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California Begins Drastic Government Cuts

By: Steve Johnson

1/20/2009 - 30 Comments

Last Thursday, governor Schwarzenegger has basically declared a state of emergency in the state of California.

Schwarzenegger warned that California, which is the world's eighth-largest economy if it were a country, faces insolvency within weeks if lawmakers fail to close the widening deficit.

Here is what one article said,

Schwarzenegger said the state's financial problems are so pressing that no other issue — including education, water policy or health care — can be addressed until its budget problems are resolved.

"Let me tell you, I have big plans for this state. They include action on the economy, on water, environment, education, and health care reform, government efficiency and reform, job creation, and the list goes on and on," Schwarzenegger said. "But our first order of business is to solve the budget crisis."

Closing California's deficit will require billions in spending cuts. Schwarzenegger has ordered state workers to take two days off a month without pay, starting in February, while departments have been asked to take 10%, across-the-board cuts.

Public works projects have ground to a halt because the state no longer can pay for them, and teachers in some school districts have received layoff warnings as the state runs low on cash.

The governor's latest budget plan proposes $17.4 billion in spending cuts, $14.3 billion in tax increases and $10 billion in borrowing to close the deficit through June 2010.  But that is not enough – because of the estimated $42 billion is deficits that are expecting by the end of 2010.

Raising taxes is not a good solution because it risks a mass exit, as many are starting to migrate to other states in search of lower taxes, lower standard of living and more jobs.

Florida, Arizona and Michigan are probably going to soon face a similar situation.  The federal government is going to face a very difficult situation.  A large part of Obama’s stimulus package includes billions of dollars for state bailouts.  Eventually the situation will force the federal government to drastically cut its budget.  But until the dollar sinks, they will just keep selling Treasury-Bonds as fast as they can.

The economy is in deep trouble.  So far the fed has been able to continue to borrow money from the rest of the world to pay for the bailouts, but that is coming to an end as foreign nations are pulling back to pay for their own bailouts.

The fed will soon be left with only two options, print the money they need or make drastic cuts.  More than likely they will begin by printing the money until inflation comes around again. Then, they will be out of options and will be forced to take drastic cuts that will crater the economy.

Even Minnesota, my state is facing a $5 billion dollar deficit - and the politicials are deadlocked with no chance of cutting costs or raising taxes.  Instead, they are asking the fed for the money. It's only a matter of time before the Fed will not be able to provide a bailout and the states will have to drastically cut their costs.

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