FRIDAY, JUNE 26, 2009
The Associated Press reports that California lawmakers remained at an impasse over the state's deficit.
(emphasis mine) [my comment]
Controller: IOUs show Calif. fiscal mismanagement
By JUDY LIN – Friday, June 26, 2009
SACRAMENTO (AP) — California lawmakers remained at an impasse over solving the state's $24.3 billion deficit Friday as the state controller prepares to hand out roughly $3 billion in IOUs to vendors, low-income seniors and others.
A morning vote on a portion of the Democratic budget plan fell short of the necessary two-thirds support in the Assembly for the second time. Lawmakers were scheduled to work through the weekend, with the beginning of the new fiscal year and an impending cash crisis just days away.
State Controller John Chiang said he will have to start issuing IOUs as soon as Thursday without a budget revision because California will lack enough incoming tax revenue to meet all its payment obligations.
Among those who would not get paid until after October are students expecting college grants, low-income seniors and the disabled, and vendors that provide an array of services. Counties also will have to wait to be paid for administering social services.
The IOUs, also known as registered warrants, offer only a temporary fix to the state's cash-flow problem. Even if California issues the warrants, the state will be $600 million in the red in September, according to the controller's office.
It's not clear whether banks will honor the state's pledge to pay later.
The IOUs will look similar to a check but have the words "registered" printed on the front. If the state has enough cash in October, the state treasurer will pay the IOUs with interest. [The key word here is “IF”]
"We're not aware of any banks that (have) made a decision yet on whether they will honor those registered warrants," said Beth Mills, a spokeswoman for the California Bankers Association. "It's up to the individual banks."
Mills said banks will determine whether they will cash IOUs depending on how much the state will pay in interest. A state board is not expected to announce the interest rate until July 2.
The last time the state issued IOUs was during a protracted budget fight in 1992.Some banks initially honored the registered warrants but stopped cashing them as the stalemate dragged on.
On Friday, legislative leaders indicated they may make a second attempt to avoid having the state issue IOUs through a complicated cash-saving maneuver that includes delaying billions of dollars in payments to K-12 school districts, community colleges and universities. The vote passed the Assembly on a bipartisan vote Thursday but failed to get enough support from Republicans to pass in the Senate.
…
Without a new budget, Chiang said Friday that he will have to start issuing IOUs.Students expecting college grants and low-income seniors would not get paid, along with vendors providing services to the state.
Chiang said taxpayers will also owe interest on IOUs.
US news reports that 10 Things You Didn't Know About California's Budget.
10 Things You Didn't Know About California's Budget
The Golden State is facing a large budget deficit
Posted June 26, 2009
1) California's economy is larger than that of many countries, including Canada and Brazil.
2) The state's deficit is estimated at $24 billion for the fiscal year that begins July 1.
3) Gov. Arnold Schwarzenegger's budget proposes slashing health and welfare spending by 26.5 percent and closing 80 percent of state parks.
4) To cut the deficit, Schwarzenegger has stated that he would eliminate the state's basic welfare program, which serves 1.3 million residents. [there are going to be drastic cutbacks on welfare programs across the nation]
5) Democrats are seeking alternatives to major cuts, such as rescinding $1 billion in corporate tax breaks, enacting a 10 percent tax on oil pumped in California, and tapping into a $4.5 billion rainy-day fund.
6) Californians pay the second-highest sales tax in the nation; the state's gas tax is the third-highest in the nation; and California's top earners have the second-highest state income tax rate in the country. [Despite all these high taxes, California is still running out of money… That is a show of staggering incompetence]
7) California residents with incomes of more than $500,000 pay nearly 40 percent of the state's personal income tax revenue.
8) A state ballot initiative approved by voters in 1978 limits property tax rates, the primary source of revenue for school districts and local governments, to 1 percent.
9) California has the highest research and development tax credit in the country, which will cost the state $1.2 billion in potential tax revenue this year.
10) State officials have said that California will run out of cash by the end of July. Schwarzenegger sought a $6 billion loan guarantee from the federal government, but his request was denied.
My reaction: California is slipping deeper into financial crisis and is about to start issuing IOUs. There are two key points to realize from what is going on in California:
1) California’s crisis has implications for all government debt
Two weeks ago, I reported on how California is leading nation to bond default abyss.
My reaction: As Kevin Hassett writes, “The California budget crisis may well lead to a second financial calamity that would be far worse than anything experienced over the past 18 months.”
1) California is more than $24.3 billion in the hole.
