I really don’t know why this news story isn’t getting more attention. The Peoples Republic of California is now paying state vendors with IOUs. These same state vendors do not have a clear path to convert these IOUs into money to meet payroll and other expenses. The same banks that defrauded the state for years are now refusing to accept these IOUs for payment.
Photo taken outside an ATM in San Diego yesterday.
The State of California is committing fraud and this is going to have devastating effects.
- Lawsuits – Any money the State of California thought it could save by kicking the can down the road will be eaten and more as these vendors descend on court houses. It is going to be a lawsuit frenzy in the Golden State.
- More Layoffs – If vendors can’t pay their employees and the state can’t pay them, then that will trigger more layoffs. Then the already cash-strapped California will have to pay unemployment benefits to those laid off. Someone didn’t think this through.
- Services Shutdown – If these vendors are being issued non-convertible tender, many will stop services until they get paid for services rendered. A lot of vendors work directly with protecting the safety of the citizens of California. Those planes that put out wildfires need to serviced.
- Pay Up Front - California just became a credit risk. Going forward all vendors will demand payment up front. No money, no work.
When you rip people off, they go on strike. The California situation reminds me of the book Atlas Shrugged. Only this time the strike is not being initiated by excessive regulation, but by lack of payment. I’m sure other state legislators are watching this closely. If they can avoid tough decisions by issuing paper promises, they will do the same.
Let us review the facts:
- California represents 13% of GDP.
- California can not pay its vendors.
- California is issuing IOUs and banks are not accepting them.
- President Obama has indicated there will be no federal bailout for California.
- History tells us “where California goes, so goes the country”.
If you are long in the stock market now, you are a fool. The most important state to our nation’s economic health is now committing financial fraud. This can not end well.
Meanwhile, other news is slipping under the public radar too, such as the two Japanese bankers who were cought on a train on their way to Switzerland to dump 1.34 billion in U.S. Bonds.
There are 9 other states heading for default behind California as well. This ought to be interesting to see the outcome of this, there’s simply not enough policeman to control the population of L.A. as it slowly turns into something comparable to Calcutta India. Just be thankfull your not stuck down in that rat hole.
Maybe the next book to come true is Snow Crash (http://www.amazon.com/Snow-Crash-Neal-Stephenson/dp/159606157X). In that book, each gated community is it’s own City-State, with their own economy. I think SoCal is perfectly positioned for it!!
I am reading COLLAPSE by Jared Diamond now. When governments fail to deliver promised services, societies turn on each other. Civil war.
Population trends already show a mass exodus of CA taxpayers to Texas and Washington.
Ed’s comment about Los Angeles has me thinking. If the government can’t provide safety for the citizens, the gangs will sense it is open season to make power moves. It’ll be like The Shield only without Mackey there to clean up the mess.
No one is willing to make the tough decisions. The Feds are the same way with their “No Banker Left Behind” program.
I am waiting to see what they do with CIT as a litmus test for Obama. The are not “too big to fail” but I bet they will want to make a zombie bank instead of actually shutting them down as they should.
Anyway, what is going on in California is insane for all the reasons you state. I guess if everything burns to the ground (between the wildfires and the gangs) it will shift the burden from the banks to the insurance companies…
We can assume the feds will eventually have to act with force at some point before all hell brakes loose. This includes militarily too at some point, and are troops and majority of the National Guard are fighting the Taliban.
The best country in the world is disentigrating at a rapid pace, unbelievable. What a shame.
It seems we aren’t alone. Every other country appears to be in a race for the bottom. Are there any countries doing the right thing now? Or are we just taking everyone down with us?
I think each country is doing what they can. But the collapse which started in November, is inevitably getting worse, and I don’t think this cap and trade, green jobs thing for everyone is going to work. That is, if its passed. So yes, I think we are taking everyone down with us, and when the dust settles we will see a whole new set of laws and principles that everyone in the world will be forced to live by. Sick I know.
