Bill Jenkins

Ever since the War Between the States (circa 1860), there hasn’t been a serious (or at least widespread) move for succession from the United States. However, there is a call by some for the State of California to be removed. Have you heard about this?

As you may know, California is bankrupt. That ball got rolling back in December 1994, when Orange County declared bankruptcy. Once one of the most prosperous districts in the state, it watched a pool of riskily invested and highly leveraged money go south, and the game was up. After losses totaling $1.6 billion, a liquidity trap was sprung from which Orange County’s Treasurer Tax-collector Robert Citron could not escape.

Although considered somewhat of an isolated incident, it wasn’t long until related problems began to emerge. Now the state faces endless traffic jams, aging schools and hospitals, falling cash accounts and an annual budget more dependent on volatile tax revenues than at any time in state history. And it looks like the crunch will come to a head under Gov. Arnold Schwarzenegger. But here’s the real problem.

All by itself, California is the eighth-largest economy in the world. So its bankruptcy would spell trouble for those that are interconnected with it — especially neighboring states that depend on California’s economic machine for their own growth.

But does California care? It doesn’t seem that way. Its state budget is larger than any other in the United States ($56 billion). And yet that still isn’t enough money to keep it out of trouble. It refuses to live within its means, and is determined to borrow at ever-increasing levels. For proof, remember that California voters rejected a bill that was really called, “The California Live Within Our Means Act.”

Why the arrogance? Perhaps it believes the Fed will step in with a bailout. After all, billions and billions have been given to private corporations… why shouldn’t a state benefit equally — especially if it would sink the U.S. economy otherwise?

But the corporate bailouts came with strings attached. So it’s easy to see the government telling the state to take action to get out of its mess. Reduce spending, cut programs and implement austerity programs until California’s budget is actually balanced.

Then make the very real threat to exorcise it from the Union if it doesn’t comply.

I’m sure you’re saying, “Wait, wait, hold the phone! Nobody is talking about this. There’s no chance that California is going to be kicked out of the United States”

And I am sure that you’re right. But we’ve heard very similar language used when it comes to talking about Greece and the European Union. And, in fact, that’s what today’s commentary addresses. Is it more likely that Greece will be removed form the European Union than that the state of California will be removed from the United States? After all, there are some similarities that make the comparison of the two cases worth considering.

Will California Go Greek?

Each party, Greece and California, are members of a union or conglomerate of political entities. Each one shares a united currency with the others in the union. Each one has particular trade interrelations as well as financial interrelations with others in the union. Lastly, each is “bankrupt,” and that has a certain dilatory effect on those around it.

As you may know, Greece has gotten a lot of bad publicity of late, and it has really hurt the euro — down around 10% in the last few months alone. Does the negative position of the Greek economy warrant such a drag on the European Union as a whole? Generally, they are only considered to be about 2–3% of the economy as a whole. California, on the other hand, is a little more than 10% of the U.S. economy as measured by GDP.

Thus, in theory, Greece should only drag down the euro by 3% on balance, but California should drag down the U.S. dollar by 10%. Overall, then, the USD should have fallen total of 7% against the euro… all things being equal.

But the problem is — all things are NOT equal. Here’s why.

California is a part of a 235-year-old republic. Even though it has not been a member for that same period, it nevertheless is a part of a union that has stood many difficult tests of time.

On the other hand, the European Union is still an experiment. It is barely out of adolescence, and we don’t know yet if it will even grow to stand among the older economies of the world. Also, even though both parties are entities in union structures, the structure of each union is different and addresses problems differently. The long and short of it is that California’s position in the United States is significantly more substantial than that of Greece in the European Union.

So right now California looks like a keeper and Greece a goner. If Europeans are reluctant to break up their happy (till now) Union, they only have a few options:

1. The European Union offers “solidarity” but no financial support.
2. The European Union offers a unified fiscal support from all members.
3. The European Union designates the stronger countries to subsidize the Greeks.
4. A mixture of numbers 2 and 3. Many have maintained that a bailout would be a violation of the Maastricht Treaty, the paperwork that created the European Union. However, the treaty itself is somewhat like a vicious dog that has no teeth or claws.

Here is an excerpt from the consolidated treaty, a piece that is commonly called the “No Bailout Clause”: The Community shall not be liable for or assume the commitments of central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of any Member State, without prejudice to mutual financial guarantees for the joint execution of a specific project. A Member State shall not be liable for or assume the commitments of central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of another Member State, without prejudice to mutual financial guarantees for the joint execution of a specific project. There you have it… NO BAILOUTS.

