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.

Mike “Mish” Shedlock
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