2009 July 07 Tuesday
California Credit Rating 2 Steps Above Junk Bond Status

2 more notches down and I'll be living in a junk bond state.

Fitch lowered its rating of California’s general obligation bonds by two steps to BBB from A-, placing the debt two ranks above so-called high-yield, high-risk junk ratings, and said the state may be cut further.

Have the people who brought us this folly learned any true facts about the foolishness of their ways? I'm thinking NO.

The state is running a deficit of $3 billion for a population of about 37 million and growing. If that growing population was highly skilled and smart we could produce our way out of debt. But the population is dumbing down if anything.

While Gov. Arnold Schwarzenegger and lawmakers battle over closing a $26.3 billion budget gap, the state's controller last week was forced to issue IOUs for the first time in 17 years. Some county agencies, state vendors and taxpayers are getting paid in paper. The IOUs help the state controller stave off a deficit of nearly $3 billion for July.

The state also had a BBB rating back during the 2003 fiscal crisis which resulted in Arnold Schwarzenegger replacing Gray Davis as governor. But this crisis is worse because the economy is worse and likely to stay worse for years.

The state's cash crisis has become pretty severe. The state has now begun issuing promissory notes rather than pay all its bills.

The state last week started issuing "IOU" promissory notes for some bills to conserve cash for priority payments, including payments to investors holding the state's debt.

With bad economic news on unemployment and a big drop in the employment to population ratio I do not think California can grow its way out of this one. It has to cut, cut, cut.

Share |      By Randall Parker at 2009 July 07 12:01 AM  Economics Government Costs

Wolf-Dog said at July 7, 2009 3:11 AM:

When California, other states, and even the US government are later forced to cut their budgets, there will be mass starvation.

It will then be apparent that the deficit spending is in fact impeded by the foreign trade deficit, which is nearly 6 % of the GDP. Without foreign trade deficit, the internal government deficit spending can actually continue without severe inflation.

Ultimately, it will be decided that currency controls, tariffs and other measures will be needed to stop the foreign trade deficit. Without so much foreign trade deficit, unemployment would be much lower. Imagine 6 % of the GDP added internally to the job market.

A.Prole said at July 7, 2009 3:31 AM:

I'm sure the 'pornos' can get you out of this jam.
The revenues of the LA porn industry #now SoCal's major industry#are potentially enormous.Perhaps a better compact #less regulation in exchange for more tax#, can be found with the Porn men.

"Ho, ho, ho - The Phallus"

Aki_Izayoi said at July 7, 2009 5:09 AM:

"When California, other states, and even the US government are later forced to cut their budgets, there will be mass starvation."

Good job, you are an empiricist... unlike those deluded people who think private charity will step in.

I wonder what will happen to East Germany if West Germany doesn't subsidize it as it did after The Reunification; would it be similar to California as they have high unemployment rates and a majority of the population is on welfare there. Maybe the US will subsidize California.

"It will then be apparent that the deficit spending is in fact impeded by the foreign trade deficit, which is nearly 6 % of the GDP. Without foreign trade deficit, the internal government deficit spending can actually continue without severe inflation."

Given a rising savings rate and poor alternative investments, it might be possible to finance the deficits domestically.

Calorie Counter said at July 7, 2009 6:44 AM:

"When California, other states, and even the US government are later forced to cut their budgets, there will be mass starvation."

I hope so. Then some of the useless feeders will die off and more will head back south. We could do with less NAM welfare cases, criminals (and future criminal makers) and the like.

gcochran said at July 7, 2009 5:45 PM:

"there will be mass starvation"

Before the Internet, who knew that crazy people could be so boring?

Randall Parker said at July 7, 2009 6:24 PM:


If the poor folks are lucky times will get tough enough that lower class obesity will decline somewhat. That'll reduce the incidence of type II diabetes and their life expectancies will increase.

Mexico has about a quarter of the US GDP and Mexicans in Mexico are healthier than descendants of Mexican immigrants in the US.

Calorie Counter,

I expect your hopes to be dashed.


Are you the guy who sees an upside of downturns because more attractive women seek work in the porn industry? Or am I confusing you with someone else.


I like to think the silent reader majority thinks wiser and more sound thoughts than those who write comments. I could be wrong.

Daniel said at July 7, 2009 7:18 PM:

The trend is our friend. Kick it in. The sooner we hit rock bottom the better. Then we can hang the scoundrels (so to speak).

A.Prole said at July 8, 2009 3:38 AM:

No,the comparison is to the strictly Darwinian swarm of blow-flies that only sees nutriment in what we see as filth and corruption.
Nature is , of course, strictly Darwinian and without compassion.

Aki_Izayoi said at July 8, 2009 6:07 AM:

People say the US will have a lower standard of living. I could be optimistic if the poor could at least live like the people in the German Democratic Republic since people in socialism have an allegedly low standard of living. The DDR wasn't a total hellhole nor was it miserable place.

Would the German Democratic Republic be a floor for the US standard of living, or will it go lower Randall?

Mirco said at July 8, 2009 9:34 AM:

The standard of living of people will depend on how much the government will grow and meddle with their lives.
Will it grow more or, in a few years, the flood will reverse?
This will do the difference from East germany and Italy.

Rot said at July 8, 2009 10:53 AM:

"Would the German Democratic Republic be a floor for the US standard of living, or will it go lower Randall?"

The USA isn't full of Germans. It is full of less capable, more violent, duskier types.