However, when a member does get into fiscal hot water, that language is no longer effective or applicable. At that point Article 100 takes over. It reads: Where a Member State is in difficulties or is seriously threatened with severe difficulties caused by natural disasters or exceptional occurrences beyond its control, the Council, acting by a qualified majority on a proposal from the Commission, may grant, under certain conditions, Community financial assistance to the Member State concerned. The President of the Council shall inform the European Parliament of the decision taken. NOW, there you have it… BAILOUTS PERMITTED.

I only give you that so you are aware that bailouts can and will be formulated in the upcoming disasters. And they do not violate the treaty itself.

However, the bigger question remains, if the European Union allows fiscal support for Greece, does that mean carte blanch permission for others to run to the EU money window and collect assistance for their carefree spending days?

It certainly seems to me that if the European Union makes this decision, which, as we have seen, is fully allowable by law, it will lose all credibility. And that may be the only thing that stands between them and ruination of the Union. It may end up collapsing on itself, even if no members ever leave, and its downfall will be the loss of confidence in the currency.

So then, how much further could the euro fall? Could it go all the way to parity? Most certainly. But before that point we will likely see many waxing and wanes of each side of the currency pair. We see a little rebound in risk appetite.

But what does all this mean for the United States and its currency?

The United States

Philosophically and economically, the United States is on a rendezvous with history… unfortunately, the path we are taking is a crash course. Many people have to come realize that we are nearing the end of a gigantic global economic experiment. No one has really walked this particular path before. A circumstance where every major nation in the world (and many minor ones too) is utilizing paper currency that has no backing of any value except for the promise of the issuing government. And we have all come to see what that is worth.

And as the saying goes, the bigger they are, the harder they fall. No currency is bigger than the U.S. dollar. No economy is bigger than that of the United States. When it comes, great will be the fall of it. Fortunes will be made. But so long as it remains the reserve currency, it is very difficult (although not impossible) for it to collapse.

It is difficult because each time it falls and gets cheap to buy, there are many who still buy it because the majority of the world’s goods are priced in U.S. dollars. So when the dollar gets cheap, so do the world’s commodities to those who are buying in currencies other than the dollar.

For us here in the United States, a cheaper dollar means more expensive everything: gas, groceries, cars… you name it. But when the dollar is cheap and other currencies are strong, it becomes a good time to stock up. Such buying will continue to prop up the dollar until a different reserve is found or created. Since such a thing will not occur overnight, the prospect for currency fluctuation over the next several decade and our opportunity to profit from it will be tremendous.

But make no mistake: the dollar is in trouble — one foot in the grave and the other on a banana peel.

Regards,
Bill Jenkins

February 19, 2010

Bill Jenkins
  • http://www.thetexasring.com Linda Brady Traynham

    Dear Bill:

    Thanks for a great article–and a a big laugh. You wrote “But the corporate bailouts came with strings attached. So it’s easy to see the government telling the state to take action to get out of its mess. Reduce spending, cut programs and implement austerity programs until California’s budget is actually balanced.

    Then make the very real threat to exorcise it from the Union if it doesn’t comply.” I may go off into spasms again over the thought of either of those things happening, and talk about the pot calling the kettle black?

    I wrote a little article for http://www.thetexasring.com recently with a very sensible plan to balance the budgets, although I admit cheerfully that it hasn’t a chance of being implemented. Instead of a budget for 2011, simply use the budget from 2001. What you see is what you get, and department heads would have to work out what and who to cut where. (If your department didn’t exist, tough.) In 2012 use the budget from 1991, same stipulations. Repeat until the budget is showing a surplus and then cut taxes. Well, taxes should be cut first but no one is going to do that EITHER.

    Business and the wealthy have been fleeing for several years; Austin, TX, is the new Silicon Valley. At the same time the numbers lining up at the trough continue to increase.

    We may have to go to plan A: shove California out, and we don’t even care if they decide to call that disaster “Aztlan.” Old saws frequently have sharp teeth: they made their bed, so let them lie in it.

  • Thomas McGovern

    Re: “California is a part of a 235-year-old republic,” the US of A came into existence in 1788 when New Hampshire was the ninth colony to ratify the Constitution. The government began operating in 1789.