Here’s a list of fifty things to do right now which may be helpfull. I was told originally came from Austria.
http://www.lewrockwell.com/spl/50-things-to-do-now.html
MAS – Depends what you mean by “doing the right thing.” I view stimulus as a necessary evil, but the bailouts as pure evil (Treasury and the Fed Programs) …but then I tend toward Keynes versus Austrian theories.
Ed – I really hope we don’t need your list!
Hi Jim,
I hope we don’t either but I prefer to play it safe. I think the day is coming when a C note isn’t going to buy much.
Ed,
Thanks for the list. Here is 10 Things by Karl Denninger: 10 Things You Must Do.
Ed – I share your concern, but still expect deflation (versus inflation). Here is an excellent case (also in one of Mauldin’s recent e-mails):
http://www.nakedcapitalism.com/2009/07/make-sure-you-get-this-one-right.html
Here are 3 of the key parapgraphs:
Japan – The Japanese authorities have used every trick in the book to reflate the economy over the past two decades. The results have been poor to say the least: Interest rates near zero (failed), quantitative easing (failed), public spending (failed), numerous attempts to drive down the value of the yen (failed); the list is long and makes for painful reading.
Liquidity Trap – The Bank of England, the European Central Bank and the Federal Reserve have all flooded their banking system with enormous amounts of liquidity in recent months but what has happened? Instead of providing liquidity to private and corporate borrowers as the central banks would like to see, banks have taken the opportunity to repair their balance sheets. For quantitative easing to be inflationary it requires that the liquidity provided to the market by the central bank is put to work, i.e. lenders must lend and borrowers must borrow. If one or the other is not playing along, then inflation will not happen.
Credit Destruction – There is another way of assessing the inflationary risk. If one compares the total amount of credit destruction so far (about $14 trillion in the US alone) to the amount spent by the Treasury and the Fed on monetization and fiscal stimulus ($2 trillion), it is obvious that there is still a sizeable gap between the capital lost and the new capital provided.
I’m with Jim when it comes to DEFLATION.
If things get as bad as the hyperinflationists think, the most valuable precious metal will be LEAD.
Mad MAS – Beyond Thunderdome!
I’ve been meaning to revisit the MAD MAX movies. Thanks for the reminder.
Thanks MAS but I always pause when someone downplays the importance of having some assets in metals. No you can’t eat gold. I suppose a dollar bill would taste better. But it doesn’t make sense to me why someone would feel this way especially if they expect more turmoil ahead in the bond market. Other good points though.
Thanks for that link Jim, I book marked it and will read it again later. It does make sense but I wonder (cautiously) if some important issues have been overlooked.
As this deflationary process deepens, and our debt soars, nations which have already begun to slow their purchase of treasuries, let alone dump them, have already started the quest to bail on paper for more tangible assets, things of real value, on the cheap while they still can. The level of confidence is eroding. So as this imbalance drifts further apart, these assets no longer become as cheap possibly resulting in hyperinflation, as countries compete with each other desperately attempting to bail in dollar denominated paper assets.
Also its been said that a new financial crisis could develop from the failure to effectively regulate derivatives, where attempts will be made to buy real assets through insider scams. Banks have lobbied hard against any changes that would make them unable to do so. Since wall street owns the government, we shouldn’t expect otherwise.
I assume the international bankers want a peaceful solution to the global financial mess, with a one world currency ,without a fight of course.
Deflation aint ruining my summer, and that’s a good thing.
Hi Ed – If you TRULY believe the hyperinflation argument you should buy as much property as you can get your hands on. In such an environment rents would quickly outstrip mortgage payments and mortgage rates are historically low. The returns would far exceed boring old gold, since property is levered at least 4:1.
The only equivalent leverage I know of is /YG (gold) futures contracts or GLD call options, which are also both highly levered.
Anyway no offence, but I just think most gold bugs are talking their book. Other good hyperinflation investments are always completly ignored and gold is always the only option presented …even though real estate and currency trading would likely be more profitable (and less risky) in a hyperinflationary environment.
Whenever I hear calls that the USD is going to continue tanking, I ask “relative to what?”. This is a global recession (depression) and as bad as our banks and balance sheets look, they are equally and often worse in other countries.
