Poverty Soars in California

In September the state of California hit a new high in food stamp benefits, crossing the 6 billion dollar mark on an annualized basis. Over the past year in California alone the total number recipients of the federal SNAP program (supplemental nutritional assistance program) rose by 16.3%. In many of the big counties of California however, food stamp usage rose even faster. As previous readers of this blog understand, it’s useful to look at the car dependent regions of southern California as they are emblematic of the state’s post peak-oil, economic breakdown. After all, the food stamp program is really a food and energy program–which frees up household cash for gasoline. In San Bernardino County, for example, with its population of two million the number of SNAP recipients has now crossed the 300,000 level. Yes, a full 15% of that county is now on food stamps. But the growth rate in usage is even faster now at 22.7% since last year and has showed no sign of slowing down. | see: San Bernardino County SNAP Users vs the Price of Oil 2004-2010.

The State of California is running hard now to take as much federal assistance for which it qualifies. In addition to food stamp benefits now annualized at six billion dollars, the state continues to borrow funds from Washington to pay its own portion of unemployment benefits. That particular debt is now reaching ten billion dollars. Meanwhile, as evidenced by Sacramento’s trouble over the past two weeks in new issuance of state bonds (which had to be cut back in the face of a buyer’s strike), Sacramento instead pulled the rip-cord on Build America Bonds–yet another federally guaranteed method of borrowing. Indeed, The Golden State has used all manner of accounting tricks and fiscal year liability-shuffling to hobble its way through the past 3 years. Nevertheless, no matter how much the Budget is pounded lower the growth in revenues has not yet arrived. This is why the incoming Governor, Jerry Brown, will face the exact same problems this coming fiscal year that triggered fighting (and IOUs) between Schwarzenegger and the legislature previously. | see: State of California Enacted Budget FY2000 – FY2010.

The pro-cyclical nature of California’s budget, which peaked at 146.5 billion right at the intersection of the housing bubble’s top and the crushing price of oil, suggests that a nasty reversion has a long way to go. Eventually debt service will also begin to overtake Sacramento’s ability to borrow. Accordingly, it would make sense that the state budget will inevitably find its way back to the 100 billion dollar level as people and businesses leave the state. Also, while US exports are recovering very strongly and California is a powerful exporter, this will not be enough to rescue California’s economy which is still largely pegged to previous credit-bubble price levels. High priced homes, vast automobile and highway architecture, sunk-cost decision making in government and services–all these artifacts of the excess capital economy are now burdens in the shrinking economy. As is so often the case, through backward revisions and spin, the state last week reported a “gain” in job growth for October. But the unadulterated view, the total number of California employed, was flat again on the month, and remains at levels last seen a decade ago. What the State reported was nothing but noise. | see: California Employment in Millions 2000-2010.

At best, unfolding now in the US economy is a recovery largely tied to exports that’s creating some moderate new job growth,  but at much lower wage levels. The United States, like the rest of the OECD, is now succumbing to the global wage deflation that was masked by last decade’s credit bubble. As a result, and on many measures, poverty is soaring in America and in California especially as increased food and energy costs collide with new, lower payscales. Worst of all however is that the meager public assistance that millions of Americans now collect–the billions in food stamps and unemployment checks–are no match for rising prices of gasoline, bread, milk, coffee, sugar, and meat. Indeed it is not merely the unpleasant fact of The American Dole in all its breadth, but, that these coupons are set to decline in value. While congress will no doubt debate these billions and discuss federal obligations in static terms, what’s now set in motion is the loss of purchasing power of government benefits. And that may be the surprise that the political complex doesn’t see coming. By combining reflationary quantitative easing and a failure to reform the financial system, in an era of higher commodity prices and deflating wages, the United States is not building an economy so much as a poverty machine.

-Gregor

20 Comments ↓

  1. montyhigh writes:

    Your work is unique and valuable. Hope you can keep posting.

    MontyHigh, http://www.worldofwallstreet.us

  2. C185pilot writes:

    A few weeks ago I took I-80 from SFO to Sacramento. It was nearly all freshly repaved/nice bright painted
    lines. Lots of stimulous money just before the election. I guess it worked, the only state where all the
    incumbent democrats got re-elected, even a dead state legislator. But it means no change in the dead-end policies in Sacramento. Re-elect a dysfunctional government and expect reform/change. That is the definition of insanity.

  3. ericgarland writes:

    Wait Gregor, this guy says that everything in California is great, that all of the state’s problems are total slanderous lies (http://yhoo.it/eD1ev2) and this guy goes one further and says the whole recession is back to normal, we should stop being such gloomy gusses about the double unemployment and drastically reduced household wealth since this is just like the 80s and Wall Street is back and everything should be cool and we’ll have another Dot Com Boom in like two more months cause that would be the 90s. (http://bit.ly/e7JCQT)

    Am I missing something?

  4. Doublehooks222 writes:

    Always an insightful read. I consistently utilize your insight and perspectives to shape portions of my investment decisions. It’s somewhat more sane here in Texas, however, fundamentally the trend lines are not encouraging.

  5. Pavan writes:

    California is once again at the forefront. The increasing poverty in CA is a preview of what the USA can expect. Since Obama was elected, there have been no increases in Social Security, so those who collect SS are getting poorer. Most others who have a job in the private sector have received minimal raises, if any. Meanwhile, the cost of food and energy sky-rockets, while the government is working on creating more inflation. So far, things have been rosy for government employees, but there will soon be a backlash. We live in interesting times, but it also seems to be the end of the good times.

