It has been said that if California was a country it would have the 10th largest economy in the world. Lately, however it seems that California has lost its luster. California has managed to take its self from a first rate economic juggernaut to what could be classified as a third world country. Aren’t most third world countries mired in huge debt and don’t have the money to pay anyone?

Enter California’s current government pickle.

californiaCalifornia’s economy has shriveled mostly due to an unsustainable economic boom based on the false pretense that housing prices will rise perpetually forever.  The same problem is plaguing much of America. It was a vicious cycle that has ended in collapse. The collapse of the false economy has claimed an atypical victim, the state government.

Because the economy has shrank so much so fast, California has not been able to create enough state revenues through taxes and fees to support the massive government it has created for its self in better economic times. California’s government spending grew faster than a late 90’s IPO. The spending on this government like the housing boom was completely unsustainable. There are no free lunches.

The people of California have begun to revolt. The people voted to deny tax increases. The only way to fix the budget shortfall is to cut government. This is where an awkward predicament becomes glaringly obvious. The politicians in office are serving two masters. On one side they represent the people.  This is basically an allegation.  Don’t believe it. Really the politicians serve their donors also known as powerful groups like unions.  It’s a simple equation of no money no re-election, no re-election no job, no power etc. This year may be different in that the people (silent majority of non-donators also known as “voters”) are becoming fed up with over taxation, massive job losses and now IOU’s. And the gasoline of change is vaporizing into an explosive mix.

We are about to see a battle between the Governor and the California Legislature.  Neither appear to want to back down.

Because California doesn’t have its own currency it can’t just print more money and or borrow indefinetly like the Federal government. In the mean time since California is broke, it is passing out IOU’s.  This means that the state promises to pay back the amount that they owe you plus 3.75%. It’s a forced loan to California at an extreme bargain basement rate. Nobody wanted to loan to California at a higher rate thus causing the state to issue IOU’s so why would they want to at an extremely low rate? They don’t and big banks have said they don’t want IOU’s. This means that the little people in California’s economy get stuck with a loan to California. The IOU’s are paying about half of the prime rate, a horrible investment at best.

The average small business owner who is the meat of our economy cannot live or do business being stuck with IOU’s.  You can’t pay suppliers, you can’t pay employees, and you cannot pay your mortgage with a Cal State IOU.  It doesn’t work. I can’t even imagine what is happening to businesses doing business with California. It doesn’t just affect one person. It’s global.

California is suffering through a real estate melt down and a government melt down. It means only one thing. Watch for the exodus! People and Business will be leaving the Golden State and  fast. In Utah over the last 5-10 years we have seen a huge influx of ex-patriot Californians. The states that are surviving in this economy are small government low tax states states like Texas and Utah.

No business can compete when they are forced to pay extremely high taxes. It makes them uncompetitive in the world. Extreme costs keep qualified workers away as well.  It is interesting to watch what has happened to California when it became too socialized with too much government overhead. Big government collapses under its own weight.  Do we think that our President will learn a lesson here?  Yeah me either.

Conflict of Interest Warning: I am a Californian living in Exile.