In a blog written for www.safehaven.com, I wrote about the 8 risks I believe will drive the United States into a deflationary spiral in the coming years. One of those risks is "The Bubble State (California)".

There are several reasons why CA is so important to a deflationary cycle. In a series of blogs I will discuss the various CA issues and their importance. So, why is it so important to the risk of a deflationary spiral? Like it or not, "Size does matter"!

1. California's estimated population is almost 37,000,000. The Bubble

   State's population is greater than the combined populations of the 20 smallest states. In contrast to the big state of California, Wyoming has the lowest estimated population of a little more than 544,000 people. Wyoming would only qualify to be the 5th biggest city in California.

   Why is that relevant? If WY experienced a 50% unemployment rate of its total population that equates to roughly 272,000 people or probably something close to 100% of their entire working class after children and retirees are deducted. While that would be devastating to WY, it's such a small number nationally; I doubt it would have an impact outside of WY.

   Contrast that to CA with a current unemployment rate hovering around 12.6% or roughly 4,662,000, per the bureau of labor statistics. That's larger than the combined populations of Wyoming, District of Columbia, Vermont, North Dakota, Alaska, and South Dakota.

   Imagine 4,662,000 (That's a significant difference compared to WY) spending less on goods and services, buying less real estate, and contributing less to state and federal taxes and you can imagine the relative importance of CA's financial momentum, good or bad. As goes The Bubble State, so goes the nation.

   Now imagine an increase in unemployment. Let's make the implausible hypothesis that WY has 100% unemployment of its entire pollution, that's only 544,000 people, which includes children and retirees, so it couldn't happen anyways. Compare that to CA's unemployment going from 12.6% to 16% or an increase of 1,258,000 people or almost 6,000,000 unemployed.

   It's easy math. The big states create prosperity and they are integral to a deflationary cycle. In fact, the 9 largest states account for 50.46% (half) of the total population.

    

   	State	7/1/2009 Est. Population	Unemployment Rate (current)
   1	California	36,961,664	12.60%
   2	Texas	24,782,302	7.81%
   3	New York	19,541,453	8.60%
   4	Florida	18,537,969	12.30%
   5	Illinois	12,910,409	11.50%
   6	Pennsylvania	12,604,767	9.00%
   7	Ohio	11,542,645	11.00%
   8	Michigan	9,969,727	14.10%
   9	Georgia	9,829,211	10.60%

Michigan is a perfect example of this big state issue. Being number 8 with almost 10,000,000 people creates a real problem for the country because they are this nation's leader in unemployment because they have a great deal of industry (auto) concentration, and when that went bad it impacted not only the state but the country.

Take into consideration, since the beginning of 2008 the 3 states with the most banks closed by the FDIC are Georgia, Florida, and Illinois, which can only reflect an erosion of their economies, and any continuation is dire as their total collective pollution is slightly more than CA at just over 40,000,000.

Yes, size really does matter. Keeping an eye on the trend if CA is important to everyone because the impact of 37,000,000 people and what happens to their incomes and spending habits impacts a great deal of the population living outside of CA.

Hope all is well.