California IOUs

[August1991]

But the Republican governor quickly promised to veto the legislation, saying he wouldn't sign anything that raised taxes or fees more than he has proposed.

"They should forget about that," he said, accusing Democrats of going through a "song and dance. Let's get to work, fix it."

...

State Controller John Chiang has said he would have to start issuing IOUs unless lawmakers act by the end of the fiscal year on Tuesday.

Without a compromise, roughly $3 billion worth of IOUs will be issued in July to everyone from contractors to welfare recipients.

Democratic Assembly Speaker Karen Bass and Mr. Steinberg accused the governor of using last-minute maneuvers to push a laundry list of policy reforms rather than addressing the budget gap.

WSJ

I left my shirt in San Francisco....

-----

I think this is interesting for several reasons. To begin with, Schwarzenegger's game-theory chicken play. Welcome to the future of politics, methinks. First of all, it's dramatic. And second of all, people find out who is the real politician. And thirdly, it is so unlike markets and so much like life several hundred thousand years ago. (Levesque and Trudeau did this movie far better before Schwarzenegger and Toronto is now making the Made-for-TV version.)

But my real interest in this IOU idea is related to that crazy thread about Central Banks.

1) What happens if California starts to issue its own currency? A recent example of this is Argentina when local governments, denied subsidies from Buenos Aires, began to pay their bills with "state bonds". (This eventually lead to the unravelling of the idea of a currency board and a fixed peso.)

2) Why hasn't the Quebec government paid its employees/creditors with its own currency? This has always me struck me as an obvious idea. Scotland has its own currency. Hong Kong has (had?) two parallel currencies.

If this really happens and Caifornia's state government issues these IOUs, then presumably they'll be tradeable. If a welfare recipient can get groceries with the IOUs, then they're tradeable.

Edited June 30, 2009 by August1991

[Riverwind]

2) Why hasn't the Quebec government paid its employees/creditors with its own currency? This has always me struck me as an obvious idea. Scotland has its own currency. Hong Kong has (had?) two parallel currencies.

A bond is really no different from an IOU except IOUs cut out the middleman.

[August1991]

A bond is really no different from an IOU except IOUs cut out the middleman.

One way of describing it.

P. J. O'Rourke (proof that the Right has a far better sense of humour than the Left) described a similar Central Bank situation in the former Soviet Union (Russia and 14 more or less independent republics) as a guy with 14 ex-wives, all with access to the joint Visa account.

[Pliny]

... my real interest in this IOU idea is related to that crazy thread about Central Banks.

1) What happens if California starts to issue its own currency? A recent example of this is Argentina when local governments, denied subsidies from Buenos Aires, began to pay their bills with "state bonds". (This eventually lead to the unravelling of the idea of a currency board and a fixed peso.)

Well I am glad you said "it's own currency" and not "it's own money" - Obviously it has none.

A bond is just a promise to pay as is an IOU. If you think Schwarzenegger will pay then you will accept the bond.

Anything that does not completely satisfy an exchange without a further exchange to obtain the full benefit of the original exchange is a currency. Money would satisfy the mutual benefit of an exchange fully and be a complete transaction. It is necessary then that "money" be a commodity. A fiat currency would then be only a half of a transaction as the person receiving the currency is not really interested in the paper, which has no actual value, and he will not receive benefit from the original transaction until he spends the fiat currency in a second transaction

.

This may be said of "money" as well but there is a difference. The difference is that money is determined by people engaged in trade who develop it as an actual guarantee of value by it's intrinsic value, and fiat currencies are determined by governments that have a tendency, especially with the right of printing unbacked currencies, to disappear after a generation, or maybe two, leaving their currencies at their intrinsic value of zero.

The US went completely off the gold standard in 1973 so it's fiat currency is in it's second generation. something that some will applaud, I suppose. It has lasted along time.

2) Why hasn't the Quebec government paid its employees/creditors with its own currency? This has always me struck me as an obvious idea. Scotland has its own currency. Hong Kong has (had?) two parallel currencies.

It would never be able to buy anything from outside the country.

If this really happens and Caifornia's state government issues these IOUs, then presumably they'll be tradeable. If a welfare recipient can get groceries with the IOUs, then they're tradeable.

They wouldn't be much different, technically, from the American dollar or any of the world's fiat currencies.

They are just tokens. They wouldn't enjoy too long a history as they would remain local. If they were redeemable for other tokens, like the American dollar, they could reach a higher acceptance level but let's face it - it is just more credit extended to government by the taxpayer.

