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More On Those California IOU's

As mentioned last Thursday, the State of California has started issuing IOU's in place of cash as a result of a political impasse in Sacramento. One commenter here chastised us that this has been done many times before and it is much ado about nothing. I beg to differ.

These IOU's are useful to the state of California and the recipients only as long as banks are willing and able to exchange them for cash. It appears now that the banks are sending signals that they don't want to accumulate this quasi currency for much longer:

A group of the biggest U.S. banks said they would stop accepting California's IOUs on Friday, adding pressure on the state to close its $26.3 billion annual budget gap....The banks had previously committed to accepting state IOUs as payment. California plans to issue more than $3 billion of IOUs in July.

The California IOU example may wreak havoc with President Obama's monetary and fiscal policy goals as it exposes the risk of issuing fiat currency. Kevin Hassett made this point quite clearly yesterday:

The California morass has Democrats in Washington trembling. The reason is simple. If Obama's health-care plan passes, then we may well end up paying for it with federal slips of paper worth less than California's. Obama has bet everything on passing health care this year. The publicity surrounding the California debt fiasco almost assures his resounding defeat.

It takes years and years to make a mess as terrible as the California debacle, but the recipe is simple. All that you need is two political parties that are always willing to offer easy government solutions for every need of the voters, but never willing to make the tough decisions necessary to finance the government largess that results. Voters will occasionally change their allegiance from one party to the other, but the bacchanal will continue regardless of the names on the office doors.

California has engaged in an orgy of spending, but, compared with our federal government, its legislators should feel chaste. The California deficit this year is now north of $26 billion. The U.S. federal deficit will be, according to the latest numbers, almost 70 times larger.

This type of scheme only works as long as the money and financing flows and therein is the flaw of the "business as usual" argument. If the banks refuse to accept the California IOU's it is game over. If the banks continue to eat the scrip issued by the state it is a de facto bailout of California's fiscal insanity by the U S taxpayer.


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Comments (24)

One other possibility for t... (Below threshold)
James H:

One other possibility for the California IOUs. If banks stop accepting them, we might see a secondary market develop. There isn't much of one yet b/c you can still get cash value from the banks. But if the banks stop accepting the scrip, then peopel might buy the IOUs at below value ...

At the point that the banks... (Below threshold)
MunDane:

At the point that the banks stop accepting the Registered Warrants, expect to hear several things.

1) News reports from barely literate, morbidly obese SEIU members complaining how they will be starving soon, because they can't buy groceries.

2) Karen Bass and her lapdog from the State Senate will appear and blame the Republicans for stalling the "budget process with unreasonable demands"

3) The Republicans will be too busy fighting over who is ideologically pure and trying to defend their members from their irate constituents to offer an alternative explanation, i.e. cuts need to be made everywhere, we have a revenue problem, fewer workers = fewer taxes collected

By September, and yes it will take that long, there will be a 10% spending cut along with some "Stick it to them rich bastards" tax, which will drive even more of them "rich bastards" out of the state and into Nevada and Arizona.

Hugh: There was an instance... (Below threshold)
Stan25:

Hugh: There was an instance where the Government issued IOUs. That during the Revolutionary War. These IOUs were called Continentals. They finally became more and more worthless as the war progressed, until they were not worth the paper that they were printed on.

The liberal Democrats will ... (Below threshold)
MPR:

The liberal Democrats will not be able to get past the fact that they have run the state into the ground. That's what liberals do. It is the model for what Obamalala and his horde have in store for the rest of the country. When Grey Davis was run out the people voted Arnold in thinking he would SAVE the state. This should be a lesson as to what happens when you elect a moderate RINO.

Banks no longer accepting t... (Below threshold)
OLDPUPPYMAX:

Banks no longer accepting this funny money? Politicians and other thugs/criminals/phonies will begin that familiar drumbeat of "minorities and women" hardest hit. The world will come to an end and the Feds will HAVE TO take over. Voila!! Feds will then run the "offending" financial institutions and all will be well. HA!

Obviously things are going ... (Below threshold)
GarandFan:

Obviously things are going well in Sacramento. Yesterday the legislature spent time writing up an apology to the Chinese for the way they were treated in the 1800's. Karen Bass was scheduled for a meeting on the budget but declined to attend. Priorities you know.

But isn't Califoneeyuh too ... (Below threshold)
bobdog:

But isn't Califoneeyuh too big to fail?

Will we start to hear from Schwartzenegger on a daily basis how he will be forced to halt all payments for social services, killing the elderly, the halt and the lame, closing the prisons and insane asylums, and removing the state highways? That's what's happening in today's soap opera in Illinois.

Didn't someone by the name ... (Below threshold)
John:

Didn't someone by the name of Madoff just go to jail for a similar scheme?

