California !

I know, I am picking on one state, and I should leave it alone. Except is seems the most logical candidate for a melt-down. I could pick Boston, New York, Washington D.C., or Atlanta, but California has all of the ingredients…to me…which could precipitate an economic disaster. I am not trying to pick on it, but facts cannot be ignored. The very word “collapse,” might well be an exaggeration, and I hope it is, but let’s look at the various factors which could make times hard for California, and possibly spread to the rest of the US.

First of all, there are fuel costs, and the amount used by Californians. Californians use almost 20 BILLION gallons of gasoline and diesel per year, in their 29 million vehicles, which is 12% of total US consumption. Californians drive 300 BILLION miles per year, mostly on the so called “freeways.” Fuel prices climbed 44%, between December, 2003 and May of 2004. With $65 per barrel oil, fuel prices have climbed another 50% since Jan 1, 2005. There are over 11 million trucks on California highways, driving on over 815,000 miles of roads, which are available to trucks. The hundreds of millions of truck miles, plus billions of gallons of diesel used, as well as millions of gallons of diesel used in railway locomotives, plus thousands of jet planes burning billions of gallons of jet fuel, makes California, and especially Los Angeles, the most polluted state in the union. To put it mildly, California uses its cars and trucks, more than any other state. It is totally dependent on them.

An interesting side note: The Pacific Electric interurban lines, ran over a thousand trains a day, on over 1100 miles of track, creating no pollution, hauling millions of passengers daily, on routes which now are freeways. The last Pacific Electric “Red Car” ran in the early 1960’s. The lines ran literally everywhere. Pasadena, beaches, all the towns, etc, were served by Pacific Electric. A few of the cars are preserved and running at the Perris, California, Orange Empire Railway Museum. California dug its own grave by demanding freeways. Today, Californians are paying $3.00 per gallon of “regular” gasoline, and more for diesel. How does this cause a “collapse?”

If you have ever driven in Los Angeles or other major California city, you know that in order to get to work, Californians use their cars. They have to use their cars. They have no choice. If the average commute for a Los Angelean, is 30 miles each way, that’s a 60 mile per day drive to get to and from work. Assume the car gets 15 miles per gallon, and that’s a measly 4 gallons, correct? Yes, and that’s $12 per day to get to and from work, whereas a year ago, it might have been $6, and a couple of years before that, $4. Multiply $12 per day by 20 working days, and you get $240 per month for gasoline. According to my figures, and the US census bureau, the total cost of driving a car is 35 cents per mile, including fuel…with $1.25 per gallon fuel. So we must make it 40 cents per mile. Since the average worker might drive 1500 miles per month for work, and shopping, you can multiply that by 40 cents, and that is $600. Enough for cars.

Gasoline stations, are now having to pay a sir-charge for their fuel deliveries, because the trucks delivering it, have to pay the extra fuels costs. All groceries, and items in all stores, be they hardware, furniture, or office supplies, are delivered by trucks, usually using diesel fuel, costing more than gasoline. This means that all items purchased by everyone, have to go up, because of delivery costs. They are, according to a NPR report yesterday. Everything costs more now, than it did last year with $25-30 per barrel oil.

Home prices went up 25.4% in California last year. Property taxes went up also, as did water, electricity, gas, and insurance. Far too many couples are working to pay the mortgage, some times, interest only. When both husband and wife work; child care and baby sitting costs, have gone up tremendously, often times costing close to $15 per hour, making a good portion of the wife’s wages, eaten up with child care. California has the dubious distinction of being number one, as far as bankruptcy filings are concerned, approaching 200,000 last year.

Figuring every cost of driving, eating, working, and living in general, California is pretty expensive. According to recently released figures, Wal Mart has shown a large slump in earnings, attributed they say, to ’high gas prices.’ At the same time, J.C. Penny and Nordstrom show hefty increases in business. This could mean that the masses are getting wise to Wal Mart, or more probably, the lower income class, are cutting back radically on their spending, to defray higher fuel and other prices. I really believe that the Wal Mart slump is indicative of the working classes being on the very edge of solvency, or maybe on the very edge of failing to make ends meet. With high interest credit card debt, which has allowed them to remain out of bankruptcy this long, the thin edge of bankruptcy for huge numbers of Californians, as well as the rest of the US too, could be razor like. California is not alone in this. I picked on it, because they spend far more on gas and diesel than any other state, and this is crucial to them. Transportation, and its costs, are matters of life and death to Californians.

Is it possible that with high fuel costs, unemployment may increase? I think so, because high fuel costs will raise all prices, causing everyone to buy less, and consequently, unnecessary employees to get laid off. One of the first columns I wrote for this web site, was about the chain of events which cause depressions. The chain begins with layoffs, and those lain off failing to buy things, and make their required payments on cars, homes, and credit cards. It is pitiful to see hard working, honest families get scrunched into a corner when hard times come. If layoffs occur in all facets of business, because of many things besides fuel prices, the chain begins. The fake CPI index just released, shows a potential yearly 6% cost of living increase, and this is wholesale prices, not retail prices. Everything is costing more dollars to buy, and as I said last week, wages never keep up with inflation. NEVER. This places millions of Americans, and especially Californians, in a very tight spot, even if they don’t lose their jobs. Everything goes up in price, but wages stay the same. What to do? They miss payments on cars, credit cards, mortgages, or whatever they owe for. This starts the ball rolling, and with terrible cascading consequences.

If jobs weren’t lost already, they soon will be, because when no one can afford to buy, employees get the pink slip, and the roll has begun. Eventually, everyone suffers, because everyone has less to spend. An economy runs on money continually changing hands. People buy, which gives employment to those selling. Business owners maintain their buildings and equipment, giving those maintainers jobs and money to spend. Auto salesmen use their commissions to buy life’s necessities, and when no one is buying, they lose their jobs, and have nothing to spend. See the cascade? It all feeds on itself. All of America, not just California, but California seems to be ever so ripe for it.

The chain reaction of real estate foreclosures and bankruptcies, cannot be ignored when the innocents get laid off due to causes not their own. It is not unkind for the owner of a hardware store to have to lay off 25% of his employees if his business drops off 25%. It’s either that, or go out of business, and everyone loses their jobs. Business must show a profit to stay in business. When layoffs occur in any industry, it is usually the newest or least needed employees who get the pink slip. Hundreds of thousands of Californians have bought radically over-priced houses, with huge mortgages, many times obtained by shoddy appraisals given to realtors to obtain a sale. Credit requirements for mortgages have been reduced almost to absurdity of late, and these loans are at huge risk right now.

I do not like to be a prophet of doom. I am not a negative person. At least I try not to be, but what I see in California, New England, and other places, makes me really worry. How can a working class family afford to continue making payments on a home, which is hundreds of thousands of dollars over-priced? This, when fuel costs have tripled, other prices have gone way up, and wages remain virtually the same. I just don’t know how it can continue…in California, Boston, Washington D.C. or any other place where real estate prices are out of sight, making servicing their mortgages very expensive. I hope it all runs on the smog vapors forever in L.A. I honestly do. But I warned and warned about the NASDAQ, as did a lot of others, and we were correct. The real estate bubble in California deflating, plus fuel prices inflating, combine to make me worry. Were I in California, and didn’t need to stay there for work, I’d sell my home at a whacking big profit, and head for the hinterlands, due east. Apologies to you Californians, but I do worry about your situation! – Protect yourself.