California and the Gods Unknown

"After a time of wandering, Joseph came to the long valley called Nuestra Señora, and there he recorded his homestead. Nuestra Señora, the long valley of Our Lady in central California, was green and gold and yellow and blue when Joseph came into it. The level floor was deep in wild oats and canary mustard flowers". - from To A God Unknown by John Steinbeck

In his 1933 novel To A God Unknown, John Steinbeck tells an allogorical tale of the California experience. The protagonist, Joseph, comes to California to create his future. He discovers a place of apparent wealth and promise. And indeed he appears to be achieving all that he dreams. But over time, tragedies strike and a drought undoes his life work.

The story is about the arrogance of Californians who hold the belief that their efforts as humans, individually and collectively, create orderly wealth in a place where natural wealth has always existed in its own order of things.

In the "California Gold Rush" from 1848 to 1853 some 12 million ounces of gold was removed from the streams of "Gold Country" before hydraulic mining was used on ancient gold-bearing gravel beds that were on hillsides and bluffs in the gold fields sending large amounts of gravel and silt, in addition to heavy metals and other pollutants, into streams and rivers. Once the gold was depleted, gravel and silt remained in the areas affected.

Farmers followed the miners to extract another kind of wealth. In the Sacramento Valley and the Sacramento-San Joaquin River Delta reclamation districts were formed to prevent the flooding of farm lands by building an extensive levee system. In the same period, dams with water diversion and canal projects were proposed and subsequently built to move water into the desert areas of the Southern San Joaquin Valley and all of the State south of the Tehachapi Mountains in the California Aqueduct. Water became "Liquid Gold" for Californians as it seemed quite plentiful in the 1950's.

New Californians hadn't read To A God Unknown. Instead they believed that water was an endless resource of wealth for future Californians. Lands that once were orchards in Southern California. the San Francisco Peninsula, and Santa Clara County and farms in the Central Valley became subdivisions of housing for large populations, urban/suburban populations that were now dependent upon that water for human consumption competing with the remaining agricultural interests. This year the Southern San Jaoquin Valley has become the first area in the State to suffer significantly from the continuing drought as reported in a previous post.

But this story doesn't stop with gold and water. A massive highway system was built by government beginning in the 1950's displacing the railroads built under a previous government effort. Other infrastructure was put in place in the 1950's and 1960's to support a growing state population.

Much of this infrastructure was not built to withstand severe earthquakes, despite the experiences with the 1906 San Francisco Earthquake, the 1933 Long Beach Earthquake, and the 1952 Kern County Earthquake.

Few Californians could tell you about the 1952 Kern County Earthquake. It was a 7.3 quake that cracked reinforced-concrete railroad tunnels having walls 46 centimeters thick; it shortened the distance between portals of two tunnels about 2.5 meters and bent the rails into S-shaped curves.

Along with Interstate 5, in the mid-1960's the Edmonston Pumping Plant, the largest pumping facility of the State Water Project, was built near the epicenter of the Kern County Earthquake to lift water almost 2,000 feet up and over the Tehachapi Mountains into Southern California. At peak capacity, the plant pumps almost 2 million gallons a minute through 10 miles of pipeline across the Tehachapi Mountains. (It may never matter that this facility is located where earthquakes have shifted railroad tunnels. In recent years, State officials have discovered that portions of the California Aqueduct are sinking.)

As this infrastructure aged, the taxpayers of California "revolted" in 1978 and have subsequently failed to effectively maintain or replace, much less expand, the dams, levees, canals, highways, and all the other infrastructure, along with failing to support it's once-proud school system. Instead, in a level of human arrogance rarely seen, Californians in the past 30 years have been using the "hydraulic strip mining" approach to live off this artificial and transient wealth structure.

Recently the rest of the nation has learned that California is "the country's fiscally weakest state," a description offered by bond fund managers. Reports of those statements fail to mention California is responsible for 13 percent of the United States gross domestic product and that California contains over 10% of the nation's population. But we do have U.S. Education Secretary Arne Duncan telling an assembly of mayors and school administrators: "Honestly, I think California has lost its way, and I think the long-term consequences of that are very troubling."

As noted in the previous nine posts, California has started a "belated" economic collapse. Unfortunately for the Obama Administration and the world, the collapse of what was the world's 8th largest economy would drag everyone else down with it. I previously described all the early indications. Now some are starting to see what's facing us, though these economic tremors are being reported piecemeal making it difficult to assemble a "big picture" from which to forecast.

Today, it is being reported that California's regional banks, which on the surface appeared to sidestep the national banking near-collapse, are showing signs of significant stress. Further, a second round of home forclosures is expected this summer, according to reports.

Meanwhile, the State has begin issuing Registered Warrants - IOU's - in lieu of money in payment of it's bills. And while this is thought to be temporary until the Legislature and the Governor agree on a budget, in fact it may last longer than expected and when a "balanced" budget is adopted new job losses in both the public and private sector are inevitable, causing further reductions in State and local sales tax revenue and State income tax revenue. This may force another round of Registered Warrants after March 2010.

The Sacramento region reportedly is already feeling the impact of the measures taken to reduce State and local government spending. This will slowly spread out across the state like an economic tsunami. For the State isn't taxing a smaller percentage of the economic activity than it did two years ago, it is just pumping far less money into the economy. That ultimately means less private sector activity because of the multiplier effect.

Recent analysis indicates that even after the continuing job eliminations cease, hiring might not rebound. And as reported in previous posts in the first quarter of 2009 California had the most mass layoffs in the nation, and that since then California's unemployment rate continued to climb to the highest in modern record keeping. Further, even with those new job losses which in May included significant government job losses, the major layoffs that will affect the education and health sector as well as government hadn't yet begun.

Today, in a report on the situation in California's fabled Silicon Valley, we are told the truth of the home foreclosure situation:

Like cinders from a fire, foreclosures and short sales are landing on the mini mansions with double staircases, triple-tiered fountains and four-car garages.

"It's a mess," said Joe Fierro, who built a waterfall that cascades between his front steps.... Fierro looked out across Mountaire Lane to the hulking shell across the street, where his neighbor left behind dying palm trees, children's toys next to the outdoor kitchen....

The foreclosure numbers at The Ranch don't come close to San Jose's foreclosure epicenter — the East Side neighborhood near Story and King roads in the valley below — or in the cookie-cutter developments in the commuter towns from Manteca to Hollister.

But to those used to seeing the Lexus SUVs heading up Yerba Buena Road to The Ranch and other exclusive enclaves, the idea that these privileged people might be having trouble paying their bills is still a bit shocking.

Hidden within reports like this are the hints of further impacts. Major reductions in real estate values are already resulting in downward adjustments in assessed value which will result in reduced property tax revenues for schools and State and local governments. And as I noted in a previous post some property tax payments will not be made in this fiscal year due to these foreclosures . Many who in years past paid in full each December will take the option of paying half with the remainder to be paid in April. Some will choose to not pay anything in December hoping to be able to afford to pay the whole amount by April. We will not know until January what effect this will have on cash flow in California governments and schools.

Nothing in the Bush and Obama Administrations' Democratic Congress approved trickle-down bailout and stimulus efforts will be able to stop this further economic decline. That would have required funding an immediate direct hiring by federal, state and local governments significant numbers of new employees to work in programs to correct deferred maintenance of infrastructure and programs such as education and public health. And even if the Obama Administration and Congress could suddenly shift gears now, it would take six months for the effects of such a program to be felt.

I fear that the Gods Unknown of California are about to exact revenge in the form of a much deeper Great Recession.