Thursday, 16 July 2009

California's plight - all things must pass

The following article has a gloomy view of the future for both California in particular and for the US in general

Sacramento might have followed Washington down a blind alley, but it was first to hit the wall. When the central bank can no longer keep the federal government on life support, California's troubles will be America's. Watch the painful process of spending cuts that California is undertaking, as it portends our collective future.

The lesson is that Washington is a bad influence and a bad mentor. Our trust is placed where the governments' behavior justifies it: fast-developing countries, such as Brazil, India and China, as well as major natural-resource suppliers such as Canada, Australia, and New Zealand (collectively known as BIC-CAN).

The BIC-CAN countries offer very appealing investment opportunities, especially in the fixed-income world. Meanwhile, California and U.S. Treasury bonds are just too big a risk.

To take liberty with some well known lyrics, it certainly does seem that the land of dreamers, schemers and telephone screamers seems to be running on empty now.

However this week's Economist magazine claims that just as before California will re-invent itself as part of the great American experiment.

The BIC-CAN economies will find it hard to flourish if the sixth largest economy in the world is heading for a terminal decline and I certainly would not hold out hope for the de-coupling thesis if the US follows suit as well.

In one respect there is some similarity between the Goldman envy which I have discussed here and the envy which has existed for many years regarding the Golden state and which comes primarily from residents of other US states. The difference with Goldman is that, at present they are booming, so the envy is growing whereas for California the envy has transformed into a kind of schadenfreude where there is a callous delight from some quarters at the economic plight of the state.

Just to return to song lyrics for a moment, for California and for Goldman Sachs, there is some wisdom in George Harrison's lyric that All things must pass

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