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Special EU & EURO Warning – December 14, 2011Offshore Jurisdiction Comparison 
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Executive Summary – California is one of the first states in the USA to pass “progressive” legislation that is different than what the other states have for legislation. Now it appears that California is still retaining its first place position but this time it is the first state trying to print its own money, calling this new fiat money an IOU.
The Facts – California State Controller John Chiang announced that his office will “suspend” $3,700,000,000 ($3.7 Billion dollars) in payments owed to Californians starting Feb 1, 2009. Of course we do not know what the word “suspends” means in this context. The State will suspend tax refunds, welfare checks, student grants and other payments owed to Californians. California has a $42 billion dollar deficit. The breakdown of suspended payments is $2 billion in state tax refunds, $300 million in welfare for the poor, blind, disabled, and $13 million in grants for college students. The state has also halted payments of bond money for more than 5200 public works. This should significantly reduce the bond ratings California had causing them to have to offer more interest on bonds in the future, thus digging them deeper into debt when it comes to bonds.
About one third of the welfare payments go to residents of Los Angeles County. The county who said they can “shift” their funds around to make these welfare payments for the first month, anyway. One could speculate that Los Angeles County could experience civil unrest if their welfare payments were cut off. Los Angeles is a region that had civil unrest in the past. The state plans on issuing IOU’s in place of payments. They are negotiating with banks to accept these IOU’s for deposit. The state would have to pay interest on these IOU’s and that will just drive them deeper into debt. I guess the plan is to buy time, cut the state budget and hope the income eventually catches up and they balance the budget.
Discussion – The real juicy meat here is the IOU’s. It appears that the states are trying to test the waters and see if they can issue IOU’s instead of actually rendering payments. The US Dollar is an IOU’s secured and backed by nothing. If the states can get into the game, like the federal government, they can solve their financial crisis by printing IOU’s, just like the Federal Government does. Interesting concept. If they get the California banks to accept these IOU’s as a currency then they are on their way towards the same disaster the federal government is headed towards. In the Pre- Federal Reserve days (before 1913) there were all sorts of printed money floating around. Banks even printed their own money. The newspapers listed the conversion rates every day for the various printed currencies similar to how they list the rates for conversion of USD to Euro. Sooner or later one must pay the piper with fiat money. Fiat money never ever makes it in the long run, never one instance of this happening.
It appears that other states will follow California as they run out of money. Florida is the next likely candidate. What happens if the state pension payments revert to IOU’s? What about state payroll checks turning into IOU’s. See how bad it can get and how easily. If we see states get away with printing IOU’s that will probably prevent them from massive layoffs and bankruptcy. Of course people and the banks will be forced to accept IOU’s. Only time will tell how that goes. If they fail to make good on the IOU’s then the banks will fail that accepted them, thus more bailouts and the Federal Government may be very afraid of this. If they stop California from using IOU’s (think state issued fiat money since they are trying to get the banks to accept them) then California will be in default on debts. This will result in the planned 25% layoff of state workers, and probably reductions or defaults in state pensions.
The States can also go bankrupt and do partial repayments of their pensions and other debts. A few cities in the USA have already gone down this road with success. We will have to wait and watch to see how this plays out. I would say it is very doubtful that cities and counties will be able to issue IOU’s. They will resort to bankruptcy when they are unable to meet their budget. Many pensions will be wiped out in whole or in part this way.
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