California has entered the new financial year in crisis with a budget deficit of $26.3 billion, up from $24.3 billion, because of the ineptitude of the legislature in missing a deadline and political incompetence of Governor Arnold Schwarzenegger. The state has an unemployment rate of 11.5%, higher than the national figure, and there have mass foreclosures. As the San Francisco Chronicle tells us, they just have one month to balance budget. If they fail to do that, the deficit blows out by another billion dollars.

The state plans to issue IOUs but the banks are saying there's no guarantee they'll honor the bits of paper. California Controller John Chiang says that without the IOUs, the state will run out fo cash by the end of the month.

The San Jose Mercury News blames the Governor for being too inflexible and refusing to compromise.

California is in a diabolical mess and Standard & Poor's has warned it may cut the state's rating if it doesn't find a solution.

And with the world's eighth largest economy approaching financial oblivion, it's likely to drag the rest of the United States with it. There can be no recovery without California. As Harold Meyerson writes in the Washington Post, Americans have a stake in the California economy getting fixed. "A California that decimates itself during recessions drags the rest of the nation down with it,'' Meyerson writes.