Marshall Auerbuck at New Deal2.0, a blog for the Franklin and Eleanor Roosevelt Institute (just so you know where they stand), sees dramatic consequences if California is allowed to continue printing IOUs and then use them to collect taxes.
According to the San Diego Union-Tribune, Republicans and Democrats alike embraced legislation last Friday that would make California IOUs legal tender for all taxes, fees and other payments owed to the state – an action that effectively would mean that California is entering the currency business . . .
While it might appear that the new law seems merely to allow California to deficit spend just like the Federal Government – in actuality, the effect is far more profound than that. Allowing the IOUs to be an acceptable payment method for state taxes, instantly imparts value to them – in effect, what you have is a state creating a sovereign currency right under the noses of the Treasury. They are stumbling their way into it, and as they do so, some of the true nature of contemporary money is being revealed. It will be viewed as a stop gap measure at first, and then could very well become entrenched as states realise they have a way to escape balanced budget requirements.
It will be interesting to see what the exchange rate is between California IOU and US currency – the IOUs do offer a yield, so should be less than par by design. I wonder if NY is next.
This is like some sort of return to the 13 colonies with all kinds of ersatz currency floating about. It’s hard to believe the Rubinite wing of the Democrats will just let it be, given the threat it represents to Wall Street’s prevailing economic interests, but it is an understandable response to a federal government which continues to champion the interests of the rentier class above the vast majority of Americans by emphasising “fiscal sustainability” and destroying aggregate demand in the process.
Now obviously this is hardcore Keynesian stuff — putting “fiscal sustainability” in scare quotes, while claiming that government inaction is “destroying aggregate demand.”
Basically, he’s warning Obama: Forget this fiscal sustainability crap, if you don’t bail out California, you risk ending the union. Do what Lincoln did, and keep the union together.
The problem with this line of thought — which isn’t totally ridiculous; we’ve said it ourselves that California is creating its own currency — is that the state still needs to borrow and pay off its debt in dollars, which means there’s an inherent limit on its ability to function solely with Arnie-bucks. It can accept them as taxes, but it can’t pay muni holders with them.
Here’s a thought experiment. Imagine a bomb landed on the rest of the world besides California, and all its debtholders were dead, so it could just tear up its obligations. That would obviously solve the debt problem. Also, since there wouldn’t be a Federal Reserve or a Treasury, it would have to use Arnie-bucks, since there’d be no US currency issuer.
Would that solve its problems? Obviously not. You’d still have the fact that the state grew unsustainably, using too much of its resources for sprawl and other services, not to mention the toxic political atmosphere.
In situations like this, it can be useful to ignore money, which is a distraction. They can print and create IOUs all they want, but none address any of the fundamental problems with the state. Were Washington to bail out the state it would reasonably demand all kinds of concessions — if for no other reason than to make an example for other states, so that they don’t follow suit. Of course, that creates all kinds of fresh constitutional issues.
One cool thing: We’re living history. The idea that we’re talking about the dissolution of the union — extremely remote — is pretty interesting.
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