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Obama Tells California They Are On Their Own

By: Steve Johnson

6/16/2009 - 24 Comments

In a surprising move, the White House said on Tuesday that California will have to solve their financial problem on their own by cutting their budget.

I don’t think Obama has any other choice with the recent Bond market weakness.  If the government were to co-sign onto California’s debts, that would add further risk to the credit of the US. 

The US credit rating is already at great risk from the trillions from the federal budget. If the US were to loose its AAA credit rating, the Fed would not be able to keep interest rate from rising very quickly and that could put the US as risk for defaulting on its national debt - which would be solved by monetizing the debt (otherwise known as printing money), adding to the wave of inflation that is already in the cards.

This could mark the beginning of the end of the last decade of social government expansion as the weight of the government social programs has tipped the scale and the California economy can no longer function under the burden of its own government.

In telling California that they are on their own, Obama is risking the state to default on their debts without massive budget cuts that will be very painful but very necessary.  This is perhaps the first major step in the right direction as the government is finally starting to realize that there is nothing they can do to help the economy but get out of the way.

We need to cut the size of both state and federal governments and make way for the entrepreneurs to rebuild a viable economy based on real consumer demand.  Obama is eventually going to have to make the same big cuts to the federal budget.

As California goes, so goes the nation.

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