2) On Monday, California Gov. Arnold Schwarzenegger ordered a halt to funding for state contracts on everything from pencils to office space.
3) California's state controller has warned about the state running out of cash in two weeks (this warning happened last week).
4) The likely scenario (also the nightmare scenario) is that all California’s lenders disappear, and the state is unable to roll over its debt.
5) If the unofficial eighth-largest economy fails on its debt, it will cast doubt on all government debt, especially treasuries.
6) The US government's fiscal situation is in worse shape than California's.
Conclusion: The ‘bad’ phase of the financial crisis is on the verge of beginning. It involves the dollar’s collapse, soaring commodities, and skyrocketing interest rates.
The time frame for everything to really start falling apart is the next two or three months. California budget crisis is one of many factors which sets this time frame (default is likely within three months). A default by California would drag the bond market into the abyss.
It is virtually certain that lenders will desert California at some point later this year, and the state will be unable to roll over its debt. When this happens, borrowing cost for US governments on all levels (local, state, and federal) will go up. The dollar will also be hurt as lenders look outside the US for more credit worthy governments to lend to.
2) California’s problems aren’t unique
Unfortunately, California isn’t the only state in trouble. As I reported last year, the vast majority of states are facing budget troubles.
1) The vast majority of states cannot run a deficit or borrow to cover their operating expenditures. As a result, states must close to budget shortfalls by either drawing on reserves, cutting expenditures, or raising taxes.
2) States have already begun drawing down reserves, and the remaining reserves are not sufficient to weather a significant economic downturn. Also, Many states have no reserves and never fully recovered from the fiscal crisis in the early part of the decade.
3) State budget cuts often are more severe in the second year of a state fiscal crisis, after reserves have been largely depleted.
4) When states cut spending, they lay off employees, cancel contracts with vendors, eliminate or lower payments to businesses and nonprofit organizations that provide direct services, and cut benefit payments to individuals. These cuts, like taxes, drain an enormous amount of money out of the economy.
5) Expenditure cuts and tax increases are problematic policies that cause economic downturns to deepen. They both leave business and individuals with less cash and thereby remove demand from the economy, causing state and federal GDP to shrink.
6) The federal government will eventually be forced to step in and offer states some form of assistance to prevent economic collapses and humanitarian disasters. This means more bailouts, and these bailouts will only marginally help state deal with their enormous budget shortfalls.
7) All the state budget troubles also apply to local governments. In fact, local governments with their reliance on property taxes and crushing pension obligations are in an even worse financial position.
As local and state governments across the country cut back on spending, unemployment will rise and US gdp will shrink.
Next week OUI's will be issued to fund college grants and vendors and state employees. You can be sure that lenders will flee in droves when this happens.
80bil in gold for CHINA
Rep Mark Kirk (R-IL) says during an official visit to China he was told in private by Chinese government officials that they had created a second strategic petroleum reserve and were in the market for $80 billion in gold.
Here is the interview with Greta van Sustern... which gets interesting around the 3 minute mark:
http://www.youtube.com/watch?v=PUl9DedlQJw
PCE Deflator (y/y) 0.1% vs. consensus 0.1%; PCE Core (m/m) 0.1% vs. consensus 0.1%. Apr Income revised to 0.7% from 0.5%; Spending revised to 0.0% from (0.1%).
* * * * *
U.S. consumer spending rises 0.3 pct in May
WASHINGTON, June 26 (Reuters) - U.S. consumer spending rose as expected in May while personal income posted a larger than expected jump, a government report showed on Friday, as consumers spent government stimulus money.
Spending, which accounts for over 70 percent of U.S. economic activity, rose 0.3 percent after an upwardly revised flat reading last month. It was the first gain in spending since February, a Commerce Department report said.
end.
The unexpected strength in personal income, up 1.4% in May, was somewhat misleading. Wage and salaries, which are the key underlying driver of income, actually fell (0.1%) in May. The strength in total income was driven entirely by government transfer payments, which jumped 8.0%, driven by a 21.0% spike in the "other" category of benefits. Equity futures spiked initially, but are already giving back some of the gains, with S&P futures currently (1.0) vs fair value.
09:55 Jun Univ of Michigan Confidence 70.8 vs. consensus 69.0
Prior reading was 69.0.
* * * * *
Consumer sentiment rises in June: survey
NEW YORK (Reuters) - U.S. consumer confidence rose in June to the highest since February 2008, as expectations grew that the worst economic recession since the Great Depression may be ending, a survey showed on Friday.
