California follows national trend

In a recent article, I warned that national leaders should look at the problems facing California as a harbinger for the national debt outlook. California paid out almost $2 billion in IOUs since beginning the new fiscal year without an operating budget in July. While the IOUs, officially warrants, were set to mature at latest on October 2nd, California has announced that it will end warrant issuance on September 4th and begin repaying them. The move comes as Gov. Schwarzenegger signed a budget that should eliminate the projected fiscal shortfall in FY2010.

The improving credit conditions are not unlike those at the national level. In its statements this week the Federal Reserve’s governing body, the FOMC, announced that it would end its $300 billion Treasury purchase program one month later than expected. The move will spread out the remaining purchases, of less than $50 billion, over a longer period, and wane the economy of Fed purchases. Other Fed programs aimed at private firms, such as the commercial paper program, have already seen stymied outflows as firms find better borrowing rates in the market.

Yet in neither Sacramento nor the Fed have debt issues been resolved. California is taking a loan to pay its IOUS. The Fed’s balance sheet remains double the size that it was at the beginning of 2008.