Edited July 1, 2009 by Pliny

[August1991]

Anything that does not completely satisfy an exchange without a further exchange to obtain the full benefit of the original exchange is a currency. Money would satisfy the mutual benefit of an exchange fully and be a complete transaction. It is necessary then that "money" be a commodity. A fiat currency would then be only a half of a transaction as the person receiving the currency is not really interested in the paper, which has no actual value, and he will not receive benefit from the original transaction until he spends the fiat currency in a second transaction.

Please define "value" - and you are welcome to use any of its standard conditional adjectives: surplus, trade, exchange, labour, use, intrinsic, book, market, etc.

(BTW Pliny, I liked your term "full benefit". WTF?)

Meanwhile, back at the ranch:

At least one bank has said it will honor California’s IOUs, which the state’s controller will start sending out today. Bank of America said it will accept the warrants from its customers, at least through July 10.

The press release though doesn’t say whether the bank will charge customers an additional fee for the favor.

Even if it doesn’t, the bank stands to gain from the interest paid on the IOUs when they mature. The state will set the interest rate later today.

Reuters

California's IOUs will have an interest rate? If I were Schwarzenegger, I'd set a negative interest rate if only to make Bernanke jealous.

[bush_cheney2004]

....They wouldn't be much different, technically, from the American dollar or any of the world's fiat currencies.

They are just tokens. They wouldn't enjoy too long a history as they would remain local. If they were redeemable for other tokens, like the American dollar, they could reach a higher acceptance level but let's face it - it is just more credit extended to government by the taxpayer.

In this instance...yes. But the notion of IOU's is alive an well in local commerce....I see them issued and redeemed every day in the lunch cafe. It works quite well.

[Jerry J. Fortin]

In this instance...yes. But the notion of IOU's is alive an well in local commerce....I see them issued and redeemed every day in the lunch cafe. It works quite well.

One way around the problem I guess. Of course trying to pay back that large state debt with IOU's isn't going to fly.

[August1991]

In this instance...yes. But the notion of IOU's is alive an well in local commerce....I see them issued and redeemed every day in the lunch cafe. It works quite well.

I have always enjoyed using my BMO Mastercard in the US too to leave a piece of paper with the cashier, but the critical question is whether anyone will want to hold California paper.

(In my case, Americans usually return quickly my signed MC credit card paper to the Bank of Montreal for payment. Ugh.)

IMV, California was far too generous:

California will pay an interest rate of 3.75 percent on IOUs it will begin using today to pay its bills, a panel decided, as Governor Arnold Schwarzenegger and lawmakers remain deadlocked over how to close a $26 billion budget deficit.

....

Bank of America Corp., the biggest U.S. bank by assets, said yesterday it would accept the IOUs from its customers through July 10. Wells Fargo & Co., JPMorgan Chase & Co and Citigroup Inc. said today they will accept the so-called registered warrants, also through July 10.

Bloomberg

3.75%? No wonder Wells Fargo and JPM will happily take the IOUs.

3.75%? Are Californian bureaucrats nuts? Do they know something/are they compensating for something that I only fear (inflation)? Or are they simply spending other people's money?

Talk about a Ponzi scheme: Currency with an interest rate. As Woody Allen would say, "Only in California."

Edited July 4, 2009 by August1991

[August1991]

If you are in need of money & you received an IOU from the State of California, I will buy your IOU for a small discount to face value. Please reply to this Ad with your Name, Telephone number, city you live in & $ amount of your IOU. I am only interested in helping people & will pay close to face value.

Thanks

Location: los angeles

it's NOT ok to contact this poster with services or other commercial interests

PostingID: 1254791075

Craigslist

Cute.

[msj]

Looks like some big banks disagree about the 3.75% interest rate since they intend on stop accepting IOU's this Friday:

Banks Will Stop Accepting California IOUs Friday

It should be noted, however, that it is not like the banks have any credibility when it comes to accurately pricing risk.

Edited to add:

Now there is chatter that the banks not cashing the IOU's may be doing this as to help preserve cash.

If that's true then let the domino effect begin.

Edited July 7, 2009 by msj

[rabidgoose]

Craigslist

Cute.

It almost sounds like they'll be issuing confederate money in California any day now. We have the Loony. What they call their notes? Arnies?

