The Burgeoning Deficit Of California

California…ah the land of Hollywood, Silicon Valley, wine and cheese…what an American story right? Well, they’d better do something and quick, if they want the story to have a happy ending!

This $1.8 trillion dollar economy is the eighth largest economy in the world. Its economy literally rivals the size of Italy or France. There are 36.5 million people there which make it home to 1 out of every 8 Americans. So this place is massive by any metric. However, it’s “not too big to fail”.

In fact, Governor Schwarzenegger has declared in last month’s speech that “California is in a state of emergency”. He went on to say that “this deficit is a rock upon our chest and we cannot breathe until we get it off.”

Aid to students and to the poor delayed? And tax refunds delayed?!?

Never have more sobering words been spoken. In fact, the state Controller John Chiang has warned the state that the state could run out of cash as early as next week!

You’ve seen the signs that say “California or bust”. A new one might be “California going bust”.

There are already some payments that he may have to defer due to the lack of cash in the state’s coffers. Chiang has already imposed a delay on tax refunds and has threatened to stop paying some bills.

Even worse…aid to students and to the poor could be halted and some state offices may reduce their hours.

Even Moody’s warned of a possible downgrade of the state’s credit rating. If this happens, it would make it even more difficult for them to borrow and it would make whatever borrowing they could get much more expensive.

So how bad is it? The state’s deficit is growing at around $29,000 a minute or around $500 a second. So, the “deficit clock” outside of the governor’s office is whirling at a mind boggling rate.

The governor has been battling it out with their legislature because it is the only state that takes a 2/3 vote to pass a budget. This requirement has hampered his ability to get new sources of revenue approved as well as cuts implemented.

(If they don’t get something worked out soon, their whole state government may be the “girly men”!)
The former body builder has proposed a wide range of spending cuts and tax increases to help to bring the deficit down from: a three year increase in the state’s sales tax to an alcoholic beverage tax of 5 cents a drink, to taxes on auto repairs and on golf games (which have remained free from taxes up until now).

In all, he’s proposing 17 billion dollars in spending cuts, 14 billion dollars in additional revenue and 10 billion dollars in borrowed money to bridge the gap. The deficit is anticipated to balloon out to $40 billion over the next year and a half.

So the “2/3rds rule” delay has caused them to not be able to raise enough cash before the recession hit. Also, the housing crisis hit the state much harder than many states and so it will probably come out of its recession much later than that of the overall nation. This “housing crisis” has caused depletion of tax revenues.

I think this example of what is going on in California shows what could happen to the entire nation if things aren’t dealt with soon.

So here’s what could “profit” and “plummet” in this type of an environment!

This outlook keeps a dark cloud over the nation which has continued to hinder stocks and “at best” keep them in a locked trading range presently.

It’s times like these when there’s no wonder why gold jumped from $853 last week when I wrote on it up to $ 920 today. I think this gloomy economic outlook could help gold soar even higher and eventually take the U.S. dollar much lower.

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