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California’s Bingo Bondage

Since  the California IOU’s (aka registered warrants) pay interest they would at first glance seem better than money IF you can also readily exchange them for federal fiat dollars. The interest rate offered is quite enticing when compared with current Federal Treasury notes. The fat interest worm on the hook has been deliberately set for enticement and to induce folks to hold them until (in the words of the comptroller) they MAY be redeemed.

Beware.

Of course these IOU’s are NOT readily exchangeable (at least not yet outside of California banking institutions). Nor can you go to the grocery store and plunk down a payment warrant amounting to say $1200 for a yogurt and some cookies and expect change in fiat currency.  California State  IOU’s simply are not legal tender.

Why?

If the IOU’s had printed on their face that they are legal tender for all debts public and private, then THEY WOULD BE ILLEGAL UNDER FEDERAL LAW because under federal law only the federal government can issue money or legal tender.

Since a substantial amount of these warrants may be sent back to the State coffers in lieu of payment for quarterly State income tax obligations, it is reasonable to assume that California will have even less tax revenue coming in from now  through October 2, 2009 and the State is unlikely to make good on the warrants when due. It just will not be able to redeem them. On the other hand, should the State refuse to accept it’s own warrants in payment for taxes due, then that may engender a real tax revolt.

Fact is, the current deficit and the projected deficit for October 2, 2009 is less than half of the one projected for the  last quarter Jan 2010. These projections already made California the worst credit risk for any State in the Union.

In the words of the California comptroller, “registered warrants will continue to be issued until the State has sufficient cash to cover all of its bills and redeem outstanding IOUs. The ability to restore making all payments with regular warrants depends on when the Governor and the Legislature reach real resolutions that address the State’s long-term budget deficit and provide immediate cash in the State Treasury”. Words like “depends”, “when” “may” and “reach” should make anyone suspicious. Bottomline: the warrants MAY be redeemed on October 2 or again they may not be redeemed then, if ever. The fact is there is no money now, and the future prospects are worse. (The prospects of collecting the pre-budgeted amounts of even such basics as State property taxes are turning very questionable).

Actually, if one receives a State registered warrant and holds it through maturity, then technically that person has not yet been “paid” (with legal tender) . Therefore the quarterly income tax payable in legal tender is not due until the State makes good on the warrant. Therefore, California will not get much revenue or anticipated “fresh new money” to be able to make good on the warrants as they become due. Any bank that gorges on these warrants for just the interest is foolhardy. But maybe that is the two stage surreptitious way the Federal Government can help out California. Just like before, the Banks buy the crap and the feds buy it back. Me thinks China et al are not going to buy anything like that. They probably learned their recent lesson.

Left to itself, California is toast.

A similar problem was faced by the provinces (States) in Argentina in 2001. Argentine Provincial governments issued the same kind of fancy engraved paper warrants (called bonos, i.e. bonds). Problem was nobody wanted them, not even the provincial banks because they carried no interest. The neat solution to make them desirable to the general population was that once a week, there was a lottery called over radio and TV that would call out the serial numbers on the lucky winning “bonos” and you could win a car, a motorcycle, a dishwasher, even a house if your winning IOU number came up. Of course the idea was to get people to retain the money  for as long as possible. It sort of worked for a while and the bonos became paper  flood in all kinds of horrendous astronomically high  denominations. (Guaranteed by the good name and faith of the local Argentine government!!). Right!

Just picture a poorly paid local state employee and his taxi driving son and their large families sitting in their cramped, modest living room at night shuffling stacks of the IOU’s around as the string of winning numbers are called out on the radio. I witnessed this. (Of course the big winners always turned out to be the governor’s mistress or some such, but that is Argentina and another story).

Pretty soon, every province and city government  in Argentina issued it’s own “bingo bonds” but you could not take this quasimoney “out of state” so to speak because they had zip zero zilch value outside their own local jurisdiction. (No value whatsoever in fact because everyone had their own competing lottery)

Sort of the same thing was the  “Notgeld” (emergency money) issued in every city and State of Germany in the 1920’s. (My father gave me an envelope full of billions of Reichsmarks, also worth zip, just as part of my education and a lesson needed to be learned by the next generation) Of course the amount of zeros added to this Argentine bingo/bongo/lottery money increased exponentially as more and more sheeple realized that this quasimoney was a fraud, until it was repudiated altogether and a succesion of new fiat currency was issued, backed by politicians with new high sounding promises.

Of course what followed was a complete economic collapse, run on the banks, strikes, riots, looting and election of the next populist turkey. (I still carry a million peso note in my wallet as another lesson to be remembered, since this second lesson actually cost me a bundle). Let’s see, what does Schwarzenegger have in common with post Weimar Republic or Argentine presidential worthies? (other than shrieking administrative incompetence and the inability to reach political consensus?) Ahhh, yes, they all promised pie in the sky and they all were democratically elected and then happily led their sheeple to either economic or physical slaughter or both.

Bottomline: If you have no choice but are obligated to take them, even if you like the pretty engraving of duffy duck on them, then get rid of the IOU’s as fast as you can, no matter what the interest rate, no matter what the promises, no matter what the cash discount.

The jig is up. It is like an infection.  Today California, tomorrow die ganze Welt.

Happily, the author is not an economist. Just another working stiff about to receive a California registered warrant instead of a legal tender payment. I think I learned my lessons now. Good luck to you.

CARLOS BENEMANN lives in Humboldt county, California. He is a California Court Certified Contract Interpreter and can be reached at fernbook@humboldt1.com

 

 

 

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