[August1991]

Swaps on California have risen more than three-fold in the past year as its credit rating was lowered two levels to Baa1 by Moody’s, the same level as Russia, which reneged on $40 billion of sovereign debt payments in 1998. Russian default swaps are near a 10-month low of 255 basis points, about 20 basis points less than contracts linked to California. The former Soviet state’s 7.5 percent, 2030 dollar bonds are at a 2 1/2-month high of 101.74 cents on the dollar.

“If California is issuing their own dummy currency in the form of IOUs, that’s not a good sign,” said Augustus’ McNamara.

Bloomberg

This is remarkable because one assumes the US federal government would bail out a bankrupt State of California government.

[Wilber]

This could be great for sharks. Buy IOU's at a huge discount from companies that can't afford to wait for their money, then cash in this October. Kind of like hole in the wall payday loan companies, supported by government. Assuming of course, the state will be good for the money in October. Questionable at this point.

[Craig1]

I wouldn't mind getting my hands on a few of these IOUs California as a state has allot of assets out side federal control and its economy is larger and more diverse than allot of country's. More and more states are trying to declare independance and Calafornia I think is one of the better onse. If it could get its immigration under control I would even consider it home. Arnold needs to sit with DR. Ron Paul and end the FED.

[Pliny]

Please define "value" - and you are welcome to use any of its standard conditional adjectives: surplus, trade, exchange, labour, use, intrinsic, book, market, etc.

(BTW Pliny, I liked your term "full benefit". WTF?)

Value - this term is one that really confuses the socialist - they believe it to be a fixed amount measured in money. Governments also think of value in terms of a fixed benefit. When you get paid you exchange your labour for currency. Governments who think in terms of the currency's fixed face value will tax you accordingly although inflation over time will eat at the value of the currency. You lose one or two percent of the fixed face value over a year. So, as an example, we see that what bought so many goods 40 years ago will only buy fifty percent of those goods now. The government sees everything in terms of dollars and controls the amount of dollars in order to to stabilize it's "value". They don't want run away inflation and they don't want deflation so they just attempt to inflate it at a regulated rate.

Value is a subjective matter. I don't value a tractor as much as a farmer would. It is fairly worthless to me. If someone gave me one I would sell it right away and trade the currency I got for it for something I valued.

In an exchange the persons making the trade obviously place a greater value on what they are trading for than what they are divesting themselves of or trade would simply not happen. A third party, and socialists being the do-gooders they are, are always looking at the economy and judging who is benefitting from trade and who is not, enters his own value in on the transaction and may think that one of the participants was ripped off based upon his subjective assignment of value. For instance, many people in western society are shocked that a person in a third world country makes a dollar a day working at some factory. This is an outrage in their view. However, that dollar a day feeds his family better than it has ever been fed, provides for some extras and generally increases his standard of living. All that people in the west know is he is only making a dollar a day.

If someone looked at my tractor transaction, let's say I undervalued it on the market since it was worthless to me anyway, and it was worth $3,000.00 on the market but I sold it for $2000 dollars the third party would say I got ripped off. Well, maybe I did but I was willing to make the trade and got what I wanted for it and could now get something that was to me was of more utility to me instead of being a worthless piece of machinery in my driveway.

Governments act as a third party in their observation of the economy and currency is the way they fix value, or measure value, in the economy. People in the west are not conditioned to barter. They go shopping and pay the tagged price. The tagged price ensures the business makes money to sustain itself. This is generally considered the fair price until someone sees the product on sale and thinks they were ripped off if they paid the higher price. Thinking of value entirely in terms of money is rather erroneous. If you think you were ripped off on a purchase then you need to be a better barterer. If you have ever bought anything on TV it usually turns out to be a piece of crap. Sometimes it is useful and you do get value from it.

So as far as value goes we depend too much on the currency to make the judgment rather than on the utility of what we are buying. Utility, in most cases, is the determining factor in willingness to trade. If the individual has a lot of money you would think they would be buying a lot of crap that people will try and trade them for their money. But I don't think they have a lot of crap because they understand the value isn't in the "fiat currency" (as governmnt thinks), the currency is just a measure or yardstick and the real value is in the present or future utility of the product - and that is basically what wealth is.

California's IOUs are the same as Lincoln's greenbacks that financed the civil war. Or the Continentals that were issued after the revolution to pay for government. People will of course trade them, but confidence in them will fade the longer they are around and the longer they are around the greater their loss in value, that is, their willingness to be accepted in trade.

