The Alta Californian

Some updated links related to the possibilty of bankruptcy for the the State of California, and for some municipalities within the state:

Isleton Issues Bonds
Napa Valley Register
Sacramento Bee

Butte County
County versus State

I cannot find anything more recent on what has happened in Butte County (it’s been nine months), which must mean they ended up making the necessary spending cuts.

California Itself

No bankruptcy yet, but it seems like we are getting closer everyday.  My bet is on a federal bailout (or special Fed loan) or default on bond payments by the end of June (maybe July if we’re lucky.)

This is old news, but it shows how real the threat of municipal bankruptcy is, and how much is at stake for many people:

California Cities Face Bankruptcy Curbs

We saw Vallejo declare bankruptcy last year, but many other California cities are on their way to likely bankruptcy.  I’m starting a “short list” of those that have been in the media lately with the possibility of bankruptcy being mentioned.  I plan to update it as more cities and counties join the party.

Rio Vista and Isleton
Napa Valley Register

Butte County
County versus State

This article also mentions Kern County and Shasta County as examples that have thus far avoided bankruptcy.

California Itself

The possibility of the State of California itself having to file for protection seems to be real.  As anecdotal evidence, this is the first time that I’ve heard the state advertising bonds on the radio, as if we are selling war bonds to the general populace.  Maybe the state does need to sell “crisis” bonds to the public in order to close the budget gap.  What I would prefer to see, though, is large-scale reform of taxes and spending, including changing property tax laws, and current and future state pension benefits.  In California, actually going bankrupt is probably the catalyst needed to force us to get our financial house in order.  Heck, we are people who just authorized a high-speed rail project in the midst of budget emergency.  We are model of financial responsibility!

About 100 people turned out to protest the Federal Reverse System outside the San Francisco Fed building on Saturday, Nov. 22, 2008.  I got there a bit late, so I may have missed the peak turn-out.  This post is more than a bit late.  Here are some pictures of the protest.

Hey everybody!  We get to learn a brand new dance!  I call it “The Depression Two-Step”.

Here’s how it works:

Step 1:  Go to cash because virtually all asset prices will fall (high quality bonds are an exception.)  You could call this a bull market for cash since everyone needs it to operate a business or fund their monthly expenses (at least rent or mortgage.)

Step 2:  Diversify into gold and possibly other currencies when deflation seems to be easing and when the possible default of our US government debt seems imminent.  If/when you think the Fed is getting ready to monetize thte debt, it is time for Step 2!

When this dance is over, we’ll have the chance to learn another one, but it’s going to be a surprise!  Will it be a 1950-1960s style golden age for equities? Or, will it be a crazy brave new world of post-American Empire madness after default or monetization?  Naturally, I hope for a golden age, but that may be wishful thinking.

This inflation versus deflation debate has gone on long enough.  Here are my thoughts on the subject:

Bottom line: if you destroy tens of trillions (credit contraction), but only add trillions (govt. debt spending and Fed balance sheet), you absolutely must have deflation.

Someday, once asset prices have finished coming down (mostly), continued expansion of the money supply could start to produce significant inflation.  But, in the meantime, why buy gold or other commodities now, when you can hold cash through the deflationary period and get in closer to the bottom?  It is not necessary to exactly call the bottom, but we know the near term (6-9 months at least) will be dominated by deflation.  Consider different asset types:

Stocks: earnings will be terrible this quarter, worse than optimists who think they are getting stocks cheap want to believe.  Prices will decline.

Commodities:  Where is growing demand for commodities going to come from?  Most people are trying to buy less, not more.  This means producers of all types will need less, not more.  Prices must come down.

Gold:  I only separate gold from other commodities because of its monetary function.  Aside from jewellery and some industrial usage, a major use of gold is to store value.  Over the spring and summer, gold was caught up in general commodity speculation, and initially was somewhat in sync with the decline in prices of other commodities.  But, since then, the monetary use of gold has kept it from crashing to the same extent that food and industrial materials have (and will continue).  Silver also followed this pattern of demand to some extent, although its industrial usage has been a more significant factor.  But, as long as we do business in dollars (or other currencies), when everyone needs cash to pay debts and operate a business, they are not going be pouring more money in gold.  Eventually, concerns about a collapsing dollar will probably out-weigh the immediate need for cash.  This is the point at which gold with start to rise.  Will that be at 600, 300 or some where in between?  I have a hard time imagining gold staying within its recent 700-800 trading range.

Real estate:  With businesses going bust, or at least trying to reduce costs, vacancy rates will rise.  Lease values will therefore decrease, thereby further pushing down purchase prices.  The same goes for housing.  With the exception of some very constricted regions (like SF city proper), there is plenty of housing available.  Purchase prices have already come down and in some areas rents decreases have lagged behind because, for a time, there are suddenly more people who have to rent who would have tried to buy when credit was easy.  In the end, rents will also have to decline as people lose jobs and opt to live with relatives or in smaller digs.  This is probably already well underway in most markets around the country.

Bonds:  On the one hand, bankruptcies will rise causing loses in bonds.  On the other hand, demand for cash and low inflation (or as I’m arguing, negative) rates will mean that real interest rates increase.  This might not be obvious if nominal rates appear low.  Mish has a great article on high nominal interest rates here: link.  Overall, this trade-off probably means that high-quality bonds will return a high real interest rate (even better than cash), but low-quality bonds will lose some value along with other asset classes due to increased risk and actual defaults.  If I could hold cash only in my 401k, I would, but as it stands the best option I have at my company is to hold a mixture of bonds and cash.  Such is life.

