • California will not issue less debt even if the economy slows.
  • California " could face lower tax revenues " but he opposes tax hikes.
I discussed the above and other California fiscal insanities on December 16, 2007 in Turn out the lights California, the party is over .

Inquiring minds may also wish to consider
"The Arnold" is going to have to renege on his promise of not increasing taxes. Furthermore, he is going to have to make huge budget cuts as well. This will throw more Californians into the ranks of the unemployed and reduce discretionary spending by the amount of increased taxes as well.

A downward spiral in California has begun. There is no stopping it now. Sleight of hand wizardry has run its course. The day of reckoning can no longer be postponed. Years of reckless spending has wrecked California.

As noted in Hardball In Vallejo, No Balls In D.C. , the city of Vallejo has declared bankruptcy. More cities will follow. California (and Florida) will lead the way.

By Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance, low volatility, regardless of market direction. Visit http://www.sitkapacific.com/ to learn more about wealth management for investors seeking strong performance with low volatility. You are currently viewing my global economics blog which has commentary 7-10 times a week. I am a "professor" on Minyanville. My Minyanville Profile can be viewed at: http://www.minyanville.com/gazette/bios.htm?bio=87 I do weekly live radio on KFNX the Charles Goyette show every Wednesday. When not writing about stocks or the economy I spends a great deal of time on photography. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at www.michaelshedlock.com.

© 2008 Mike Shedlock, All Rights Reserved

Mike Shedlock Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in