JCT: I spent the past few weeks commenting on the "problem" of
California being forced to pay its debts with IOUs at a couple of
hundred newspapers and blog sites:

Jct: There's nothing wrong with small denomination California
State IOUs if anyone 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 by everyone.
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.
Too bad California IOUs won"t be accepted in payment for state
taxes and services like state bonds were in Argentina. Too bad
California 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.
See http://youtube.com/kingofthepaupers

Some headlines from those sites:

090624 Are California's IOUs an Unconstitutional Bill of Credit?
090627 IOUs a sign of fiscal mismanagement.
090630 California has nothing left but IOUs
090630 California's IOU Fever is Likely To Spread To Other States
090701 Bill Mitchell Letter to the Governor of California
http://www.moslereconomics.com/2009/07/01/california-iou-suggestion/comment-page\
-1/#comment-8099

Letter to the Governor of California
Dear Governor Schwarzenegger

I note that the State of California is planning to issue IOUs
(registered warrants) from tomorrow (July 2) to ease your cash
situation in the face of the political dispute you are having
over the budget with the Democrats.

http://bilbo.economicoutlook.net/blog/?p=3145&cpage=1#comment-714
My latest blog - California IOUs are not currency, but they could
be!
- analyses this situation and suggests that you "tax-empower"
these IOUs
- a move that will radically enhance the options available to
you. You can read the blog here

In summary:

1. It would be economic madness to start cutting your deficit now
given the extent of labour market deterioration your state is
currently enduring.

2. The present plan to issue IOUs will hurt the most
disadvantaged members of your community because the warrants will
not be readily tradeable and it is unclear whether banks will be
prepared to hold them for the interest payment on redemption
(that is, cash them).

3. You can easily eliminate this disadvantage by making the IOUs
eligible for payment of Californian state taxes and fines. This
one change to your current plan will allow you to create your own
sovereign currency and the IOUs will become widely accepted
within the community. Even those who are not being directly paid
in IOUs would be happy to hold them because they would realise
they could extinguish their tax obligations to your government
using them.

4. You could then use these IOUs forever for state purchases as a
substitute for USD and avoid issuing more debt.

5. You will also be able to directly employ the 2.1 million
Californian citizens who are currently unemployed with the IOUs
and start using this idle labour to advance public purpose via
community development projects.

If you need any further advice on this please do not hesitate to
contact me. best wishes, Bill.

William F. Mitchell
Professor of Economics
Director, Centre of Full Employment and Equity
University of Newcastle
New South Wales, Australia
---

JCT: So let's check his article on the wisdom of making the IOUs
tradable.
http://bilbo.economicoutlook.net/blog/?p=3145&cpage=1#comment-714

California IOUs are not currency . but they could be!

I seem to be stuck in the US at the moment - blog-wise. I can
assure you I escaped their shores at the weekend and am now
freezing in Newcastle, NSW. But I still have reading left over
from hanging around US book shops last week. One story that is
very interesting at the moment is the plan by the Californian
State Government to begin issuing IOUs (reserved warrants)
because it has "run out of cash". As far as I can work out the
IOUs will not become a second currency (alongside the USD) but
one simple extra announcement by the State would be enough to
allow California to be sovereign in their IOUs. What do you
suppose that extra complication might be?...

the increasing deficit has to be "funded" because a state
government does face a revenue constraint. It has to increase
taxes, cut spending or increase its borrowing (state debt
issuance) to resolve the fiscal deterioration... Trying to
resolve the burgeoning Californian state deficit by increasing
taxes and cutting spending at the height of the worst downturn
the economy has faced in years is madness. It will almost
certainly make matters worse...

Which brings us to the story at hand. The State of California,
the worlds 8th largest economy plans to begin issuing IOUs -
formally known as registered warrants - to the tune of $3 billion
from July 2, to fund its commitments to various suppliers and
contractors to government; university students; and welfare and
pension recipients...

While two of the major banks that operate in California - the
Bank of America and Wells Fargo - have said they are uncertain as
to whether they will accept the state-issued IOUs in return for
cash, they have an incentive to do so because they can then earn
the interest payable once the redemption date is up.

Who will get the IOUs? The most disadvantaged - stupid! No other
group would tolerate being treated in this way.

The State Controllers Office has some analysis of how the IOU
system will work and who will be provided with them in lieu of
cash. they also provide a FAQ page for the warrants system. We
learn that the largest proportion of the IOUs will go to the aged
($590 million), the unemployed ($495 million), and the disabled
($363 million).

There are two interesting points to note from FAQ page. First,
there is no guarantee of convertibility into cash. I say this
even though the state will (if it has enough cash) accept them on
October 1 for cash. But there is no stipulation that they can be
traded in the meantime as if they were cash.

