California IOU’s
California has started issuing IOU’s todayafter failing to balance the budget. I had never heard of this until tonight, but it is absolutely incredible, and devastating for the State’s future as well.
California’s credit will be crushed from having to issue IOU’s. This will make it extremely difficult to issue bonds in the future, thus leading them to the lender of last resort. That, of course, is the US Treasury, which we all know is already massively over-leveraged itself.
IOU’s, however, have a more drastic immediate impact as well. That is because they are basically worthless pieces of paper. Yes, California is basically printing it’s own money, except nobody accepts that money.
This happened previously in 1992. Prior to that, IOU’s have not been issued in California since the Great Depression. In ’92, Governor Pete Wilson issued IOU’s to state employees, who sued and won, and thus the State is no longer able to pay its employees with IOU’s. Who can they pay with IOU’s? The rest of us. California will issue IOU’s to contractors, vendors, local governments, and to taxpayers expecting refunds.
In 1992 when this happened, the banks accepted the IOU’s as legal tender and immediately issued credit. Well, so far, banks have yet to say they will accept them. The IOU’s will pay interest, but the interest rate will not be decided until a July 2nd vote, so until then, banks are hesitant to say they will accept them. There is no guarantee that the State will pay back the IOU’s, especially if they State is forced into some form of receivership.
Thus, critical vendors may just refuse to take the IOU’s altogether. In this case, the State could lose access to suppliers who help maintain its infrastructure.
Even if banks do accept IOU’s at first, as the State’s credit falls and the uncertainty of paying off the IOU’s grow, they may stop doing so eventually. Many companies being asked to take IOU’s cannot continue to pay vendors or employees without the cash flow. Eventually these firms have to close, which adds to the State’s unemployment and welfare programs. The vicious cycle continues.
The whole situation is not pretty. It is not beyond reason for the State Legislature to cut more spending in the near term to balance the budget. Nor is it beyond possibility for the US Government to bail out California (the precedent that could be set there is very tricky as other states are following California into bankruptcy). In all reality some solution should be found. Let’s hope it happens soon rather than later.
*image source: pennsylvaniarevolution.com
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Jct: There’s nothing wrong with small denomination California State IOUs if I or anyone else can pay their taxes with them. When Argentina’s government workers were faced with cuts, their unions talked 6 state governments into paying them with small-denomination state bonds which could be used to pay for state services and taxes and which everyone accepted as useful currency. Best of all, when the local currency is pegged to the Time Standard of Money (how many dollars per unskilled hour child labor) Hours earned locally can be intertraded with other timebanks globally! In 1999, I paid for 39/40 nights in Europe with an IOU for a night back in Canada worth 5 Hours.
U.N. Millennium Declaration UNILETS Resolution C6 to governments is for a time-based currency to restructure the global financial architecture. See my banking systems engineering analysis at http://youtube.com/kingofthepaupers
Too bad California State IOUs won’t be accepted in payment for state taxes and services like state bonds were in Argentina. Too bad California State IOUs will be denominated too big to use as local currency. Too bad Argentina people were smart enough to avoid the tent-cities catastrophe and California people are too stupid to follow their example.
Nothing wrong with IOUS kingofthePaupers ?
Sounds like you need to actually read up on your Argentinian history buddy.
Jct: I have to read up on ARgentine history?
You didn’t even know that bankrupt Argentina had paid off all their IMF-World Bank debt 2 years early in 2006? How’d they do that?
I explained it in my videos which you never bothered to watch before making your uninformed comment.