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Here are two facts that may have been overshadowed by the serial economic dramas of the last two weeks.

The world's fifth-biggest economy is on the brink of bankruptcy. Three years ago it was considered one of the strongest economies in the world, but today rating agencies threaten to downgrade its status to junk. Its current budget deficit is $38 billion, just three years after running a surplus of $10 billion.

Second: Its leader is likely to lose his job and is highly likely to be replaced by - Arnold Schwarzenegger.

Yes, Arnold Schwarzenegger, star of The Terminator movies, 1, 2 and 3.

No, this isn't a joke. It is the real story of the state of California, which, if separated from the rest of the United States, has the world's fifth biggest economy.

It may be the richest state in the union, but it's running out of cash. Unless its hapless governor, Gray Davis, manages to push through an economic program including steep budget cuts and $10 billion in bond sales, California may go broke. Davis will be history and, quite possibly, replaced by Arnold.

The bankruptcy of California is, first of all, a gripping tale, and second of all, it is based in large part on the story of Silicon Valley and the tech bubble of the late 1990s. But there are other factors underlying its budget meltdown, and some are frighteningly reminiscent of what has been happening in Israel over the last three years.

Not the intifada alone

Even though most of Israel's recent economic ills are usually blamed on the intifada, the truth is that many were caused by the same things that may reduce California's bonds to junk status.

As for California, during the late 1990s and in 2000, the high-tech industry and Silicon Valley experienced the biggest, loudest boom in history. Wall Street poured hundreds of billions of dollars into the Valley, creating millions of jobs and reducing unemployment to close to zero. The prosperity did well by the state, too, in the form of tens of billions of tax dollars.

California's standard of living climbed. Public-sector spending did, too, as the state authorities adapted their spending across the board - on health, taxes, immigration, services and education - to the good times, which nobody saw ending any time soon.

Yet one morning, they ended, at warp speed. Within three years, unemployment in the Valley surged from 2 percent to 9 percent. Thousands of companies collapsed, hundreds of thousands of paper millionaires went broke, inflated real estate prices collapsed and tax revenues imploded.

The mind-boggling result is that for the first time in California's 153 years as an American state, its governor faces recall. Ouster. The sidewalk. A grass-roots group, led by the Republicans, is urging his dismissal based on the state's economic collapse.

Much the same happened here. 1999 and 2000 were not great years, economically speaking, with one exception - there were enormous inflows of foreign currency into the high-tech industry, which stimulated the entire economy, leading to unprecedented affluence.

Handling a la Arnold

The government did not take advantage of the influx to reduce taxes or carry out structural reforms. It used the money to inflate its spending across the board.

For the last two years, the government has been forced into one "unprecedented" budget cut after another. All are deemed to cut into the living flesh, but the truth is that these "painful" adjustments barely lower its expenditure back to the level before the high-tech bubble.

And it isn't only the government. The business sector fattened up just as the government had, just as American corporations had, through tremendous overinvestment, based on the assumption that the prosperity would go on and on.

What we have been seeing in the last two years is a process of bringing expenditure into line with the new, lower level of economic activity. It began with business and is continuing with the government.

Sadly, we do not believe the process is over, not in the U.S. and not in Israel. If Benjamin Netanyahu wants to preserve his achievements of recent months, he'll have to keep slashing at that "living flesh" in the 2004 budget, which the treasury has begun to discuss.

He isn't the only one who has to be creative. Despite the optimism sweeping the Israeli and global financial markets, the business sector's painful diet can't end yet. Whole industries are still plagued by overcapacity. Spending has yet to adjust to the harsh economic reality, which is a problem that both companies and countries will have to tackle. Some cases will, we are sorry to say, require the kind of brutal, painful treatment at which the Terminator excels.