Marketplace Middle East - Blog
8/18/09
Not so Golden State
While we are in the midst of a global power realignment between the G8 and the G20, I found it useful to get a temperature reading in what would be a G8 country on its own, my original home state of California.

The landscape continues to attract scores of literary writers who are drawn by the size, diversity and the light. These are the same elements that provide the business vibrancy and creative energy. But there is a critical debate underway on whether the so called Golden State has passed its golden hour and what that may mean for the U.S. economic recovery.

Anecdotally, California remains a magnet for Middle East and European visitors. My British Airways flights to and from Los Angeles were filled with visitors from the region. It is fair to say that our Gulf visitors may have set a record for both the quality and number of bags checked in. So the allure remains, but the shine certainly has been dulled for natives who can put various pieces of the puzzle together.

For one, this downturn has created new terminology in the U.S: “staycation” - a very local vacation. My queries for a Santa Barbara beach house were met with a 20 percent inflation hike due to the local competition by Americans who could not afford or at least justify plane travel overseas.

But far more serious indicators are easily found beyond the shores and nearby wine estates of California. For example, the research belt that surrounds the University of California at Santa Barbara resembles a silver mining ghost town at the turn of the 19th century. Building after building has “for lease” signs posted on former offices of technology and defense companies. California is home to a quarter of the country’s agriculture products, but the latest crop of signs is an eerie indicator for the future.

Mohamed El-Erian, the respected Chief Executive of Pimco - the giant bond fund manager based in Newport Beach, California - recently signalled out “high and rising unemployment” as the main policy issue in the industrialized world. As the economic growth gap widens between emerging and developed countries, pressure will increase on G8 policymakers to protect jobs and wages. The International Monetary Fund placed that growth gap at four percent by mid-2010; it was a record six percent at the start of this year.

While the Middle East is struggling after the contagion of the Western led banking collapse, leading projections still peg economic growth in the region at around three percent for 2010. The excitement this week that the U.S., Germany and France may have bottomed out, greatly exaggerate the breadth of the recovery. It is abundantly clear that central bankers threw as much liquidity as possible at the problem, but there is little left in the arsenal to combat the general sluggishness and unemployment that persists.

A Los Angeles based friend has spent two decades as a banker for a handful of firms. He has been without a job for more than a year and candidly admits that he is not confident that a job exists in the same sector. All options are on the table he says, even moving away from a state that he loves. After being out of work for more than a year, he is no longer counted in the official national unemployment figures now at a 9.5 percent, a 26 year high. Others I spoke with told me not to overlook the “underemployed”, those who are working again but took pay cuts of 25-50 percent in which to do so. It is certainly difficult to fund education fees and buy homes if ones purchasing power has dropped so dramatically.

I was based on the West Coast as a correspondent during the last severe U.S. recession in 1991-92. California felt it especially hard because of the collapse in defense spending after the fall of communism. Real estate prices plummeted, the fall in spending on research and development hit Silicon Valley and Hollywood was trying to adapt to the digital revolution beginning to take hold.

The downturn forced changed and Californians adapted by retooling those sectors. The economy emerged stronger than before and continued to attract new businesses and foreign visitors to its shores. Both are hoping for the same response, but for some reason after this visit my gut says the script may be written differently during this tepid recovery.

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ABOUT THIS BLOG
John Defterios’ blog accompanies the weekly business program, Marketplace Middle East (MME) that is dedicated to the latest financial news from the Middle East. As MME anchor, John Defterios talks to the people in the know, finding out their opinions on the big business moves in the region, he provides his views via this weekly blog. We hope you will join the discussion around the issues raised.
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