Calofornia is DOOMED!

[Raz]

Don't know much about Mr. Smith but his insight and reasoning appears quite sound, at least to me.

I have relatives in Orange County and Los Angeles who discussed this with me back in the Mid-1990s.
We all thought it was crazy back then.:eek:



*of two minds* *charles hugh smith*

Why California Is Doomed (March 9, 2010)


California is doomed for two simple but profound reasons: the cost structure is too high for most businesses to survive, and a boom-dependent economy.

The dysfunctions crippling California would easily fill a volume: a dysfunctional Legislature that has been gerrymandered to protect virtually every seat; a dysfunctional proposition system which enables special interests to craft Protected Fiefdoms via the ballot box; recalcitrant public unions who don't see anything wrong with public servants getting 90% of top-pay in pensions while still earning big bucks as "contract employees," an enormous population of undocumented workers who pay only sales taxes, and whose employers pay no payroll taxes, either-- and that just scratches the surface.

I want to highlight two systemic, structural causes for California's impending bankruptcy as a state and as an "economy": a crushingly high costs structure and an economy entirely dependent on the next boom.
I know this sounds too simplistic to be meaningful, but I think there is much truth in this statement: Costs are too high because the guy before you paid too much.
In other words, you can't afford the $500,000 mortgage on the $625,000 house you bought in 2008 because the guy before you paid $550,000 for a house which sold for $140,000 in 1997.
These numbers are drawn from reality: our friends bought a small home in a desirable suburb in the San Francisco Bay Area for $140,000 in 1997. Yes, it was a fixer-upper and yes, our friends completely remodeled it. The fair value of the house after renovation was probably in the $175,000 to $190,000 range, tops.
They sold the house in 2005 for $550,000, and that buyer unloaded the house in 2008 for $625,000.
This represents approximately $235,000 of actual value (the $175,000 adjusted for inflation from 1997 to 2010 as per the BLS inflation calculator) and $390,000 of "credit-bubble" excess.
Yet that "bubble valuation" is an actual cost now that somebody borrowed money to pay that grossly inflated price. This mechanism is absolutely key to understanding the California economy's fundamental insolvency: the apartment rent is high because the landlord overpaid, the office rent is high because the landlord overpaid, the house is too high because the previous owner overpaid and his/her lender ponied up the mortgage based on bubble valuations. You can see the bubble in this chart of median home prices in Califonia: ...

http://www.oftwominds.com/blogmar10/...omed03-10.html

[MulaMan]

Re: Calofornia is DOOMED!

The "cost" of that California bubble home has now been spread across all American taxpayers via the banks dumping all these bad mortgages on the federal government via TARP type programs. Lower home prices does impact local government tax receipts, but that is a plus as they will eventually be forced to cut public salaries and pensions.

I agree California could go under but you always need to look on the other side in a unbiased way. 2 major positives California has:

1. The largest wealth creation engine on planet earth. A magnitude larger than anywhere else. Do not EVER discount the power of technological advance and we are living in the middle of massive technological advances that are close to making it to market. A true technology bubble is different then a pure financial bubble because when the dust clears there are new corporations left standing that build actual products and services.

2. If California passes single-payer health care regardless of congress then that will drastically change the "cost structure" you mention.

http://californiaonecare.org/

Employers if freed from health insurance monopoly will result in a massive small business boom in California and hence a jobs boom, leading the nation in job creation hands down.

I personally would consider moving my small business to California if they pass single-payer. My costs would drastically decrease and I could hire top-notch talent away from my big corporate competitors that have a huge (massive, huge) competitive health insurance cost advantage to retain top talent.

Many people with families would move back to California for the security of single-payer health care and would not mind the extra taxes for the added security plus the added freedom to control their own careers and choose employers on their own terms.

[sunskyfan]

Re: California is DOOMED!

I think California is THE shoe that will drop. It will test the American political system like nothing before. We bailed out Wall Street because we all thought we had a chit in the game. When Obama et al are going to ask Kansas and New Mexico to bail out California is when the political fracture will happen.

[c1ue]

Re: Calofornia is DOOMED!

The upcoming FY2011 budget and end of the 2010 budget in June IMO will be the event which brings the US$ weakness back to the fore.

