If you live in the United States, there is a good chance the crisis in California is going to affect you. And if you own municipal bonds — either directly or indirectly through other investments — what’s happening in California could have a major impact on your finances.For years, state government budgets have been expanding as the economy grew and the rising housing market swelled property tax coffers. But the severe recession that has brought rising unemployment and a collapse in property values has drastically cut revenues from income, property, sales and corporate taxes.

Wild fiscal imbalance… record government spending… rampant federal encroachment into the private market… The government script is that the free market has failed. And what is their response? More federal government…

At the beginning of 2009, institutional and individual investors were sitting on a mountain of cash, pulling money out from everywhere – including equities, commodities and municipal bonds. That’s nearly $9 trillion, according to the Federal Reserve.

The state of California has joined the bailout cue. Governor Arnold Schwarzenegger yesterday warned Treasury Secretary Hank Paulson the state may need an emergency loan of as much as $7 billion from the federal government within weeks.

Subprime has found a new victim, reports Bloomberg: municipal bonds. Already, the amount of municipal bonds that have defaulted this year is three times that of 2007.

So far this year, $736 million in municipal bonds have defaulted. That doesn’t necessarily mean they didn’t pay investors; they may have just drawn down reserves. That’s what happens just before they stop making payments to bondholders.

I don’t know about you, but I’m not earning much interest at the bank these days. Fortunately, an extraordinary “return-on-your-cash” alternative has come up in the last month.