Second, there is no provision that a Californian resident can pay
their state taxes using the warrants as contra payments. In other
words, the warrants are not currency.

If the State of California, announced that it would accept these
IOU vouchers (their face value in $US) as legitimate vehicles to
liquidate one's tax obligations to the State then the situation
changes dramatically. To circulate the vouchers, all State
employees would receive some (or all) of their pay in the IOUs
(bits of paper or via electronic transfer into special voucher
banks), which they could then use to pay their taxes. If all
Californian citizens could similarly extinguish their tax
obligations using these vouchers then there would be a
generalised demand for them, which means that State employees
would be able to spend the IOUs in shops as they would the $US.

The State of California would have no financial constraint in the
IOU vouchers. It would simply spend them (pay its workers) and
collect the taxes later as people handed them back to satisfy
their legal obligations. Imposing the tax obligation (in
vouchers) creates a demand for them and allows them to circulate
as a "currency".

Soon enough, the banking system would develop IOU Voucher
Accounts and related products. In this way, the State of
California could more easily maintain its level of services
without imposing huge costs on the disadvantaged which they are
forcing to accept the IOUs. The State could also expand public
employment to attenuate the labour market impacts of the
recession.

There might be some reluctance to hold the vouchers. In general
terms whether Californians would desire to demand the IOUs would
depend on how enforceable the tax obligations are. The State of
California could probably enforce the tax obligations and allow
them to be extinguished using vouchers. This would be sufficient
to generate a viable demand for the IOUs as an operating
currency. I am not considering any constitutional issues here.
Just the logical point.

If the state had have decreed that any resident could extinguish
their tax obligations using the warrants then they would become
more broadly accepted as an alternative currency in California
and the disadvantage that those citizens face who will be forced
to accept them in lieu of cash payments would be considerably
reduced (or eliminated entirely)...

But the bottom line is that the IOU plan in its current form will
further hurt the poor. The simple act of allowing them to be used
for tax purposes would reduce this disadvantage considerably...

We should start a petition to request the State does make the IOU
"tax-empowered" and then we would be able to satisfy our
curiosity. It is a perfect chance to empirically demonstrate (and
validate) some modern money concepts. bill
---

JCT: More sites leading up to the big event:

090701 California: The haves and the have-nots
090701 California IOUs may be difficult to cash
090701 Out of Cash, California Turns to IOUs
090701 Schwarzenegger declares fiscal emergency in California
090701 Schwarzenegger orders third furlough day, proposes new cuts
090702 How the Terminator Can Save the World (Scott Baker)
090702 Bank of America to accept California IOUs
090702 California IOUs could make it harder for local government to
borrow
090702 California IOUs have Value If Applied to State Obligations
090702 Why one state agency won't accept California IOUs
090702 No IOUs for California Politicians, They're Still Getting Cash
090703 Are California IOUs Constitutional?
090703 As Goes California (Argentine Patacons)

http://www.grandinite.com/2009/07/03/as-goes-california/#comment-5752

As Goes California...
It might be useful to look up the phrase Patacon, which refers to
the IOUs issued by the largest province in Argentina, just four
months before it collapsed in 2001.

The Patacon (officially called Letra de Tesoreria para
Cancelacion de Obligaciones de la Provincia de Buenos Aires) was
a bond issued by the government of the province of Buenos Aires,
Argentina, during 2001. The patacones were used to pay government
bills, including state employees' salaries during a period when
the economic crisis caused regular currency (Argentine pesos) to
be scarce. Patacones then circulated in the economy in much the
same way as pesos.

First issued during the peso/U.S. dollar convertibility regime,
just like other complementary currency Patacones could be
attractive due to a revenue scheduled for payment in 2003 in
pesos (practically equivalent to dollars). When the
convertibility was abandoned amid fears of hyperinflation, the
attractive of this revenue practically disappeared. The basis for
the acceptability of complementary currency shifted to their use
to pay taxes.

However, the value of Patacones became eroded as the series "B"
was issued because as a way to put pressure on the Government to
cancel a large debt, the company that printed them eliminated
many safety features deemed too expensive, thus making them
easier to counterfeit.

JCT: They didn't print enough to pay to make them right!!

Also, the revenue of series "B" was scheduled for payment just in
2006. The economic importance of Buenos Aires province ensured
the acceptability of Patacones because there were plenty of large
companies that found use for them as payment of provincial
charges. Patacones were accepted outside the Buenos Aires
province and eventually circulated (albeit informally) in border
areas of neighboring countries.