Big Bill said at July 8, 2009 5:05 PM:

It takes peanuts to feed folks. Maybe $30 per week for food for a family of four. NAMs will learn real quick how to survive without Twinkies, RC Colas and beer. Plenty of empty houses to squat in that the bankers do not want to foreclose as they wait for the Obama bailout. Learn from the Europeans: if a European apartment buildingis leftempty, squatters just move in and take up residence. As long as they don't trash the place, there is little the police can (or want to) do.

So just find a house and squat. Tell the electric company to turn on the juice and move in. Again, the bankers do not want to foreclose since they will have to write off the debt and go bankrupt. The neighbors don't want a derelict drug den, so just walk over and introduce yourself as the new neighbors. Given the huge number of forthcoming defaults and abandonments, there will be a lot of places to choose from!

So start a squatter web site where people can apply for a squat. Neighbors, fearful of empty houses attracting dopers or criminals can respond and invite decent sounding squat folks to move in to the empty REO house next door. If they get too rowdy the neighbors can always call the cops and roust them out.

Start a squatter cooperative. For $500 a year/squatter a lawyer will be on call to contest any eviction orders (should they ever get around to doing anything) and tie them up for a few months. More than enough time to find another squat.

Why sleep in a tent under a bridge when there are tens of thousands of empty houses going vacant? It is not a felony to sleep in an abandoned house. It is called "adverse possession", and if you do it long enough the government will give you the land free!

Do you really think a California cop (the few that remain after the budget cuts) is going to spend day after day looking for squatters and rousting them out? Of course not! It will wind up like it is in Europe, a somewhat uneasy relationship, but one that is essentially peaceful.

What fascinating times we live in!!

Randall Parker said at July 8, 2009 7:12 PM:


I do not know how far down the economy will go in response to post peak oil production declines. That's the big question in my mind. I do not have it figured out yet.

Big Bill,

The houses will almost all come back out of foreclosure. In a deeper financial crisis I would expect a big acceleration of the rate at which houses pass thru foreclosure. The US government could just hold lots of auctions of houses held by collapsed banks.

Big Bill said at July 9, 2009 7:39 AM:

Yes, Mr. Parker, they will come out of foreclosure. But it may not be for many, many months, perhaps two or three years, which, of course, is a long enough time to destroy a neighborhood as the houses become gang-controlled and torn to shreds for scrap as they are in places like Cleveland. Who wants to live next to several vacant shells that are awaiting bulldozing?

Of course adverse possession is not likely since it takes some 10-15 years in California.

But what a delightful way to pressure the banks to sell the houses at auction. If they know the houses are not going to just sit empty for a year or two in pre-foreclosure until they can get the feds to bail them out butwill be occupied, they will be more willing to sell at whatever the market rate is.

And what better way to keep the price of housing down, if there is a massive pool of squats and a culture that is willing to use them to house the dis-housed as they do in Europe.

One of the things that fascinated me about a recent CA documentary was the foreclosure process. A couple cops get foreclosure notices from the banks and serve them on the residents. They make a big to-do of taking everything the people own out of the house and putting it on the curb. Then they leave. Then the house gets forgotten.

So why don't the owners just move back in? The house isn't going to be sold. The court has done its standard foreclosure process. The banks are not watching or managing the properties. No one is shopping for them. No realtor is taking folks to visit vastly over-priced houses. They just sit. For many, many months. And with the massive property crash coming by the end of summer (see http://www.doctorhousingbubble.com) it is going to get much, much worse.

I would prefer a massive foreclosure process and consequent reduction in price by 50-80%, but that goes against the Obama policy of keeping the banks afloat and keeping property values stratospheric as they are in California. Any massive foreclosure would destroy the banks, and Obama will never let that happen .. at least not until he can get the Midwest to pick up the tab for it via varous loan guarantee programs.

Randall Parker said at July 9, 2009 9:38 PM:

Big Bill,

My guess is states could solve this problem of empty houses in a different fashion: Just require banks not to let houses to sit unoccupied and in bank ownership for more than N months. Choose a number for N. Come up with penalties where the bank has to knock down or sell or rent the property after N months.

Regards http://www.doctorhousingbubble.com: I like his attitude. Yes, the financial press and TV talking heads understate the scale of the problem. I like this 10 reasons no 2H 2009 recovery. The household net worth graph is pretty shocking since there's not been as steep and deep of decline in net worth in the last 25 years and probably for much longer than that.

As for a massive property crash by the end of the summer: I think prices will drop some. But people are mostly resistant to selling at big losses. So unless the banks do massive auctions it is not clear to me how prices can drop steeply at the end of summer.

Wolf-Dog said at July 11, 2009 8:17 AM:

Suggestion: Make tax deductible against future non-investment income including salary, those capital losses from selling a house at a loss.

averros said at July 11, 2009 11:02 PM:

Oh, the State of California's going broke! THE SKY WILL FALL!!!!

Not. The state of the USSR fell apart completely. The net result - from a brink of starvation Russia got to the place where one may actually want to live in just a decade. Supermarkets are just as good as in Western countries. The middle class appeared out of nowhere, and it becomes harder and harder to outsource there because salaries of professionals are catching up. Lately, the government got a better grip - with the predictable result of stalling the explosive growth the country's economy experienced in the absense of "law and order", and replacement of petty bandits who mostly were busy shooting each other with industrial-scale robbery being run by FSB (former KGB) people.

If anything, if California will cease to exist as a political entity, the inhabitants will be much better off. Most of the welfare parasites will move on, and the hordes of government parasites will find gainful (and actually useful to others) employment in restaurants and cleaning.

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