California Stumbles Closer to Bankruptcy: Opinion

VANCOUVER (Bullion Bulls Canada) -- Observing the California economy is like watching a train wreck in slow motion. Indeed, this "slow-mo" effect is such that when glancing back at my archive of commentaries, I had no idea it had been well over a year since I had last written on this economic catastrophe.

The other aspect to this pathetic melodrama which tends to have an hypnotic effect on observers is the way in which California's political "leaders" seem perfectly content to merely sleep-walk toward implosion. This is an economy which has been in an admitted "economic crisis" since 2007. Yet in a new piece discussing the nightmare of the current fiscal year -- a $19 billion budget-gap (plus $6 billion in unpaid bills from last year) -- was the revelation that this is composed of a $10 billion collapse in revenues + $9 billion in spending increases (inherited from the "fiscal conservatives" known as Republicans).

To already be hopelessly insolvent, and then to ratchet-up spending is the obvious behavior of a deadbeat. Sadly, the combination of massive corruption and political gridlock is severely compounded by the refusal of U.S. governments to "govern."

In what is purely the abdication of responsibility, California (like most U.S. states) has deliberately chosen to "tie its own hands" when it comes to economic (mis)management. Even if total political gridlock didn't make it impossible for state "leaders" to take the first "baby steps" in controlling exploding debts/deficits, the choice of U.S. states to permanently entrench unsustainable spending and permanently entrench inadequate taxation into their budgets must result in bankruptcy.

Thanks to the reader who forwarded a wonderful clip, which took a historical look at the economic policies which existed in the U.S. when it was at its peak of prosperity: maximizing wages for the middle class and a 90% income-tax rate for the highest earners. The historian, Michael Hudson, who discussed this era in the U.S. (which ended after World War II), noted that even with high wages the U.S. was able to out-compete low-wage jurisdictions in manufacturing, and even with a 90% tax-rate, the very rich got much richer.

This totally contradicts the economic gibberish of modern economic charlatans (i.e. "experts"): that the way to be "competitive" is to slash the wages of workers, and that high tax rates on the wealthy "harm" an economy. Indeed Hudson noted that those who preach this nonsense the loudest are now given a Noble Prize for their economic "genius."

Who would have thought that after a mere 60 years of doing the exact opposite of what produced U.S. prosperity that most of its citizens would have been impoverished, and all levels of government made hopelessly insolvent?

Understand that European nations are currently being pummeled by Wall Street's economic terrorists (via credit default swaps) for attempting "austerity", and (predictably) failing. These nations are failing because they are duplicating the same failed policies that have brought Western nations to the brink of economic suicide: squeezing those on the bottom (who have already been squeezed dry), while refusing to even touch the vast hoards of wealth accumulated by those on top.

Conversely, in the Ponzi-scheme economies of the U.S.'s local, state, and federal governments, these deadbeats are already so hopelessly insolvent that merely attempting austerity (as is being done in Europe) would cause all levels of the U.S. economy to immediately implode.

Even without attempting the slightest bit of fiscal restraint, the only way that the U.S. government is able to postpone an immediate collapse of the U.S. economy is to keep U.S. interest rates at an insanely artificial level -- by printing up trillions of new Bernanke-bills to buy any/every U.S. bond in sight. This brings us back to California.

With spending out-of-control, and revenues still in a downward death-spiral, what is California's new governor proposing? On the side of "spending cuts," only $7 million (no misprint) has been currently proposed. This amounts to less than 0.0005% of the planned spending increases for the current fiscal year. Presumably, new Governor Jerry Brown (who is also a former governor) should have been able to come up with at least a couple of viable ideas for fiscal restraint while campaigning to be elected.

In terms of raising revenues, the picture is equally pathetic. The Governor is boldly contemplating merely extending a 0.25% increase in personal taxes, and a 1% increase in sales taxes -- both of which will take most of their money from those on the bottom, and the amount of revenue raised is totally inadequate to close the funding gap. "Pain" with no gain.

As Europe has already seen, attempting to balance budgets by squeezing those on the bottom is making their economies sicker, not healthier. Ironically, as Wall Street's (ultra-wealthy) economic terrorists profit from attempting to bankrupt entire nations, what they are illustrating for all to see is that the only policy alternative which does not have any adverse consequences is massive tax increases for the wealthy.

In a post on our forum, I recently joked about how the "austerity" proposed by the new Republican Congress would take roughly 10,000 years to balance the U.S. budget - if the U.S. economy could be totally frozen in time, so that none of its $100+ trillion in unfunded liabilities became payable.

It's a similar picture for California. No one is acknowledging the true magnitude of debts/liabilities. No one is acknowledging the totally inadequate tax base. No one is proposing anything which will either bring the growth in debts/liabilities under control. No one is proposing any kind of major, tax overhaul necessary to restore a viable level of funding for government.

The California economy is not like "a runaway train heading for a chasm with the bridge out." It's like a runaway train which has already gone over the edge -- while the conductor muses about whether he should finally apply the brakes. There is no longer any possibility of avoiding a "crash" of the California economy, all that can be done is to minimize the damage when "impact" occurs.

Despite this reality, like every other government in the U.S., its only plan is to stall for time until "things get better" -- while pursuing policies which must make its economy sicker and weaker. Europe can be likened to a heroin-addict attempting to "kick the habit" by switching to methadone (i.e. "austerity"). Using the same analogy, the U.S. is a heroin-addict who claims that its real "problem" is that it's no longer getting "high" off of its current doses of smack -- and so it increases its heroin consumption.

California is clearly the "poster child" for this attitude, in that not only is its own economy a good microcosm for the entire U.S. economy, but (lacking its own printing press) its own bankruptcy is virtually certain to precede that of the U.S. as a whole. All aboard!

This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

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