Mish's Global Economic Trend Analysis

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Prepare for Demise of California; Liberals Will Get All the Government (and Tax Hikes) They Want Posted: 10 Nov 2012 10:12 AM PST On Tuesday voters in California went the wrong way on three propositions. Voters approved Proposition 30 "temporarily" increasing the state sales tax and income tax on individuals making over $250,000. They voted against Proposition 31 that would allow the governor to cut the budget in fiscal emergencies. They voted against Proposition 32 that would prevent unions from making campaign donations via members' dues. Moreover, and worse yet, Democrats picked up two more votes in the state legislature giving them a supermajority, capable of passing any tax hikes they want. Those results are so awful I suggest you prepare for the demise of California. Indeed California's Liberal Supermajority is about to run the state into the ground and taxpayers are going to get all the government they ever wanted. The main check on Sacramento excess has been a constitutional amendment requiring a two-thirds majority of both houses to raise taxes. Although Republicans have been in the minority for four decades, they could impose a modicum of spending restraint by blocking tax increases. If Democratic leads stick in two races where ballots are still being counted, liberals will pick up enough seats to secure a supermajority. Governor Jerry Brown then will be the only chaperone for the Liberals Gone Wild video that is Sacramento. The high Democratic turnout in moderate and right-leaning districts helped the party pick up three seats in the senate and four in the assembly. So now Californians will experience the joys of one-party, union-run progressive governance. Mr. Brown is urging lawmakers to demonstrate frugality and the "prudence of Joseph." As he said the other day, "we've got to make sure over the next few years that we pay our bills, we invest in the right programs, but we don't go on any spending binges." That's what all Governors say. Trouble is, merely paying the state's delinquent bills will require tens of billions in additional revenues if lawmakers don't undertake fiscal reforms. With no GOP restraint, liberals can now raise taxes to pay for all this. [$200 billion in unfunded liabilities, the California State Teachers' Retirement System in need of $10 billion annually for the next 30 years to amortize its debt, $73 billion in outstanding bonds for capital projects and $33 billion in voter-authorized bonds, etc.] They'll probably start by repealing Proposition 13's tax cap for commercial property. Democrats in the Assembly held hearings on the idea this spring. Then they'll try to make it easier for cities to raise taxes. The greens want an oil severance tax. Other Democrats want to extend the sales tax to services, supposedly in return for a lower rate, but don't expect any "reform" to be revenue neutral. Look for huge union pay raises and higher pension benefits. The silver lining here is that Americans will be able to see the modern liberal-union state in all its raw ambition. The Sacramento political class thinks it can tax and regulate the private economy endlessly without consequence. As a political experiment it all should be instructive, and at least Californians can still escape to Nevada or Idaho. Law of the Funnel in Action Big government and absurdly strong unions destroyed Greece and Spain. Expect no less for California. Many large California corporations that can flee, will flee. Those stuck in California will see massive tax hikes (with many more to come) just so public unions and administrators can collect absurdly high salaries and benefits that most citizens can only dream about. Please see the Law of the Funnel for a description as to what just happened. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com "Wine Country" Economic Conference Hosted By Mish Click on Image to Learn More Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Economists Cut US GDP Forecast, Raise Inflation Forecast Posted: 10 Nov 2012 08:44 AM PST Here is a headline news story that I found interesting for reasons I will explain following: Economists cut U.S. Q4 growth forecasts. Economists expect the economy to grow at an annual rate of 1.8 percent in the current quarter, down from the previous estimate of 2.2 percent growth, according to the Philadelphia Federal Reserve's fourth-quarter survey of 39 forecasters. While that left estimates for gross domestic product for the year unchanged at 2.2 percent, growth in 2013 looked modestly weaker with economists forecasting 2 percent, down from 2.1 percent. Over the next three quarters, growth was seen averaging 2.1 percent, down from earlier expectations of 2.2 percent. The unemployment rate was forecast to come in lower than expected, averaging 7.9 percent in the fourth quarter from the previous estimate of 8.1 percent. The monthly unemployment rate released by the government was 7.9 percent in October. Still, unemployment was seen stuck at 7.9 percent in the first quarter of next year, and holding at 7.8 percent in the second and third quarters. Economists raised their forecasts for inflation this quarter with the headline consumer price index seen averaging 2.3 percent, up from earlier estimates for 2.0 percent. For the year, CPI was expected to average 1.9 percent, up from 1.8 percent. Given exports were recently revised up and imports revised lowered, I expected economists to think GDP would come in higher. It would have been interesting to see their reasons. Hurricane Sandy perhaps? I expect the economy to weaken of course (and by far more in 2013 than the economists). Curiously the economists do not seem worried about the alleged fiscal cliff, at least for their GDP estimates. For more on the fiscal cliff, please see "Saturation Point" for QE Nonsense; Fiscal Cliff Comparisons. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

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