  • http://www.triond.com/baltimorebarry Bary Dennis (DiogenesRedux)

    Here’s the thing:
    In no way, other that the currency “flyer” could the Euro nations be considered as having any homogeneity other than geographic proximity, and even that’s stretched by the “adjacency” theory.
    The U.S. did, until recently, claim homogeneity-the melding of disparate background,religions, ethnicity, and cultures-as it’s own unique skill. The common acceptance of the greater American Experience as the primary controlling cultural denominator, is gone, or losing steam rapidly.
    Nos, instead of Americans, we have African-Americans, Italian-Americans, German-Americans, and all the rest.
    Not a good thing, in my opinion.
    When the greater American Experience is sidelined in favor of maintaining a cultural identity AT THE EXPENSE OF THE AMERICAN IDENTITY, all are losers.
    So, California, which are you? American, or Californian-American. While we’re at it, let’s just be realistic in noting that most of California’s deficit is due to state provisioning of social, educational, even prison services to up to three million illegal immigrants, and their families, and bloated state employee payroll and benefits programs.

  • Mike M

    Mr. McGovern,
    Re: “California is a part of a 235-year-old republic,” the US of A came into existence in 1788 when New Hampshire was the ninth colony to ratify the Constitution. The government began operating in 1789.

    Perhaps the author was referring to Spain since California was originally part of the Spanish “empire”.

  • Republicansrevil2

    If every state in the U.S that is going bankrupt was kicked out, we would have about 6 United States as that’s about how many states not insolvent.

  • Scott R. Martin

    Long term Agora member here. Re: Will California Be Removed from the United States?

    1. The California Codes define “…..in this State” and “….this State” as: Those areas within the exterior boundaries of California that have been ceded or sold to the United States of America”. In this usage USA means District of Columbia.

    Question: How about removing the “United States” from California ? Note: The flag says California Republic, not “State of California”. The distinction must be made.

    2. Lincoln went to war because the Insurgency was interfering with “the collection of Revenue”. That’s what the early Mobilization Orders stated as justification. Money has a lot to do with things I guess.

    3. To say that there is “no backing” to the USD is not the entire story (not that I know the entire story) but I do know this: The Birth Certificates of the people have been tendered as collateral. This started in the early 1930’s as I understand the time frame.

    At this point the readers of Whiskey & Gunpowder have hopefully gotten themselves into lifeboats and backed away from the sinking vessel.

  • Tex Norton

    Although the situation in Orange County, CA was an aside from main gist of the article, it’s important to separate what happened in Orange County vs what has occurred in CA overall. Bob Citron was a rogue tax collector who stuck-out the necks of the residents by taking incredible investment risks far beyond what would be considered prudent. CA in general, has been and continues to be a free spending, devil take the hindmost, welfare state par excellence. Sacramento has always been anti-business and pro-welfare. Sacramento has let the fringe elements dictate the direction of the state. The no-nukes shut-down what was a very respectable nuclear electrical generating program. Orange county still benefits from the San Onofre plant in San Clemente. Oil develop was shut-down. It seems as though everything that could have continued to make CA great was outlawed. Even if the folks that objected were sincere in their beliefs, their decisions were based on junk science. Sacramento has been run by Democrats regardless of the party represented by the Governor. Arnold has also turned out to be a great disappointment. So the country of Greece and the State of California are extremely similar; both ultimate welfare havens. Surprise, surprise that they are now collapsing. Atlas continues to shrug.
    Bar Stool #23

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  • http://www.thetexasring.com Linda Brady Traynham

    Dear Scott:

    Winners write history, so few know that 150 years ago the South was the wealthy part of the nation. Yup, King Cotton did better than shipbuilding and manufacturing. Someone asked Lincoln why he didn’t just let the South go. Mr. Lincoln exploded, “Let the South go?! Let the South GO?! How then should I fill my coffers?”

    Nuthin’ like a good war over principle, is there?

  • http://www.thetexasring.com Linda Brady Traynham

    Dear Republicans Are Evil Too:

    What interesting ideas you have occasionally. “If every state in the U.S that is going bankrupt was kicked out, we would have about 6 United States as that’s about how many states not insolvent.” An 88% bankruptcy rate is scarcely a recommendation for welfare-tax-spend-regulate, but surely you do not propose that the other 12% attempt to fund their giveaways and business- and wealth-destroying ideas? One is reminded of Tom Lehrer, “Oh, we’ll all go together when we go…every Hottentot and every Eskimo…”
    There is no need to cite the author who suggested “They won’t be content until we’re all living in huts on the Ganges.” One either knows or one doesn’t.