I mean, promises of payments as long as people continue to work and businesses continue to run and "invest", in California then they will get money...

Unless the state severely cuts back spending, to match revenue coming into the state, IOUs may continue to be their future...

Dumb ass liberal Democrats...Maryland will soon following that route given the Democrats cannot curtail their spending...

A secondary market and unfo... (Below threshold)
914:

A secondary market and unforseen competitor for toilet paper has now been implemented by Ahhnold.. See Barry, this is how You libs run a Government. So imaginative You are You idiots.

I tried to walk out of a de... (Below threshold)

I tried to walk out of a department store with a TV, having very carefully left my "IOU" where the TV had been. Even after I explained to the Security people that this was the new currency in Kalifornia they refused to allow me to keep the TV.

Slow learners...and grumpy about it too!! Geez!

HA HA HA... (Below threshold)
914:

HA HA HA

Confederate currency anyone... (Below threshold)
ODA315:

Confederate currency anyone?

Buy them up at a discount a... (Below threshold)
Andy T:

Buy them up at a discount and use them to pay your taxes. Hard for the state to turn them down. Even if you double pay and put yourself in a refund position, that will be 100% and you would have paid the taxes at whatever discount you paid for the IOUs.

UPDATE: Banks have stated ... (Below threshold)
GarandFan:

UPDATE: Banks have stated that they won't be accepting IOU's after the 10th. Hmmmm...could it be that the banks are not impressed with the legislative priorities so far displayed regarding the lack of a budget? Debating cow tails and apologies to dead people? Maybe this is the wake-up call those fucking idiots in Sacramento need.

Andy T: "Buy them up at ... (Below threshold)

Andy T: "Buy them up at a discount and use them to pay your taxes. Hard for the state to turn them down."

that is the FINEST idea I have heard yet!!!!

thanks!!

Not to rain on your parade,... (Below threshold)
GarandFan:

Not to rain on your parade, but Kalifornia has already told us that it will not accept IOU's for payment of taxes. A state assemblyman has already proposed a law that says the state would accept IOU's in payment but only if there were still an outstanding amount to be collected.

Personally, I'd like to see those selling supplies to the state refuse to provide anything unless paid immediately IN CASH!

I saw an article that state... (Below threshold)

I saw an article that stated that the politicians would continue to pay themselves in cash. It is only the business people dealing with the state and the tax payers who would be given the IOU's.

GarandFan#16.Just ... (Below threshold)
krkrjak Author Profile Page:

GarandFan#16.

Just heard a blurb on radio news a short time ago that a court (?) has ruled that IOU's can be used to pay state taxes.

Any IOU from California is ... (Below threshold)
marybel:

Any IOU from California is worthless to the nth degree. The democrats in Sacramento have spent decades running the Golden State into the ground.

i sure hope they figured ou... (Below threshold)

i sure hope they figured out how to fix this budget gap because the major banks are going to stop accepting those IOU's on Friday, I think it's time to legalize marijuana and enjoy the tax bounty that overfloweth from the cup, or bong i should say yovia.com/blogs/timlara

PENNIES ON THE DOLLAR. Tho... (Below threshold)
ShortSellerChingChangChongFromChina:

PENNIES ON THE DOLLAR. Those IOU's are about as toxic as mortgage default swaps.

California should give the ... (Below threshold)
HS:

California should give the same thing it receives from taxpayers for late or under payments.

"An underpayment penalty will be charged when taxes are not paid by the due date. The penalty is 5 percent of the unpaid tax as of the due date plus 1/2 of 1 percent each month, or part of a month the tax remains unpaid, not to exceed 40 months. The maximum penalty is 25 percent of the total unpaid tax.

A delinquent penalty will be charged on unpaid taxes if a return is filed late. The penalty is 5 percent of the unpaid tax due for every month that the return is late, up to a maximum penalty of 25 percent of the unpaid tax. The minimum penalty is $100 or 100 percent of the unpaid tax, whichever is less."

The Republicans hold the pu... (Below threshold)
R:

The Republicans hold the purse strings in California with the two-thirds rule. That is a simple fact that is immutable. It's their fault. Now their governor wants to use this crisis to force through reforms that would never be agreed to by the people - typical vulturism and anti-democratic politics. Then again I think a lot of you want to go back to the days of the window tax, the poll tax and other means to restrict the franchise.

If only California adopted ... (Below threshold)
Nick:

If only California adopted Sarah Palin Socialist's Tax Policy for oil... (Dude, that was fun to say) Sarah rasied the tax rate for non entrepenurial oil extraction to the Texas level of 25%. California just failed to raise it to 14%.

Republicans claimed it will raise the price of oil (set in NY). Thanks Republicans for stiffing us in small business who get the IOU's




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