  6. While the US continues to deal with its structural economic issues, California is in the unfortunately position of not being able to wait for a Federal solution — regretfully, life may never be the same for Californians who continue to bank on a resurgence of state tax revenues even while the US economy continues to languish — by guess is that many unemployed Californians will never work again in America — emigration from California to other states is likely to accelerate in the coming months as budget cuts take a deeper hold on public employment in the state in the coming year — good luck Californians…

  7. howardlindzon writes:

    if you are irish andlive in california…double bummer. both home teams devastated

  8. howardlindzon writes:

    if you are irish andlive in california…double bummer. both home teams devastated

  9. howardlindzon writes:

    lets catch up on this this week on stocktwits.tv and how your portfolio looks as a result. great stuff the last few weeks. thx

  10. howardlindzon writes:

    lets catch up on this this week on stocktwits.tv and how your portfolio looks as a result. great stuff the last few weeks. thx

  11. Allen G. writes:

    This analysis, while objective and valuable, has avoided entirely the immigration issues. The demographics of the state are changing and a new cultural base is expanding. As a simple example, what can poverty figures actually mean when 1,000 unskilled, illiterate, Mexicans crawl across the borders and then take super-low wage jobs picking fruit – jobs that legal residents won’t and can’t do? Obviously, when the California real estate bubble pops and everyone cuts back, those on the lowest income levels without savings, will skew the poverty counts.

    The real figures for food stamp and medical care recipients is debated, since apparently anyone born in the U.S. can receive such aid. I think the population ratios in S. Calif. have made non-Latino caucasians the “minority.” In any case, those are raw figures of percentages but do they really define an increase in “poverty?” I have my doubts. My guess is that if you went into the home of a typical Mexican family now living in our defined “poverty” level, they would say that their lifestyle would be considered very comfortable, if not wealthy, compared to back home. Their roads are not paved with gold, but at least they are paved.

  12. Interesting article in The Weekly Standard about letting states like CA file for bankruptcy–Give States a Way to Go Bankrupt | The Weekly Standard shar.es/X3AQ3

  13. SteveAverill writes:

    this is a fantastic analysis that I am sharing with several cali friends who are still in denial. the more we can wake up to reality the better we will be able to solve our problems.

  14. gregor.us writes:

    Well, I did not intend to avoid the issue of cheap, immigrant labor so much as it was simply outside the scope of the posting. That said, I generally favor the view that cheap, below market rate labor–offset by social costs borne by the state for its unpaid services to illegal immigrants–comes out just “slightly” positive in a net energy sense for the system. I’ll wager many would disagree with me, on that. But, that’s my view.

  15. gregor.us writes:

    If you like this analysis, use the California tag to find all my other posts on the golden state over the past two years. Thanks so much for reading.

    G

  16. gregor.us writes:

    Thanks!

    G

  17. Jackdykes writes:

    I read your fine blog,and read a number of others addressing the imminence of peak oil. I also read other entries talking about the “500 billion barrels” of oil in”the Monterey shale,”soon to be freed to flow by a new technology using the injection of “acidified water”.I also read about the “400 billion barrels” of heavy crude in the Orinoco basin,which we can “just go and take if we really need it”,not to mention the hype about the endless supplies of shale gas that will save us.How is a layman like me supposed to make sense of all this. I tend to lean in your direction,but is there any way to be reasonably sure,or is it all just a matter of opinion and emphasis?

  18. gregor.us writes:

    I’ll give you a simple concept to guide you. Here it is: reserves are not flows.

    Peak oil is not about reserves. It’s about the rate of extraction. Write this down: “Peak oil is everywhere and always about the rate of extraction.”

    An example. You and I are watching the Black Giant oil field of East Texas being discovered 80 years ago. It is a huge reservoir of conventional, easy flowing oil. From the day it was discovered, it only took one year to start producing nearly a million barrels a day.

    That no longer happens.

    As you know the Alberta tar sands, and other unconventional oil resources are vast in terms of recoverable oil. But that says nothing about the rate of extraction. In fact, the rate of extraction is ploddingly slow, and the expense to bring on the resources are high.

    This is a very important concept: we are replacing the fast flowing, cheap to develop oil with slow flowing, high-cost oil. The result? No increase in global oil production in 6 years.

    Hope this helps!

    G

  19. Ebrin6833 writes:

    I have a frievd who is a geologist in the oil field and his comment was “There will always be oil, it’s just how much you can afford to pay for it.”

    I would think that the pricing mechinism should impact the petro chemical industry in regards to the oil based ticky tack currently produced. We still seem to churn it out endlessly though…at least for now

  20. gregor.us writes:

    Your friend is correct but it’s not as simple as that. For example, the
    relationship between higher oil prices and increased production is now
    broken. That is a fact: higher prices no longer bring on more supply. The
    last 6 years of global energy production are clear.

    However, will higher prices bring on new oil production in certain regions?
    You bet. And a ton of money will be made betting on those regions. Again, it
    *won’t change the fact of global peak oil* but in places like North Dakota
    it will upgrade lifestyles and incomes.

    G

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