Cash:  This is my investment of choice.  It is the only thing that must increase in value short term.  As I’ve said, I think short term to me means at least 6-9 months, as any study of the Great Depression shows, we could have deflation for a few years.

Land use battles rage across California from the redwoods of our temperate rain forest to the desiccated Algodones/Imperial Sand Dunes. This fight is nothing new. Nor will it ever be settled permanently so long as the lands in question remain public. Land use decisions for Bureau of Land Management (BLM) and National Forest land hinge on local politics and the conservation/exploitation ideology of whoever is currently in the Whitehouse. Instead of fighting for control over public lands, conservation groups should be focusing on private ownership of land, including bringing public land private.

Buying lands for the purpose of conservation is the most effective way of removing them from the public tug-of-war. Once a tract of land is owned by a private organization dedicated to conservation, those who would develop that land have no recourse. That protection, however, relies on protecting private property rights as well - even the property rights of off road vehicle enthusiasts and developers. Areas such as deserts are particularly fragile environments because the resources to support life are more limited. They are stressed and damaged easily by human activity. But, desert land is also pretty cheap, meaning a whole lot of it can be protected at a relatively small cost.

Successful examples of private conservation already exist in this state. Santa Catalina Island is owned almost entirely by the Catalina Island Conservancy. The Nature Conservancy owns approximately 76% of Santa Cruz Island and other land world-wide. Just last summer (2006), this same organization purchased land in the Mt. Hamilton Range near San Jose and more near San Luis Obispo.

Population and resource demands will keep growing. By supporting private property rights and protecting land privately, conservationists can create a robust arrangement for protecting the natural world, even when public opinion sways in favor of development.

The following are the results of the California statewide election. The data was taken from the
California Secretary of State’s website.

Ballot Measures

1A - Yes
1B - Yes
1C - Yes
1D - Yes
1E - Yes
83 - Yes
84 - Yes
85 - No
86 - No
87 - No
88 - No
89 - No
90 - No

Wal-Mart, Intel and AT&T recently announced that they are joining the Service Employees International Union, America’s largest labor union, to promote universal health coverage. While the Wall Street Journal may think this an “unlikely coalition,” anyone who understands government subsidy
will see what these large companies stand to gain.

Government-provided (or at least subsidized) universal health coverage will result in a huge cost-savings to these large companies, especially Wal-Mart, which employs 1.39 million people, 57% of whom are not covered by the company health plan. Why pay for approximately 800,000 employees to have health care when you can lobby the federal government to cover it for you?

Other large companies like AT&T (190,000 employees) and Intel (100,000 employees), which do provide health benefits, also have an interest in reducing their costs through government subsidy. Acting now allows these companies to take advantage of the popular universal health care movement that already exists, thus saving even the cost of lobbying.

Even though they pay lip service to private responsibility, it is clear from their statement that this is simply a call for socialized medicine:

“We believe that businesses, governments, and individuals all should contribute to managing and financing a new American health care system.” [my emphasis][1]

Calling for business, government, and individuals to contribute is nice way of de-emphasizing the fact that the only change they are advocating is the addition of government. Their only motive for getting government involved is to pass the costs to other people.

Saving money is not the only thing these companies expect to gain — they also expect to free themselves from the smear campaigns of labor activists. If the federal government provides health care, then employers are absolved of any supposed responsibility to provide it themselves. No longer will labor activists be able to smear them publicly, at least on the point of health care. But, this is wishful thinking — labor activists will have plenty to complain about, such as the quality and inequality of health care.

We will see growing support for universal health care amongst large companies simply because they expect to profit from it. The costs for such a program will be passed on to all of us through taxes, inflation from increased deficit spending, or simply though long waiting lists for health services.

[1] Press Release

Wouldn’t it be awesome to see massive herds of bison stampeding across miles of open prairie? We could enjoy this wonder of the world once again…if we had were a bison run! It’s just like a dog run in your backyard, except it crosses a couple states and maybe even into Canada. The size is different, but the idea is the same.

Right now the last remaining herd of wild bison (fully wild, not mixed with domestic cattle) survives in Yellowstone National Park and some adjacent National Forest land, depending on the time of year. I’m sure they would be happy to grow their numbers from about 3000 to the tens of thousands we would need to really create some thunder.

Prop. 89 will ensure that tax dollars are used to fund Democratic and Republican political campaigns, while offering little for independent and third-party candidates. And, like any attempt at funding campaigns with tax dollars, it forces all corporations in the state to fund candidates whose ideas they may despise. Even if you do not reject funding party politics with public money, you still might not like campaign financing reform that clearly benefits the two major parties over everyone else.

Under Prop. 89, qualifying “Clean Money” candidates receive public money for their campaigns up to specified limits. But, the rules governing qualification for public funds ensure that in most cases only Democrats and Republicans will receive significant public funds, while third-party or independent candidates receive little or nothing. Partial support is offered to third-party and independent candidates under certain circumstances. Full funding would be offered only when a party received more than 10% of the votes in the last election, something many parties only get in their strongest districts, and something an independent candidate could never have (because he has not been on the ballot before).

The matching funds provisions included in the legislation are designed to prevent qualifying candidates from being outspent by an opponent with private money, but neither Democrats or Republicans are at a loss for private money. At the same time, private funds and personal wealth are the backbone of most (if not all) independent campaigns. Prop. 89 essentially guarantees public money for any Democrat or Republican campaign, while penalizing independent candidates who must use their wealth usually to just get on the ballot.

Prop. 89 will not reduce or eliminate corruption, but it will grant public money to help Democrats and Republicans get elected. Vote No on Prop. 89.