There are a number of old-line economists in California who have been calling for a rebound in the state’s economy for over a year now. Like most economists, they completely missed the destructive nature of the housing bubble when it was underway, and never integrated energy factors into their models. It should not be surprise that many economists are still using post-war recession models to account for extraordinary conditions in California today: oil prices above 75.00 dollars a barrel, overlaid on 21.9 % broad unemployment. Hello: those are not post-war recession numbers.

How can the state’s budget not be in a crisis, when the number of people employed in California has fallen back to levels seen ten years ago?  This is why I remain with my view that Washington will have to perpetually bail out the states in a kind of staged process that combines aid, with some austerity, followed by more aid. We have just been through one full cycle of this process already with the initial stimulus package, followed by California having to downsize its budget severely from the peak, to the resumption of aid via unemployment extensions. However, the fact that California is signaling a potential return to the IOU system in 2010 is probably a cry for help to Washington. And of course, elections are just 90+ days away.

As if to add a touch of comedy to this news, Alan Blinder and Mark Zandi are out with a Mission Accomplished paper today, which details how the FED and the Government saved the US from a depression. Perhaps a short walk through San Bernardino County (picture above) or several other California counties with their white paper in hand might be in order, as a way to augment some of those views. I would suggest that the US Dollar is probably indicating already some of what lays ahead, here. California’s broad unemployment figure at nearly 22.00% is yet another new high, and indicates the trend is still in place. While Blinder and Zandi are stuck in post-war recession-land, the US Dollar is pointing towards California.

-Gregor

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