Do you have a confusion about what I mean by "full benefit"? Do you prefer a fiat paper currency over anything else? If so, then I understand why you would think that "full benefit" has been realized when you receive your fiat paper currency. However, if you put your fiat paper currency away and saved it, over time you would lose your benefit. You could put it in an interest bearing account but I know there are other things you would prefer over your currency so you trade it.

It has served it's purpose in providing you a medium of exchange for something you can utilize that is useful to you. Alone it is not useful to you like food, clothing and shelter would be.

[Pliny]

This could be great for sharks. Buy IOU's at a huge discount from companies that can't afford to wait for their money, then cash in this October. Kind of like hole in the wall payday loan companies, supported by government. Assuming of course, the state will be good for the money in October. Questionable at this point.

It is questionable, I agree.

A similar thing happened with Greenbacks. Lincoln promised to redeem them in gold or silver as soon as the government could afford to. Twenty years later when they were considered almost worthless insiders got the news that the government was going to finally redeem them so they went around the country buying up greenbacks at about 10% of their face value. It was mostly bankers that were in the inside and the public was willing to get rid of these worthless pieces of paper even at a 90% loss.

[Craig1]

It is questionable, I agree.

A similar thing happened with Greenbacks. Lincoln promised to redeem them in gold or silver as soon as the government could afford to. Twenty years later when they were considered almost worthless insiders got the news that the government was going to finally redeem them so they went around the country buying up greenbacks at about 10% of their face value. It was mostly bankers that were in the inside and the public was willing to get rid of these worthless pieces of paper even at a 90% loss.

Thats why its such a great long term investment in buying these. they know the people receiving will be forced to sell you jnust need to wait for when the elite choose that its time to cash in. i would bet on these IOUs over the american dollar.

Edited August 14, 2009 by Craig1

[Riverwind]

i would bet on these IOUs over the american dollar.

these IOUs are in $US which means betting on the IOUs means you are also betting on the US$

[Craig1]

these IOUs are in $US which means betting on the IOUs means you are also betting on the US$

I don't think we will be trading on the American dollar for much longer its either going to be based on the Chinese curency or something like an Amero. The way California is going I see a independent state self reliant from the Fed or Federal reserve.

[August1991]

In an exchange the persons making the trade obviously place a greater value on what they are trading for than what they are divesting themselves of or trade would simply not happen.

Agreed, well said.

Governments act as a third party in their observation of the economy and currency is the way they fix value, or measure value, in the economy. People in the west are not conditioned to barter. They go shopping and pay the tagged price. The tagged price ensures the business makes money to sustain itself. This is generally considered the fair price until someone sees the product on sale and thinks they were ripped off if they paid the higher price. Thinking of value entirely in terms of money is rather erroneous. If you think you were ripped off on a purchase then you need to be a better barterer. If you have ever bought anything on TV it usually turns out to be a piece of crap. Sometimes it is useful and you do get value from it.

So as far as value goes we depend too much on the currency to make the judgment rather than on the utility of what we are buying. Utility, in most cases, is the determining factor in willingness to trade. If the individual has a lot of money you would think they would be buying a lot of crap that people will try and trade them for their money. But I don't think they have a lot of crap because they understand the value isn't in the "fiat currency" (as governmnt thinks), the currency is just a measure or yardstick and the real value is in the present or future utility of the product - and that is basically what wealth is.

You are dead wrong. Money merely provides a simple way to compare. More important is that the modern world has numbers. A price is a number, a term of trade.

People are smarter than you think - people know when the terms of trade change. Have you ever noticed how men buy cars or wome wear skirts?

California's IOUs are the same as Lincoln's greenbacks that financed the civil war. Or the Continentals that were issued after the revolution to pay for government. People will of course trade them, but confidence in them will fade the longer they are around and the longer they are around the greater their loss in value, that is, their willingness to be accepted in trade.

The US federal government never honoured Confederate money.

Will it honour California paper?

Do you have a confusion about what I mean by "full benefit"?

Yes I do. To me, public benefit and social value have nothing to do with personal benefit or life, except in the choices we make.

[August1991]

I don't think we will be trading on the American dollar for much longer its either going to be based on the Chinese curency or something like an Amero. The way California is going I see a independent state self reliant from the Fed or Federal reserve.

Craig, you are not the first person to lose money selling America and capitalism short.

The New York Stock Exchange was founded before Karl Marx. It has outlived Marx, Hitler, Stalin, the Soviet Union, Communism, Maoism and about three French republics.

Craig, if you want to sell the American dollar short, you can do it on NYMEX. Put your money where your mouth is. Get back to us on your proceeds.