Sunday, August 29, 2010 – 12:30 pm
Updated: August 29, 2010 – 08:50 pm

It’s baffling to hear the rhetoric, chatter, and the denials regarding the condition of the state and local economy.

Yes, it’s going to get worse. A situation that’s bad for everyone. Politicians, businesses, and everyday folk. Denial is still in full swing.

Here is a few observations.

The “Experts”

Some so-called experts, not many though, still believe that you can “talk-up” the economy. In other words, they follow the belief that people are like sheep, and if they say things are getting better, people will just believe it an go out and spend money. Maybe in times past this sort of approach worked.

Not this time though.

I’ve been periodically writing about the economy and how things would continue to slide. And that governments would be severely impacted.

You know, the inevitable layoffs, etc…

The Economy

In economics, the economy is described as being “elastic”. Meaning it expands and contracts. Kind of like a thick rubber band.

The only problem this time around?

The economy is contracting from being expanded by trillions of dollars in “funny money” that was pumped into the economy for people to spend on credit cards and homes they really couldn’t afford.

Remember those “0%” balance transfers?

Yes, it seems like a long time ago doesn’t it?

So the “rubber band” elastic economy that was really stretched out, and for a very long time, is now contracting back. But, it can’t resume it’s original form.

In other words there was never a time where a mild recession was allowed to could occur. Mild recessions of the past were healthy, and they naturally occurred as a process to restore balance between supply and demand, know as “equilibrium”.

This time however, so much money was pumped into the economy, to avoid recession, and the rubber band stretched too far.

Critical damage occurred. Now we are contracting in a manner so severe it will take years to recover. Just think of Japan.

Currently demand is pretty much non-existent. Corporations sit on cash, and government, the largest employer is broke. Any attempts at raising taxes further damages the failing economy.

The Effect

The effect of the contracting economy is starting to accelerate once again. Inland Empire unemployment is the highest since 1980. Mortgage defaults and foreclosures are building once again.

Nationally, the housing inventory supply is at 12.5 months. Healthy is a little more than a third of this number.

Local governments, usually the last to act, are reluctantly beginning the painful process of shrinking their payrolls. A major factor that will lead to a higher national unemployment rate well above 10%.

Governments should have acted long ago and rejected this proposition. Now the pain will be more pronounced.

Nearly all Inland Empire cities that were considering placing tax increases before voters have reconsidered. Except Redlands.

A sales tax proposal put forward by this city’s elected officials should and will be rejected by voters.

Enough taxes already.

Hello! People can’t afford it.

Local governments also actually believe things are going to get better. Another bureaucratic dream.

Their forward projections actually see positive revenue growth starting in 2012. (A quick note: California retail sales tax revenue fell 10% in July from a year ago.)

They can’t help it. Remember, people did say the Titanic couldn’t sink?

Expect severe cutbacks in government services.

The Banks

A major contributor to the current crisis. Banks fed the out-of-control expansion with unique, but ill-conceived, financing schemes in an effort to make a fast buck.

Now those euphoric days are over, and it’s costing them dearly.

Last year, with the help of the federal government, banks were able to stave off collapse and recapitalize by selling artificially inflated stock to investors. The same stupid investors, who had already been burned by the same banks.

Those banks in-turn used some of the new investor money to repay federal bailout loans. Remember TARP?

With the banks now reporting profits from trading securities using money borrowed from the U.S. Federal Reserve System, trouble looms once again.

Now the very same banks are beginning to spring leaks. Even with access to the federal reserve where they can borrow at a federal funds rate of 0.25% the banks are hammering consumers more than ever, by walking away from mortgage work-outs, denying credit applications, raising fees and charges, and leveraging credit card rates against prime borrowers.

The average consumer credit card interest rate is higher now than two years ago before the problems all started.

Why? Problems are coming again.

Yes, and investors seem to know.

Money center banks still have trillions in “off-balance sheet” liabilities and associated losses not factored into their financial statements. They have loan quality problems, and many other issues to deal with. The banks don’t like discussing it either.

Locally, Arrowhead Credit Union is a small-scale example of how playing with the numbers can mask a serious problem.

When pushed into a corner, for survival, who wouldn’t do it. It’s human nature.

Stock prices of major banks like Wells Fargo, Bank of America and Citigroup are quietly sinking once again. All the big investors who were snookered into investing in those secondary stock offerings aren’t feeling too good right now.

Wells Fargo (NYSE: WFC) at $24.00 is already down 29.93% from its 52-week high, Bank of America (NYSE: BAC) at $12.64 is down 36.35%, and Citigroup (NYSE: C) at $3.76 is down 30.76%.

It’s safe to say those same investors won’t be falling for the same shell game again.

The Federal Reserve

Even with the Federal Reserve buying government-issued treasuries and mortgaged-backed securities from the open market to keep interest rates low, many people still have no capacity to borrow. Plagued with massive debt, consumers are electing to pay down their balances, save money, or file bankruptcy.

None of which helps the economy.

Yes, I said the U.S. Federal Reserve is really buying debt issued by the U.S. Treasury with make believe or “printed” money.

Another way to put it. We as a country is loaning money to ourselves. What do they say? Robbing Peter to pay Paul.

In other words, we as a country are in trouble.

Recently it was revealed that consumer credit balances had taken a big drop. They sure did. The news was portrayed as a good sign.

However, one major factor was overlooked. Banks were charging off uncollectible balances delinquent for longer than six months and or discharged in the record number of bankruptcy filings……….