Investors are worried about Ireland’s banks – and rightfully so, with some estimates placing their bad debts at around $80 billion.

However, I think something that has recently occurred that no one is talking about is the breakdown in California’s municipal bonds. (I would like to thank a reader, Michael Kammen, who first alerted me to this.)

We know that California has huge debt problems, with estimates the deficit for 2010-2011 will be at $6.1 billion after a $6.9 billion deficit in 2009-2011.

However, this is going to explode in the 2011-2012 fiscal year as revenue drops and expenditures climb — most estimates have this at more than $25 billion.

California has done a lot of one-time measures in attempts to keep the deficit down but these basically run out of gas in 2011-2012.

The performance of California muni bonds has reflected these worries in recent months and especially in recent weeks.

Below is a chart of the CMF, or the iShares S&P California Municipal Bond Fund. As we can see, this has fallen off a cliff in recent weeks.

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This should come to no surprise to anyone who has watched California in recent years. The government has issued IOUs and it has huge unfunded liabilities.

However, I don’t think California will default.

We must remember that pension funds and the like all own these bonds.

In reality, there will be another federal guarantee put behind these bonds.

The Fed will probably have to print money to fund this debt along with the federal debt in order to save pension funds and the like.

This means more money printing, more inflation and a lower U.S. dollar going forward.

The media will continue to harp on Ireland but the coming California crisis is going to much larger in both size and scope.

California is a much larger economy than Ireland and the impacts of its coming crisis will in turn be much larger.

About the Author: David Skarica
David Skarica is a member of the Moneynews Financial Brain Trust. Click Here to read more of his articles. He also writes the Gold Stock Adviser. Discover more by Clicking Here Now.


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