I’ll Gladly Pay You Tuesday
link California to launch $14 billion in debt sales | Money & Company | Los Angeles Times.
This is either naivete, arrogance or a tragic combination of both. The citizens just recently elected representatives who have a history of inadequate fiscal management skills and California is bleeding financial ink badly. Now, the state is in the throes of offering $14 billion dollars of term debt to investors for the princely rate of between 1 and 1.5%. Amusingly this debt is coined as RAN’s, or Revenue Anticipation Notes. What this means is that money will be paid to investors at the aforementioned princely rate, out of tax revenues anticipated to arrive later in the fiscal year. So this is merely a stopgap funding mechanism. It’s the new take on the old character Wimpy of the Popeye cartoons. “I’ll gladly pay you Tuesday for a hamburger today”.
“…The state’s chief fiscal analyst on Wednesday estimated that Sacramento will have to plug a total of $25.4 billion in deficits by mid-2012. That may make some bond investors nervous, but many have gotten used to scary fiscal headlines about California for the last decade…”
Many have gotten used to the scary fiscal headlines. Hmm. That may have been before the taxpaying corporations which tolerated the State’s policy regime decided to gradually move out of state. As much as the Apple Computer company may be regarded as the iconic California/Silicon valley company, it’s likely many of it’s business segments are rooted out of state, including manufacturing of their products. Even the great James Cameron shoots most of his big budget flicks elsewhere in the world than California.
http://articles.ocregister.com/2010-02-24/economy/24548737_1_companies-red-teams-list-names
In addition, while still very small, this article documents individuals that are also moving out of the once prosperous state for greener pastures elsewhere. http://articles.latimes.com/2008/dec/18/business/fi-leaving-california18
That’s not to say people don’t want to live there. It’s hard to take away the magnificence of the state’s natural endowments. Californy is the place you ought to be according to migrants from Mexico. Recently, it was revealed that Spanish was the predominant first language of public schoolers in that State. If a group such as the legendary Beach Boys were formed today, they’d have be named The Gringo Boys. That’s all wonderful since one day this will be a powerful workforce. But in the meantime, support services for this community, many of whom are illegal, will be sorely strained as revenues cannot meet the outgo demand. It’s possible therefore that bond or noteholders may have to stand in line if the expected taxes don’t cover the debt obligations.
Not that there’s a risk of losing money. As is law, bondholders MUST be repaid. But it begs the question, why would you invest for example $100,000 of cash to hopefully get $1000, or $1500 back in a year? You’d be almost as wise to stick the money under a mattress. If they don’t pay you back on time, you have to stand in line until such time when they have the funds to do so. Meanwhile, you’re out $100,000. You’d be better off buying fancy art.