Consequences

California is going to issue IOUs because it can't pay its bills.

Its budget gap growing and its political process for addressing the gap unhinged, California will begin Thursday to pay vendors and taxpayers with i.o.u.’s, only the second time the state has adopted the emergency payment method since the Great Depression.

By Thursday afternoon, state officials said, 28,742 warrants worth $53.3 million will be printed and readied for distribution. If the state’s fiscal crisis – which has left California unable to pay all of its bills – continues without a budget settlement, it would issue as much as $3.36 billion for the month of July.

In addition, state workers have been ordered to stay home during some workdays.

In the meantime, Mr. Schwarzenegger, a Republican, has ordered state workers to take a third furlough day each month, beginning next Friday, to help stave off a further cash crisis in the state.

It's refreshing to see a government actually have to balance its books. They have to cut back on expenses because they don't have enough to pay for them, just as families and corporations do. Similar stories have been published about other states. They have to deal with the consequences of an extravagant lifestyle.

This is probably a stupid question, but why does the state government have to balance its books each year, whereas the federal government can accrue massive debts every year? Why do we not hear, "Well, this year Federal workers will have to take a month off without pay because the USG has already spent the money it had?" I'm guessing it's because the federal government can print money.

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Well...

Now the State of California can print money too! That's what these IOU's are, after all. It's not that they're being forced to balance their budget, it's that they've found a clever way to evade doing so.

So why don't state govts accrue monster cumulative debts?

Why don't we hear about the $100 billion California debt that will have to be paid by future generations?

The distinction is: people

The distinction is: people have the choice not to accept these IOU's, which isnt the case with 'legal tender'.

see the various state constitutions

The states are governed by their constitutions.

In Seattle, employees are (technically) paid with salary warrents, not checks. Old timers told me that during the Depression the warrants were no good at face value but the city would buy them back at half of face value. If a person held them long enough they got full price after the recovery.

Long time ago I got a city check from another jurisdiction that was stamped on the back something to the effect that "if this check bounces it will earn ? percent interest until it is good."

Will other states copy this?

It will be interesting to see how this whole IOU thing works out. If the state of California can pull this off, other states might try it out too.

Isn't this forcing the state employees to give the state a loan when nobody else thinks it has credit worthy of it (or they would just issue bonds)?

Not being an economist, I wonder if any of you have thought about this: will printing these things contribute to inflation?

IOUs as Tax Refunds

I heard several months ago (so the story may be different now) that IOUs would be issued to contractors and as tax refunds. My first reaction was that everyone would make sure to underpay their taxes. My second was to wonder if there would be a secondary market where IOUs could be purchased from one party at a discount and used to settle tax debts for another party.

another article about California IOU's

Banks may not pay out on IOU's. The article suggests investors could buy up IOUs at a discount. How much of a discount would you sell a California IOU for?