The only answer I’ve heard is that the USD will decline against GOLD and other commodities. MISH believes this as Gold is protection in a deflationary collapse. Denninger believe the opposite. I don’t know. I do see a crowd forming on the precious metals side and that always concerns me.
MAS – Your comment on the Mish vs. Denninger views nudged me to do some digging …and you are right. I was firmly in the Denninger camp, but this detailed article makes a strong case against gold being a good inflation hedge (in fact it implies somewhat negative correlation to inflation):
http://globaleconomicanalysis.blogspot.com/2007/02/is-gold-inflation-hedge.html
Gold is apparently good in the Mad Max (or Mad MAS
) scenario, but otherwise not so much. And even in this case it must be physical gold …gold ETFs and futures can’t be bartered very well for black market goods.
So a hyperinflationist is left with either real estate and/or commodities as good investments. RE for reasons I already mentioned. Commodities, since a hyperinflating currency will buy less and less “stuff” …and therefore the same commodity “buys” more and more dollars.
Regardless, I am still in the deflationary camp, which means cash and short equities. I have been more into system trading lately though, which takes advantage of high volatility regardless of market direction (i.e. makes long and short trades, but short term).
The Mish vs Denninger debate is about the direction of gold during DEFLATION. Both agree that gold rises in an inflationary environment. Denninger thinks gold can get smashed in a deflationary environment. Mish disagrees.
If I thought inflation was a serious probability I’d be long miners or do as Karl mentions: buy OTM leap call options. But I don’t. So like you I’m in cash and funds that short equities.
Jim, Im not out to get rich….just maintain my life style with minimal pain. Real estate is always a good investment and more so now for those that have small farms and alternative energy sources to live off the grid as much as possible. this would be my only interest. The idea of having my own big garden, chickens, bee farm, well and solar panels etc…appeals to me very nicely. Besides I don’t have the cash to go out buying up forclosures, nor would I want to spend the time. There’s plenty of people out there losing there ass on rentals too. No job + no money= no rent check.
But I don’t believe that the worlds super power will allow itself to simmer in a deflationary spiral and allow another country to kindly take its position. Historically, its never happened, so I lean towards self induced hyperinflation or war. I hope my theory is wrong.
I think Glenn Beck said it right last night. “there’s definitely a transformation occurring much like what happenend in Russia.”
Here’s a good read from Jon Markman.
“The U.S. and China ponzi scheme”.
http://articles.moneycentral.msn.com/Investing/SuperModels/mad-world-chinas-bind-is-ours-too.aspx?page=1
MAS – Here are the money quotes from Mish’s article IMHO (though I disagree with his conclusion):
In relation to The Golden Constant, the inflation hedge thesis is little more than an old wives’ tale. Unfortunately, that hasn’t stopped it sprouting like a weed. Lacking dispassionate empirical support, it rests instead on other theories that at root are political rather than economic.
We turn also to common sense, and note the fundamental economic difference between other commodities and gold: all other commodities are produced for consumption, whereas gold, precisely as a function of its money-like qualities, is produced for accumulation.
Gold is what you want when they seal the borders and you need to get across; it’s what’s accepted when there’s blood in the streets and nothing else flies.
Given the current underlying conditions, with increasing chances of a deflationary credit implosion related to housing, along with some chances of a collapse in the dollar, Yen, or fiat currencies in general, the incentive to store wealth in the form of gold is massive.
Ed – I hear ya …though the deflationary spiral will impact everyone IMO (not just the US). If you are listening to Glenn Beck though, my best investment advice to you is to turn off your TV!
“The idea of having my own big garden, chickens, bee farm, well and solar panels etc…appeals to me very nicely. ”
That appeals to me as well.
Sounds like this Mish guy knows what he’s talking about. I listen to beck a few others and read whatever but I stopped investing in the market. Im done with it, and I always get burned anyways. Im going to sit on the sidelines Jim and wait for the implosion.
Mas I live about a mile and a half from the 21 acre farm, never been there and it looks perfect. I will have to make an effort to get down there one of these days.