I remember when Arnold Schwarzenegger first took over as Governor in the special election in California that ousted former Governor Gray Davis.  One of the first things I witnessed Schwarzenegger do was rally the troops to pass proposition 57, The Economic Recovery Bond Act that would replace the existing $10.7 billion deficit-financing bonds with a five year maturity with a $15 billion bond which would take a longer period to pay back, between 9 and 14 years.

Land of Hope and Dreams

My gut reaction to hearing about proposition 57 was “how is this going to help things out Arnold?”  I knew that adding debt to debt was no solution to fix the economy.  But hey…Arnold also was going to do something good for the California economy at the same time!  After all, he’s the dreaded “Terminator!”

In order for proposition 57 to pass, Arnold needed another measure to pass,  proposition 58, The California Balanced Budget Act.  This proposition would require a balanced budget and  “limits on future borrowing to finance budget deficits” including a reserve to help with any future budget shortfalls.

Glory Days

From 2004 through 2006, California was living the life.  Real Estate prices were going higher and higher and the tax receipts were increasing as many got wealthy in the real estate business that saw hoards of people quit their jobs to work in the loan industry or sell real estate.

The rise in property values saw a nice bonus to the California treasury of increased taxes on the higher property values.  People borrowing from the new found equity in their homes and purchasing anything and everything in site caused the sales tax receipts to explode.

Surprise, Surprise

But soon real estate crashed, the punch bowl was empty and the tax receipts dwindled.  At the same time, government expenditures remained the same, a recipe for disaster.

By May of 2009, with no reserves available, the Terminator turned  Governator was pleading with the citizens of California to pass new ballot measures that would increase taxes to help the government pay its bills.  I guess the Governor didn’t have “Total Recall” of the living within one’s means aspect of  Proposition 58.  The governor went so far as to warn of “dire consequences if voters don’t pass the six special election measures.”

This type of reasoning, as many of you know, was utilized by Treasury Secretary Paulson a few months later in a plea to Congress for TARP money which Congress, both parties, agreed to.  Silly fools.

The Governor’s plea to the voters prompted one California University Professor at the time to write an article asking voters to pass the measures.  Of course, having lived through this once before when Arnold first took office, as I mentioned above, I had to point out to the professor this type of action by the California voters is exactly the wrong medicine or in other words, a “Raw Deal.”  The voters agreed and the measures never passed.

“Conan the Governor” and the rest of the California government were forced to figure things out on their own.  Their solution?  Go to Uncle Sam and ask for handouts.

I mean why not…Uncle Sam has bailed out so many others, why not help a state out with some of that “free” taxpayer money?

Dead Man Walkin

Many people have said in the past that California is always at the forefront of things to come.  They have also said that “as GM goes, so goes the nation” which I warned about in 2008.  There is truth in these statements.

In one sense, GM is the nation now since we all own it, along with the UAW.  In another sense, California is now showing us what will be the “forefront of things to come” as Mr. Universe seeks funds from the government.  But where will our nation get the money from to help California out?  The answer is, the same place they’ve been getting it from.  How can any nation go over $12 trillion in debt unless it had an unlimited debit card they could use at the Federal Reserve ATM?  This of course is the real root of the problem.

None But the Brave

What Arnold needs to do as Governor is become the “Eraser” and reduce and eliminate as much government as possible.  California, like many other states, can’t get anymore money from the voters through claims of  dire consequences.  It’s time for “Govenator 2: Judgement Day” to do what needs to be done if there is to be any long term solutions to the California economy.  It truly is close to Judgement Day for California because if you recall, those bond-deficit bills are going to start to come due in a few years.  Where will the money come from to pay the tab when the punch bowl is still empty…and there’s a huge crack at the bottom?

As far as the rest of the U.S. goes, they need to realize the U.S. is in dire circumstances too. Unless American citizens start telling our Congressmen and women to “just say no” to more borrowing like the California voters did to Schwarzenegger in 2009, you can bet that our nations fate will follow California into the abyss.

The Price You Pay

The real question is, “are we too late?”

Living Proof

Keep an eye on California for the answer.  But also realize, that California isn’t alone.

UPDATE 1/26/2010

In keeping an eye on California, I’m happy to announce that the Governator’s hand is being forced and he is responding with some good action in trimming the California budget.  Please see Schwarzenegger’s budget plan puts unions in the cross-hairs.

“Matt David, Schwarzenegger’s communications director, says the governor’s proposed budget makes hard but necessary choices, given a $20-billion deficit.  It’s a continuing jihad against organized labor,” said Steve Maviglio, a Sacramento-based Democratic strategist. “The governor thinks public employee unions are Enemy No. 1.”

California simply cannot pay the bloated salaries of union workers and expect to survive.  It seems that Arnold might possibly go out as hated by the Unions, but that’s ok.  No one said that being governor of California would be so easy a Barbarian could do it.  The Terminator is rising against the union machines!

In reality though, unlike the U.S. government that can, via the Fed, print more money out of thin air and pay its bills, since California voters said “no more taxes to bailout the state,” Schwarzenetter’s hands were tied.  He had no choice but to cut the size of government.

If only the U.S. government played with the same rules.  Instead, all they do is create inflation that destroys the purchasing power of the U.S. Dollar.  Instead, all the U.S. government does is grow bigger.  At some point, the People will be “Fed Up!”  But when? After it’s too late?

Related posts from the Fed Up Blog:

1. Vote For Those That Voted “NO” To the Bailout Come November
2. How Worried is Citibank About California’s Ability to Handle It’s Budget Crisis?
3. California Economics Professor Wants to Drive California Off a Cliff