I've mentioned before: California had a cumulative $60B state budget deficit in the 2007 to 2009 time frame. City and municipal deficits are cumulatively in the same order of magnitude.

The 2009 budget is a total of $85B.

This is a deficit ratio of over 35%.

What CHS speaks to is absolutely a factor, but not in the way he thinks.

The real estate issue will affect the city and municipal budgets most - many counties are already seeing net revenues fall for the first time since the Great Depression. This will exacerbate their budget deficits from an already high level.

The job losses thus far have been in the private sector - this in turn (actual UE 13.2% after a California Labor Dept. recalculation) is what impacted California's state revenues.

With the ongoing city, municipal, and state government reductions, UE can only go up.

State, city, and local revenues can only go down.

Bringing California state's budget in line with revenue, for example, means cutting tens of billions from a $85B budget (vs. a peak of around $105B).

This is true pain, Latvia style.

The other JIMY CCOFfas will also have to see similar changes though somewhat less so (new Jersey, Illinois, Michigan, new York, north Carolina, Ohio, Florida) much less the remaining major real estate implosion states: Nevada, Arizona, Georgia.

I'm thinking of changing the moniker to the JIMY FOCCers...

[MulaMan]

Re: Calofornia is DOOMED!

Glass 1/2 full or glass 1/2 empty. I agree California will the first to drop and hence the first to lead the country back to prosperity.

New Jersey is also a major economic state that is in the running for the first to crash and re-build, in my opinion.

The current system cannot be fixed by keeping the current system.

Change actually requires change.

Change actually requires the government (local and federal) to pass / change legislation.

Single payer health care would save $300 billion a year: overhead, underwriting, billing, sales, marketing department, huge profits, exorbitant executive pay, doctor and hospital administrative staff.

$300 billion = enough to cover everyone.

The numbers easily work, even with new government overhead built in, unless you are too lazy to do some actual research into the facts.

The only losers are health insurance firms and the politicians that they have bought.

It is actually a no brainer - unless of course you have no brain.

[sunskyfan]

Re: Calofornia is DOOMED!

We have two choices. Let the health system collapse or let Wall Street collapse. One or the other is going to happen if not both. The Dems have chosen the path that that would try to save health care. The Reps have chosen the path that would try to save Wall Street. The nasty little secret is that if the "fix" health care it will end the insurance pools and the final leg of the stool that holds Wall Street up will collapse. WS depends on that $1.2-1.6 trillions dollars per year paid in private premiums to pass through its mills. That is real money. Not leveraged guesses. Now that they have killed real estate it is the seed they depend on.

[audrey_girl]

Re: California is DOOMED!

I think California is THE shoe that will drop. It will test the American political system like nothing before. We bailed out Wall Street because we all thought we had a chit in the game. When Obama et al are going to ask Kansas and New Mexico to bail out California is when the political fracture will happen.

imho - I agree - this is going to be ground zero of what the entire country will have to go through

it'll all begin with i-rates start going higher and higher - then everything (and I mean everything) will start to break

- too much debt, too late to do anything about it

[c1ue]

Re: Calofornia is DOOMED!

I agree California will the first to drop and hence the first to lead the country back to prosperity.

You have a nice belief - perhaps you can expand on the mechanism by how this will happen.

Jobs aren't increasing.

New industries aren't starting.

Certainly there will be a bounce - but I still do not see how it will be something other than a dead cat bounce.

Even were reindustrialization become a national prerogative - California will lose both because it already derives significant income from imports via its Long Beach and Oakland ports and also because its labor cost structure is so high due to high housing prices.

[BK]

Re: Calofornia is DOOMED!

Lets see California is on the Brink of Financial disaster because of financial mismanagement and we are to believe that California OneCare will be run well!!!

Check out the new bureacracy that Massachusetts created with its Heatlhcare solution - The Connector.org - more State Employees with great Pension plans.

I hope Mulaman is correct about California One Care but, it requires the suspension of rational thought to believe that OneCare will be financially viable in the long term.

[charliebrown]

Re: Calofornia is DOOMED!

Someone has to pay for health care right?

