California: The Greece of the US Financial Crisis

Reckoning from Baltimore, Maryland...

America's Greece may be California.

"California nearing fiscal crisis," reports The Financial Times. Governor Jerry Brown vetoed a budget plan. He said it wouldn't do the job. We didn't see the plan, but our guess is that Brown is right. But this leaves the Golden State in a fix. It needs money. And like Greece, it can't print its own.

So the fingers are pointing. And the hands are wringing. And everyone is worried...except us.

Here at The Daily Reckoning, we've learned to make catastrophe our friend. We open the door and look for it. We invite it over for drinks. If we knew how to send Twitter messages we'd send it one or two. Maybe with photos attached.

'But if California can't pass a budget the police won't get paid...' say the worriers.

So what? Private citizens have plenty of guns in California. The crime rate will probably go down.

'But what about the teachers?' Don't make us laugh. Besides it's summer. Time for a vacation.

'What about people on welfare?' Don't expect us to cry for the zombies.

'There must be something that the state does that is essential!'

Name one thing! Ha ha...

Actually, we don't know what the state does that is helpful and what it does that is hurtful. All we know that it spends a lot of money. So, cut the money off...and we'll see what we really miss.

*** Back to the national stage...the scene is set for another recession. Here's The New York Times:


For those fretting that a string of disappointing US economic data presage a double dip in the recession, there is good news and bad news.

The good news: It would probably take a significant shock to knock the economy off course, even in its weakened state. The bad news: In the current environment there are plenty of potential shocks to worry about.
Yes, such as Greece. California. China. Housing. Inflation.

And those are just the shocks we know about.

The fact is, when Humpty Dumpty is sitting on a wall, there's always someone around to give him a push.

*** Let's define our terms. A 'zombie' is someone who lives on the flesh of living human beings. Like a senator. Or a conniving military contractor. Or a welfare chiseler. Or a bailed-out banker.

A consumer who has no money is hardly a 'zombie.' He's only a zombie if he gets his money dishonestly - that is, through theft, fraud, or government.

Even gypsy beggars are not zombies. They provide a useful service; allowing people to feel better about themselves for tossing them a buck or two.

But Roach is right. The immediate problem in America is consumer debt. It went up since the end of WWII to 2007. Since then, it's gone down. This is a big change. And it puts a strain on the whole consumer economy.

The US economy - as well as many foreign economies - is set up to anticipate more and more consumer spending. But US households haven't been able to deliver.

"Growth in consumption has averaged 0.5% annualized," write Roach. "Never before in the post WWII period has consumption growth been this weak for this long."

Well, Stephen, it's a Great Correction. What do you expect? Consumers are correcting 60 years of credit expansion.

In many ways, this is a worse problem than Europe's sovereign debt crisis. In Europe, the problem could be solved by letting a few banks and speculators go broke. It would teach the rest of them a lesson. Most likely, Europe could get back to work soon after.

But America's consumer debt problem will take many years to solve. Household debt is down to 115% of disposable income - down from 130% in 2007. But it averaged only about 75% from 1970 to 2000. Roach thinks it will take three to five years more to bring consumer debt down to more comfortable levels.

Regards,

Bill Bonner
for The Daily Reckoning