The Reuters/University of Michigan Surveys of Consumers said its final index of confidence for June was at 70.8 from 68.7 in May, equaling February 2008's reading.
This was above economists' median expectation for a reading of 69.0, according to a Reuters poll.
The index of consumer expectations edged lower, though, to 69.2 in June from 69.4 last month.
Since the November 2008 low of 55.3, the sentiment index has gained 15.5 points, recouping about one-third of the loss posted since the peak in January 2007.
"Such a sizable gain has usually indicated that an end to the economic downturn is on the horizon, as consumers begin to increase their spending on houses, vehicles, and large household durables," the Reuters/University of Michigan Surveys of Consumers said in a statement.
-END-
The following was the big story of the day: China wishes a new reserve currency and wishes to use the IMF's SDR format:
Wary of dollar, China wants super-sovereign currency
* China's central bank calls for super-sovereign currency
* Dollar's dominance has intensified risk, worsened crisis
* IMF should manage part of its members' FX reserves
By Zhou Xin and Chris Buckley
BEIJING, June 26 (Reuters) - China's central bank renewed its call on Friday for the creation of a super-sovereign reserve currency to reduce the dollar's global domination, which it said had worsened the financial crisis.
In its annual financial stability report, the central bank did not mention the dollar by name but said it was a serious defect that one currency should tower over all others.
"An international monetary system dominated by a single sovereign sovereign currency has intensified the concentration of risk and the spread of the crisis," the People's Bank of China said.
In thinly-veiled criticism of loose U.S. monetary and fiscal policies, the PBOC urged the International Monetary Fund to exercise closer supervision of the economic and financial policies of major reserve-issuing countries.
The 170-page report dusted off a call by the bank's governor, Zhou Xiaochuan, for the creation of a super-sovereign currency.
In an essay in late March, Zhou caused a stir by suggesting that the Special Drawing Right, the IMF's unit of account, could eventually displace the dollar as the principal reserve currency. [ID:nPEK184558]
Friday's report not only advocated a full role for the SDR but said the IMF should be entrusted with managing a portion of its member countries' foreign currency reserves.
"To avoid intrinsic shortcomings in using a sovereign currency as a reserve currency, we need to create an international reserve currency that is divorced from sovereign states and can maintain a stable value over the long term," the report said.
end.
Here is the latest official data from the Comex on silver and gold. You can see why I do not like to report these numbers as it is totally bogus:
COMEX Warehouse Stocks June 25, 2009
SILVER
ZERO ozs withdrawn from the dealer’s inventory.
678,158 ozs withdrawn from the customer inventory
Total dealer inventory 62.0 Mozs
Total customer inventory 56.6 Mozs
Combined Total 118.6 MOZ
GOLD
97 ozs withdrawn from the dealers (registered) category
15,595 ozs (net) deposited in the customer (eligible) category
Total dealer inventory 2.57 Mozs
Total customer inventory 6.15 Mozs
Combined Total 8.72 MOZ
Gold movements were mainly in the customer inventory. 58Kozs were deposited and 42Kozs withdrawn for a net difference of 15.5Kozs. It is laughable that 97 ozs were withdrawn from the dealers inventory!!. Once again the big news is in silver, and once again the movements are in the customer inventory…are the dealers not dealing in silver any more?!!! ; What a joke! Speaking of jokes there were 1 million ozs of silver that magically appeared in the warehouse over night! The closing balance of the customer inventory yesterday was 56.2 Mozs but miraculously the opening balance today was 57.2 Mozs! Hmmm. 1.02 Mozs were also apparently deposited today and 1.7 Mozs were withdrawn. That is a lot of metal movement. Something doesn’t smell right.
There were 151 delivery notices in gold for the JUNE contract bringing the total for the month to 5833 contracts or 583,300 ozs which is 23% of the dealer inventory!
There were surprisingly 5 delivery notices issued in silver for the JUNE contract. The total delivery notices for the month stand at 1042 or 5.2 Mozs.
Cheers
Adrian
COMEX Warehouse Stocks June 26, 2009
SILVER
130,404 ozs withdrawn from the dealer’s inventory
62,427 ozs (net) deposited the customer inventory
Total dealer inventory 61.8 Mozs
Total customer inventory 56.6 Mozs
Combined Total 118.4 MOZ
GOLD
20,358 ozs withdrawn from the dealers (registered) category
20,057 ozs (net) deposited in the customer (eligible) category
Total dealer inventory 2.55 Mozs
Total customer inventory 6.17 Mozs
Combined Total 8.72 MOZ
Some top class accounting was demonstrated in the COMEX report today. 30,074 ozs were deposited in the customer inventory and zero were withdrawn and the net change is given as 20,057 ozs!!! You couldn’t make this stuff up. I can not accept that the COMEX has the metal they say they have when there is incoherence between delivery notices and warehouse movements and there are glaring accounting mistakes.