So if the burden is lifted from business, then I assume that they can lower their prices, increase their profitablility or increase the employee's pay.

But then the medical cost burden is put on the state. Does that not mean higher taxes on the public?

I guess the profits generated by the insurance companies would be saved, but would that make up the difference in the inefficiency that results when beuarocrats spend other people's money?

[jiimbergin]

Re: Calofornia is DOOMED!

We have two choices. Let the health system collapse or let Wall Street collapse. One or the other is going to happen if not both. The Dems have chosen the path that that would try to save health care. The Reps have chosen the path that would try to save Wall Street. The nasty little secret is that if the "fix" health care it will end the insurance pools and the final leg of the stool that holds Wall Street up will collapse. WS depends on that $1.2-1.6 trillions dollars per year paid in private premiums to pass through its mills. That is real money. Not leveraged guesses. Now that they have killed real estate it is the seed they depend on.

Help me to understand how the private insurance premiums are such a support for wall street.

[charliebrown]

Re: Calofornia is DOOMED!

I know that the "float" that insurance companies have are invested in securities. I'm not sure how the portfolio is allocated if its all in short duration treasuries, or what.

If the state were to run an insurance company, they would need to park the reserves somewhere too. Maybe they would not take as much risk?
Although how many school districts / local governments had a portfolio full of SIV's
I know florida did, relax its all AAA

[kriden]

Re: California is DOOMED!

Here is an example of the system in California:

In April 2008, The Orange County Register published a bombshell of an investigation about a license plate program for California government workers and their families. Drivers of nearly 1 million cars and light trucks—out of a total 22 million vehicles registered statewide—were protected by a “shield” in the state records system between their license plate numbers and their home addresses. There were, the newspaper found, great practical benefits to this secrecy.

“Vehicles with protected license plates can run through dozens of intersections controlled by red light cameras with impunity,” the Register’s Jennifer Muir reported. “Parking citations issued to vehicles with protected plates are often dismissed because the process necessary to pierce the shield is too cumbersome. Some patrol officers let drivers with protected plates off with a warning because the plates signal that drivers are ‘one of their own’ or related to someone who is.”

The plate program started in 1978 with the seemingly unobjectionable purpose of protecting the personal addresses of officials who deal directly with criminals. Police argued that the bad guys could call the Department of Motor Vehicles (DMV), get addresses for officers, and use the information to harm them or their family members. There was no rash of such incidents, only the possibility that they could take place.

So police and their families were granted confidentiality. Then the program expanded from one set of government workers to another. Eventually parole officers, retired parking enforcers, DMV desk clerks, county supervisors, social workers, and other categories of employees from 1,800 state agencies were given the special protections too. Meanwhile, the original intent of the shield had become obsolete: The DMV long ago abandoned the practice of giving out personal information about any driver. What was left was not a protection but a perk.

Rest of Story: http://reason.com/archives/2010/01/12/class-war/print

[vinoveri]

Re: Calofornia is DOOMED!

"print" money and retire and roll over debt, while maintaining CONfidence. It makes everyone else's money worth a little less, but no one connects that dots. California will be bailed out, if not through the front door, then the back. $60billion is chickenfeed relative to the bailouts we've seen. There is no longer accountablility for spending or debts. The only question is how long the Feds can maintain the charade and keep the reflation scheme from blowing up, and it may be a long long time. Look what happened to Dubai, and now Greece, why do you think it will be any different with the states?

[vanvaley1]

Re: Calofornia is DOOMED!

I know that the "float" that insurance companies have are invested in securities. I'm not sure how the portfolio is allocated if its all in short duration treasuries, or what.

If the state were to run an insurance company, they would need to park the reserves somewhere too. Maybe they would not take as much risk?
Although how many school districts / local governments had a portfolio full of SIV's
I know florida did, relax its all AAA

My vote is to park the state run insurance company reserves in a state owned bank like North Dakota has. All state, country, local governments, school districts, etc. would be required to deposit revenues and/or reserves in said state owned banks. Of course, we'd have to get the legislature and governor on board which would not be forthcoming. But we have a referendum process that can be used. If passed and challenges from the banksters were defeated, I'd like to see any state compete successfully with this state.