Thursday, 2 July 2009

Yes, it can happen here....

The State of California has hit the fiscal wall. Public sector workers are receiving "IOUs" instead dollars as wages. Payments to suppliers are being suspended. The Governor Arnold Schwarzenegger has declared a "fiscal emergency".

It sounds chaotic and it is. How did California get into such a mess. It was simply a matter of expenditures being greater than revenues. They have a huge fiscal deficit. The state budget gap that is running at $26.3 billion , which is almost £16 billion.

What is the difference between the UK and California? We need to add a zero to our deficit. It is running at closer to £160 billion


Anonymous said...

I've not seen anywhere mention whether the politicians and Arnie will be paid in IOUs?

I did however read that some banks will accept them. Wonder how long that will last!

Anonymous said...

"It was simply a matter of expenditures being greater than revenues."

No, it's a matter of a messed up constitution. The deficit amounts to about 1.3% of Cali's GSP. It's an easily solved problem from a financial perspective. The politics of it, however, are complicated. I'll give you a hint on where to start: Prop. 13.

Alice Cook said...


This is the crux of my point. Here in the UK, we could cut expenditure now, but it is "complicated" by our constitution. We have an election in 11 months time.


fajensen said...

I wonder if I could pay my taxes the same way ....

mike said...

California is one state of many and shouldn't be compared to the UK economy.

Anonymous said...

California has no central bank to create more fiat currency/debt, and sell it to its self.

The UK does that, its called quantitative easing, to keep down the interest rate on long dated gilts, and that reduces mortgage costs.

Exit strategies are difficult to create. The circle tends to repeat.

Devalued £ will be the end result.

That's what they wanted from the get-go.

There is some doubt that banks in Calif will accept the IOU as currency.

A clusterf*ck.

Fed Gov't has declined to bale them out.

They in turn are not remitting federal taxes to NY

A double clusterf*ck

Mick said...

last I heard our constitution said "no political party can be bound by its predecessor".

And the limits on the powers of the executive are precious few.

Anonymous said...

"California has no central bank to create more fiat currency/debt, and sell it to its self." (above quote).

This is a salient point. California may be one state, but with 30 million population it is a de-facto country, with no central bank. What comes in is what goes out including interest payments on their market limited borrowings.

Imagine if all countries had to work this way. What would the currency of exchange be? How much currency would there be; who would print it. What would be the prevailing interest rate; presumably set by the financial market.

Ron Paul wants to do away with the FED. Does that compel a move to gold as the store of value?

Answers in a post please Alice.


Alice Cook said...


As you know, California is issuing script. It is but a small step from script to money. If firms and banks accept these notes in exchange for cash, goods and services, this script takes on the features of money.

As for Ron Paul. I am a fan. I just wish he was more articulate.


Anonymous said...

Not to worry, all money is being debased, and the governments will issue new money, make the old one no good, and take 10% in the exchange rate.

Makes everyone happy


Anonymous said...

Alice, Read this