  • Republicansrevil2

    Linda I was only pointing out that everyone is talking about California but not seeing the big picture . Those states in fiscal peril include California, Arizona, Rhode Island, Michigan, Oregon, Nevada, Florida, New Jersey, Illinois and Wisconsin.I believe the only states with no budget problems this year are the Dakotas, Montana, Wyoming, and Alaska

  • oldmanriver

    Republicansrevil2

    Interesting to note as of 2005 for every dollar sent to Washington these state got back from the Feds:
    Wyoming: $1.11
    Alaska $1.84
    North Dakota $1.68
    South Dakota $1.53

    Here is some very interesting information from The Tax Foundation:
    http://www.taxfoundation.org/taxdata/show/22685.html

  • oldmanriver

    For the states with budget problems. For every dollar these states send to the Federal Gov. They get back:
    Florida $0.97
    Arizona $1.19
    Nevada $0.65
    California $0.78
    Michigan $0.92
    Wisconson $0.86
    Illinois $0.75
    Oregon $0.93
    Rhode Island $1.00
    New Jersey $0.61
    Im not sure what if anything can be taken from these numbers but it is interesting. There seems to be a general trend that the population dense states are supporting the states with low population density. Which makes sense as there are fewer residents to pay for more infrastructure. It does appear that the entire south is getting more than what it puts in. Only Florida and Texas get back less than what they contribute.

  • http://Whiskey&Gunpowder Robert

    Blame it on the Federal government, blame it on the unions, blame it on Toyota, why not.
    They, CA, should be bailed out just like the auto companies or the too big to fail banking institutions.
    They already have strangling health care, oppressive regulations and onerous taxation, just what the current bunch in Washington want. Demo, Repub or Libertene they all the same, just take a big bite, don’t mind the maggots. A nod to the Rolling Stones here. NY survived. Look how well they bounced back after 9/11. Big new buildings are sprouting up everywhere. Look at Dead Kennedy’s Boston’s Big Dig, I know a union crane operator that is looking forward to going back and fixing it right this time. ‘Those leaks are going to ruin it.’
    People of sense are fleeing NJ, NY, MA, Fl, CA, NV and AZ.
    They are filling up the back country where they belong.
    Just please, not in my back yard (NIMBY).
    My welfare check barely covers the cable bill, good thing they take food stamps.

  • Jim

    You morons are allowing THEM to steer the argument. THEY,the FEDS, can bail out anyone they wish ,whenever they want as often as they want,for as long as they want. It’s only paper PEOPLE and they can print it indefinitely. The real purpose of these bailouts is Federal ownership of all US assets including your bailed out homes. Who now owns Freddie and Fanny? Did they do this through ingenious planning or just Never Letting a Crisis Go to Waste? In either case it is done. The Fed’s now own you. Call it Communism if you wish. And you foolishly sit here pointing fingers at failed States instead of the real culprits.

  • paledude

    kick us out. With the money we contribute to the USA we could probably be at square one. Born a Californian still a Californian. We wouldn’t have the 9th circuit Feds telling us that we can’t cut something.
    Then after you kick us out we could divide into two or three states and the conservatives in the middle would kick ass. All you people in the east would be wanting to come here and we would tell you to you know what.

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  • http://www.combslaw.cc CLC

    I am tired of hearing people state that “the US is bankrupt” or “California is bankrupt.” While I understand what they mean – these entities do not have the means to pay their debts – “bankruptcy” is a creature of statute. There is no provision in the bankruptcy code for states or for the national government to go “bankrupt” (though there is for political subdivisions such as Orange County, as the author mentions).

  • steverino

    I personally don’t agree that “there are some similarities that make the comparison of the two cases worth considering”. I think this essay, itself, shows how inane this comparison is. Sorry, Bill. I usually like your stuff.

    Also, I wonder if perhaps you could tell this reader EXACTLY what there was in the voter-rejected “Calif. Live Within Our Means Act”, ITSELF, that provides the “PROOF” that “(CA) refuses to live with its means, and is determined to borrow at ever-increasing levels.”

    I just don’t get your “argument” here. I am probably missing something. I hope so, cause if I’m not, Penn & Teller may be honoring you, soon.

  • http://www.gamespot.com/users/2daydietgf two day diet

    I did’t think weight can be maintained after having the pill. but I was wrong, I’ve attempted Fruta Planta ,and two months later , pounds still be reduced two lbs, no rebound, this is seriously fantastic.

  • http://rohvannyn.deviantart.com/ Rohvannyn

    That’s “Secession.” Not “Succession.”

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