Why California is Going to Fall Into the Ocean

Craig Newmark has compiled headlines of recent stories about the California developing financial crisis and added commentary to recent stories:"

Gov. Brown's ballot manipulation is sleazy politics": as bad as it sounds. 

"California parks scandal: Honor system used to keep track of $37 billion in public funds": even worse than it sounds.  

Each year, dozens of state departments report how much money they have in more than 500 special-fund accounts, which are separate from the general-fund budget and mostly tap into user fees to make up more than a quarter of all state spending. But no one checks to ensure that the special-fund figures being reported match the actual cash left in the accounts.

"California Goes Bankrupt".There’s no doubt San Bernardino and Stockton—Ground Zero for the housing crisis—suffered from the problem described above. But what did those cities do with the rapid increase in property tax revenues during the price run-up? We know—they squandered it on increased compensation for government employees, on redevelopment projects and other questionable spending deals. They squandered the money when it came flowing in, now depict themselves as victims of circumstance when the funds dried up.

The real culprit is foolish decision making. 

"Penniless in Paradise":The bad news is that there are a lot of Comptons, Stocktons, and San Bernardinos out there. Los Angeles may prove to be one of them. The good news is that things have gone so sour that some California politicians have discovered that it hurts less to act than it does not to act. That is true at the municipal level but not yet true at the state level, which makes for some interesting mayors-vs.-legislators politics. . . .

It is sobering how empty, run-down, and poor much of interior California is. Bakersfield and environs is enough to make you wonder why the Joads even bothered: Tulsa is Paris by comparison."

Bottom line: California, and its cities, like many other parts of the country, will have payment obligations that far exceed the revenue available to pay for them.

There are only two ways out: Either Bernanke starts printing like a mad man, which will boost nominal revenue for cities and states, and cause soaring price inflation to visit the rest of us, or many cities and states will, in the years to come, default on their obligations.

That's it. No matter how it is packaged, those are what the options are: default or inflation.