There were 129 delivery notices in gold for the JUNE contract bringing the total for the month to 5962 contracts or 596,200 ozs which is 23% of the dealer inventory!
There were no delivery notices issued in silver for the JUNE contract. The total delivery notices for the month stand at 1042 or 5.2 Mozs.
Cheers
Adrian
end.
As promised, this is a must read article from the well respected Huffington Post. You will agree with me that the data disseminating out of the comex is total rubbish: (press on the blue for the article)
Must-read on Comex from a reporter
for the Huffington Post. This article highlights what GATA/LeMet subscribers have long known:
What does it all mean? First, there are indications that the seller side of futures contracts (such as Deutsche Bank in April) are having a difficult time making good on their commitments. Second, the information reported by the Comex regarding physical inflows and outflows is looking more and more like a convenient fiction. Third, there is some doubt as to whether there is gold in inventory -- as there absolutely should be -- to match existing warehouse receipts. Fourth, the Comex warehouse is one of the most secure forms of gold investment in the world. If they can't be trusted, what does that say about ETFs, pooled accounts, futures, forwards, options, and all the other forms of "paper gold" out there? Fifth, if it becomes clearer that there is no physical supply to meet physical demand, the dollar price of gold could go much higher.
http://www.huffingtonpost.com/nathan-lewis/wheres-the-gold_b_216896.html***
The Fed chairman Ben Bernanke had a terrible day testifying on the hill yesterday. I do not think the Fed will get it's expanded supervisory role in the banking mess:
Bernanke appears to be under considerable pressure in the congress hearings investigating the BofA Merrill deal, as reported in yesterdays Midas.http://news.yahoo.com/s/nm/20090625/bs_nm/us_financial_bankofamerica_8
Bernanke denies Fed threatened BofA over Merrill deal
« "I did not tell Bank of America's management that the Federal Reserve would take action against the board or management," he, (Bernancke) said……………….
During the hearing, lawmakers cited an e-mail written by Richmond Federal Reserve Bank President Jeffrey Lacker as possible evidence of undue Fed pressure on Lewis. In the e-mail, Lacker said Bernanke had told him he planned to make it clear that pulling back from the merger could result in managers losing their jobs if Bank of America ended up needing aid…………..
The controversy over the Fed's role in the Bank of America-Merrill deal could also color President Barack Obama's looming decision on whether to reappoint Bernanke when his four-year term as chairman expires January 31…………
Paulson has been called to testify next month………... » END
Here we have 2 of the key PPT players, namely the Fed. chairman, and the (ex) Treasury Secretary Paulson, trying to pass the buck to each other, with smoking gun evidence (Lacker’s email) pointing to Bernancke perhaps taking the rap. Apportioning blame on a patsy is well worn routine, when the public are howling for revenge as the depression deepens.
B. is obviously reluctant to accept the role, and doesnt want to lose his job or even worse, end up like Libby as a temporary guest of the state.
So what would you do in B.’s situation ?
What leverage does Bernanke have on his PPT et alia friends, who are stabbing him in the back in order to protect themselves. ?
Would he still want to participate in facilitating the other potentially illegal market manipulations of the PPT in particular capping the gold price, (and shorting the PM shares), to support the strong $ policy ?
If B. withdraws his support for the gold suppression scheme or threatens to do so, will his « friends » back off, because he could bring down the $, and the whole system including Govt.Stacks ?
Is this the reason that yesterday gold and the PM shares started trading differently ? For the first time in months I had no red, only green on my screen with the PMs and juniors, (although many of them did not trade.).
The jury is still out until the congressional enquiry comes to some conclusion, but in the meantime this is a story to follow.
My guess is there will be a cover up and they will go back to business as usual, but they are skating on thin ice, because Bernanke is obviously feeling cornered.
Just timagine if B. tried to cut a deal to lessen any penal moves against him, and started exposing the gold suppression scheme to the enquiry ?
Interesting times ?
Best
Alan
I wish you all a grand weekend.
Jim Sinclair also wrote a piece on California at www.jsmineset.com and i urge you to read that as well.
see you on Monday
Harvey.