090704 Schwarzenegger Calls Emergency, More Furloughs
090706 California Prints Its Own Currency - A Satire?

http://lionel-murasy.blogspot.com/2009/07/california-prints-its-own-currency.htm\
l?showComment=1246975546056#c6194834697672319702

Monday, July 6, 2009
California Prints Its Own Currency - A Satire?

Not to shabby a job of what can possibly be around the corner.

Satire or not, the idea of a complimentary currency may be just
the ticket to help us out.

Suppose a college student in the need of financial aid for
community college, in lieu of state grants or loans, the state
issues a currency commensurate to the amount of hours the student
volunteers to care for the elderly.

Two birds, one stone. In essence the state acts as a
trader/broker between two markets.

090706 Wanted on Craigslist: California IOUs
090707 Trading of California IOUs ca
090707 Trading of California IOUs catches regulators' eyes
090707 Banks Reject California IOUs
090707 Banks accept California IOUs for deposit
090707 State Lawmakers back bill to make IOUs legal tender

JCT: And finally, we read:
http://www3.signonsandiego.com/stories/2009/jul/07/bn07iou-state-bill/

State lawmakers back bill to make IOUs legal tender
By James P. Sweeney
U-T Sacramento Bureau
July 07 2009 7:02 p.m.

SACRAMENTO - Republicans and Democrats alike embraced legislation
Tuesday that would make California IOUs legal tender for all
taxes, fees and other payments owed to the state.

JCT: Making California chips valuable to everyone everywhere.

A unanimous vote in the Assembly Business and Professions
Committee and support from the Democratic majority launched the
bill on what could be a quick trip to the governor's desk.
"I think we can get this done in the next two or three weeks if
the majority wants to push it hard," Assemblyman Joel Anderson,
R-La Mesa, said after the hearing on his measure, AB 1506.
Until last week, the bill had been sitting idle in the committee
with little apparent support and no date set for an initial
hearing. Before Tuesday, it also was unclear how Democrats viewed
the idea.
But with the state issuing nearly $230 million worth of IOUs
since Thursday and no budget agreement in sight, a prominent
Democrat expressed strong support for Anderson's bill and asked
to be listed as a co-author.
"It is the recipients of these IOUs who are being punished for
the actions of the governor and others who have gotten us into
this situation," said Los Angeles Assemblyman John Perez, a
member of the Democratic leadership. "I appreciate what you're
attempting to do here."
Tuesday's vote sent the bill to the Appropriations Committee, the
last stop before the Assembly floor. The measure would then go to
the Senate. A spokesman for Gov. Arnold Schwarzenegger said the
administration has no position yet on the proposal.
The state started issuing IOUs, formally known as registered
warrants, on Thursday after lawmakers and the governor failed to
agree on a package of spending cuts and other measures to close a
budget deficit that since has grown to $26.3 billion.
There was little, if any, visible progress toward a new budget
accord Tuesday, with no negotiating sessions scheduled between
the governor and legislative leaders.
While California is not broke, dwindling cash flow will push the
general fund into the red and leave the state unable to pay all
of its bills later this month, Controller John Chiang has warned.
To manage available cash and make sure mandatory payments can be
met, Chiang started issuing IOUs to vendors, individuals, local
governments and others on Thursday.
Anderson's legislation simply declares the state must accept its
IOUs as payment for any taxes, fees or other payments owed to the
state. The state already accepts its IOUs for payment of income
taxes.

JCT: Wow, I didn't know they had such good chips available all
along.

"Some companies have fleets of vehicles and they pay all the
motor vehicle fees." Anderson said. "We have some companies that
have to report to 14 different agencies and each one of those
agencies has fees.
"To expect them to pay the fees and the taxes, when they have yet
to receive cash payment from the state, is outrageous."
As he addressed the committee, Anderson produced a two-inch stack
of support letters for the bill. Among those were letters from
Santee School District and the San Diego County Medical Society.
"This bill would save many businesses and individuals from severe
financial hardship," wrote Dr. Stuart A. Cohen, president of the
8,000-member medical society.
Anderson's measure is one of three pending proposals to redefine
how IOUs can be used. They could no longer be used to pay income
tax refunds under SB 23 and AB 775 would prohibit the use of IOUs
for payments to local governments.

JCT: Now that we read that state lawmakers back bill to make
California IOUs legal tender, it's great that Argentina people
were smart enough to avoid the tent-cities catastrophe and
California people are now going to follow their example.
I'll take back every joke I ever made about Girlieman Governor
Musclehead if he engineers the California state currency
lifeboat.

Nice to see others pushing them in the same direction.
See my full reports on these articles at my
http://youtube.com/kingofthepaupers channel