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alstry (36.24)

California Has SERIOUS Problems.....The Government Bubble Collapse

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July 19, 2009 – Comments (6)

From the LA Times on CRE(CalRisk):

Nearly 16% of office space in Los Angeles County is sitting vacant as tenants close up shop or move out of expensive properties. Nearly a third of the space around up-market Playa Vista sits empty; office buildings in the Inland Empire and parts of Orange County are completely vacant.

California, relatively more than most states,  was a poster child for the credit bubble.  Californians were buying and selling real estate back and forth to each other making millions and paying millions in taxes.

The demand for real estate exploded and builders built everywhere.  Workers making $50K per year were routinely getting mortgages for $500K.  Homes were selling like crazy.  Real Estate agents were cashing in, Mortgage brokers were cashing in, Builders were cashing in, Developers were cashing in......Billions were being made and Billions were being paid in taxes due to higher incomes, property taxes, impact fees, sales taxes, etc.......

The credit bubble drove a government bubble as government started spending and borrowing like crazy.  New Schools in farm fields waiting for students to come, new government centers, and lots of pay raises for all just to name a few.

We have already seen the initial fallout from the credit bubble.....and conditions are deteriorating rapidly.  We are now about to see an even more dramatic impact from collapse of the government bubble.  If you understand the situation, you realize we are just at the beginning of the unwind as the dominos are just starting to fall.

Once government starts slashing wages from hundreds of thousands of workers, makes massive cuts to programs, and scales way back on projects....the immediate impact to California's economy will be visible as cities, counties and states struggle with escalating defaults and lower revenue streams.

Things will only get worse for CA and it seems like the press is picking up on Alstrynomics....

California's budget gap won't close for long

SACRAMENTO, California (Reuters) - Even if California Governor Arnold Schwarzenegger and top lawmakers quickly plug a $26.3 billion deficit to balance the state's budget, the state's weak revenues signal that a new shortfall will emerge.

Schwarzenegger and lawmakers say they are near a deal to balance the budget, even though a hoped-for agreement did not emerge on Wednesday because of a part of his plan to suspend a law on school funding.

A balanced budget for the fiscal year that started July 1 would allow the state to resort to traditional borrowing, providing a steadier supply of cash at a better price than the unorthodox IOUs it has been forced to issue in order to conserve cash.

But a balanced budget is seen as fleeting because California's economy, which is reeling from high unemployment and the recession, will remain in the dumps for some time. Closing the current shortfall does not account for further deterioration in the economy -- and revenue -- that many economists expect.

"It will be horrible next year," said economist Steve Levy of the Center for the Continuing Study of the California Economy.

The UCLA Anderson Forecast unit last month said in a report that California's economy is in for a "continued rough ride for the balance of 2009 and is not going to see economic growth return until the end of the year." The unit also projected the state would suffer double-digit unemployment until 2011.

California's revenues from personal income tax collections, its main revenue source, are posting their worst decline since the Great Depression.

"By no stretch of the imagination is it done," said Christopher Thornberg, an economist at Beacon Economics in Los Angeles. "This isn't going away any time soon."

RETAIL SALES TAXES WEAK

Orange County Supervisor John Moorlach said retail sales tax collections also will be weak for some time as consumers rein in spending.

http://www.reuters.com/article/wtUSInvestingNews/idUSTRE56G4FT20090717?pageNumber=1&virtualBrandChannel=0

It mathematically must get worse because much of California's economy was derived from revenues that generated directly or dirivatively from a credit bubble.  An entire sub prime industry employing tens of thousands of people grew in the state and has now fallen.  More and more industries are on the brink as they have seen sales decline substantially.

With borrowing cut way back, revenues declining dramatically, and incomes evaporating.....it is not a stretch to think CA's economy could contract by 50% or more in the near future.....tax receipts are already down by 25% and many of the cuts are still ahead.

6 Comments – Post Your Own

#1) On July 19, 2009 at 11:32 AM, 1goldsmith (< 20) wrote:

The Illegal Immigration problem is also working against California, This leads to cash flowing out of the country as opposed to being spent locally (and thus resulting in sales taxes). Also having a nearly 10% sales tax tends to be an incentive for people to find ways around paying it where possible, In today's retail environment this is easier than ever with Internet shopping, and the traditional making major discretionary purchases while traveling. Yes Travel is down, but it isn't very far to the lower sales tax ares that surround California.

 

 

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#2) On July 19, 2009 at 11:42 AM, alstry (36.24) wrote:

The Government Bubble also applies to cities, counties and other municipal entities......

This impact will be felt in every corner of the nation as we are dealing with a collective $6.5 Trillion dollar spend.

The interesting fact is most of the projected deficits applied much more optimistic numbers than actual receipts indicate.

$6.5 Trillion is half of our GDP.......the fallout will be evident.

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#3) On July 19, 2009 at 12:16 PM, bullnada (< 20) wrote:

alstry,

Front page of the union tribune in San Diego says one or more of the U.C. schools may have to close.

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#4) On July 19, 2009 at 12:26 PM, alstry (36.24) wrote:

It is just the beginning as your sociopathic government officials tell you we are stabilizing.......

A good growth business for the near future might be converting schools, office buildings, and shopping centers into green space.

Although good for the environment, it will definitely cut tax receipts to the state.

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#5) On July 19, 2009 at 1:42 PM, dickseacup (67.13) wrote:

Californians were buying and selling real estate back and forth to each other making millions and paying millions in taxes.

This is exactly what I think is happening in the stock market right now. GS and the other big players have their algorithms trading paper back and forth, driving the stock prices slowly higher. At some point, they turn them off and the "retail investors" (regular Joes and Janes) are left holding the bag with nobody to turn to in order to close out their position. The ultimate realization of "the greater fool" theory.

The demand for real estate exploded and builders built everywhere.  Workers making $50K per year were routinely getting mortgages for $500K.  Homes were selling like crazy.  Real Estate agents were cashing in, Mortgage brokers were cashing in, Builders were cashing in, Developers were cashing in......Billions were being made and Billions were being paid in taxes due to higher incomes, property taxes, impact fees, sales taxes, etc.......

Right now the big financials are cashing in with their program trading. The brokers servicing retail investors are cashing in. The executives who are selling are cashing in. The tax man gets his cut from those retail investors who manage to get out without losing their shirts. 

The stock market is just as artificial now as the real estate market was then. Same game, different venue. 

YMMV.

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#6) On July 19, 2009 at 1:47 PM, alstry (36.24) wrote:

dick,

You are scaring me right now......you are so much more right than you think.....

Just wait until America learns about High Frequency Trading and its implications.

The fact that the Gardner Brothers and Motley Fool are not raising the red flag is a bit disappointing....soon, many are likely to be disappointed from its effects.

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