Posted by ampontan on Thursday, September 16, 2010
They have to get money from someplace.
– Edwin Merner, president of the Atlantis Investment Research Corp. in Tokyo
CALIFORNIA GOV. Arnold Schwarzenegger is touring Japan, South Korea, and China as part of a PR campaign to boost tourism and to coax companies in the three countries to bid on the construction of the high-speed rail network that is planned to begin service in the state in 2020. When completed, it will extend from San Francisco to San Diego. California is also encouraging companies in Germany and France to submit bids.
The Japanese bid will probably be higher than the others, which will offset their advantages in technology, product quality, and operating experience. The state of California will have trouble paying for any system because it is $US 19 billion in debt, according to this Bloomberg article on the governor’s tour. It has one of the highest unemployment rates in the country, a net population outflow for the past four years, and a Democrat-controlled legislature that wants to raise taxes instead of cutting expenditures, even if it means reducing $US 100,000+ pensions to former public employees every year for life. California already has the 6th highest state/local tax burden in the United States. The governor and the legislature are continuously sparring over the budget. The state had to issue IOUs to creditors last year, and might have to do it again this year .
The system is estimated to cost $US 40 billion. California will sell bonds to help offset the costs, and also will receive grants from the U.S. government. To enhance their bid, the Japanese government will allow the Japan Bank for International Cooperation—the international arm of the Japan Finance Corp., which is wholly owned by the Japanese government—to loan an unspecified amount to the Californians to help them pay for it.
Now remember that the Japanese government had to borrow 45% of the money—a record—for its own record-high budget this year, approved when Prime Minister Kan Naoto was Finance Minister.
In other words, the Japanese government wants to lend money it doesn’t have to a deadbeat sub-national government that would be kicked out of any bank in the world if were a private citizen or corporation asking for a loan. The former land of milk and honey is in the second-worst financial condition of the 50 states. The United States government, which doesn’t have any money either, is going to chip in with grants. The state of California, struggling to stay out of insolvency, might well default on the bonds or the loan. Another unpleasant scenario is the potential for subjecting their creditors to what’s called financial oppression. Thus, there is a real possibility the Japanese would take a financial bath if it wins the bid. Even if California doesn’t default, by the time it pays off the loan, it might be in seriously inflated dollars.
Yet the Japanese government thinks this is a winning proposition.
And all of this is to build a rail system that will almost surely be a perennial money-loser in a state that is Ground Zero for the American car culture.
Is that not a metaphor for our times?
Bloomberg link stolen from The Marmot’s Hole.