Are California IOUs Pushing Constitutional Limits?

This recession is raising all sorts of interesting sideshows. The most recent being the California IOU issuance. There are some that see this as no less than a threat to the Union.

First consider that the state is working through a bill to make the IOU’s legal tender for the payment of all fees, taxes and other payments owed to the state. Currently, the SEC has decreed that they are securities which means that theoretically, at least, they can only be traded by registered broker-dealers. Now if the state declares them to be legal tender does that trump the SEC or do we end up with some sort of stand-off that the courts have to adjudicate.

But it gets to be a deeper pit. Article 1 Section 10 of the Constitution says in part:

No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility.

In other words you can’t print your own fiat money and this is where some people are getting really upset. Marshall Auerback has this to say about the situation:

Most significantly, the Federal government retains this monopoly under our existing monetary arrangements. If California is successful here in allowing its IOUs to pay tax, it has profound constitutional ramifications. It certainly means considerably less muni bond issuance in the first instance, if the proposal passes constitutional muster.

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.

In fairness, his essay is fairly lengthy and contains some good observations, so reading it in it’s entirety is worth your time.

So where are we headed? The Obama administration seems to have little interest in bailing out California, seeing I suppose all sorts of downside and little political gain. Any federal assistance would require some sort of tough restrictions on California’s budgeting and taxation policy which would not only leave a lingering bad taste in that state’s collective mouth but would raise all sorts of constitutional issues itself.

If he lets them work it out on their own and the IOU’s do start to resemble a real alternative currency there is going to be a point at which the federal government does need to assert its control over this issue. It might be somewhat comical now but that could change in an instant. Consider that other states are no doubt watching this closely. The IOU ruse provides an escape hatch to constitutionally required balanced budgets and many are looking desperately for any sort of get out of jail free card, rather than facing up to the hard task of cutting spending and increasing taxes.

The really discouraging piece of this entire episode is that once again we’re confronting a crisis by resorting to the issuance of more debt rather than tackling the fundamental problems the state faces.

more: here and here

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About Tom Lindmark 401 Articles

I’m not sure that credentials mean much when it comes to writing about things but people seem to want to see them, so briefly here are mine. I have an undergraduate degree in economics from an undistinguished Midwestern university and masters in international business from an equally undistinguished Southwestern University. I spent a number of years working for large banks lending to lots of different industries. For the past few years, I’ve been engaged in real estate finance – primarily for commercial projects. Like a lot of other finance guys, I’m looking for a job at this point in time.

Given all of that, I suggest that you take what I write with the appropriate grain of salt. I try and figure out what’s behind the news but suspect that I’m often delusional. Nevertheless, I keep throwing things out there and occasionally it sticks. I do read the comments that readers leave and to the extent I can reply to them. I also reply to all emails so feel free to contact me if you want to discuss something at more length. Oh, I also have a very thick skin, so if you disagree feel free to say so.

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1 Comment on Are California IOUs Pushing Constitutional Limits?

  1. Are California IOUs Pushing Constitutional Limits?

    It would be too bad if it was unconstitutional for California to print its own chips to save itself when the FEDs aren’t providing enough.
    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.
    We now read that state lawmakers back bill to make IOUs legal tender!!!
    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.

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