California So Broke it is Issuing IOUs

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Ben Cohen
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By Ben Cohen

While it's better than not paying anyone, the state of California is in such dire straights, it is now resorting to issuing IOUs:

Encumbered by a $26bn (£16bn) budget shortfall and a seemingly
intractable political stalemate, California's state government is
issuing IOUs to businesses, health clinics, college students and
taxpayers who are owed money by the state.

The green documents
look like any ordinary cheque except for the words "registered warrant"
stamped in the corner. They carry a 3.75% interest rate and can be
cashed in October, by which time California's governor, Arnold Schwarzenegger, is hoping that he will have some money.

The problems with this latest ruse are many. Firstly, California may not be able to pay them back. The state is broke and structurally incapable of fixing its economy any time soon. Secondly, pariah investors will use the IOU checks to speculate - the precursor of another debt based boom that could have potentially fatal results if it can't be paid off (like we saw with the mortgage industry).

The fact is, the ridiculous system that makes it impossible to pass a budget in California without a 2/3 majority will make it impossible for California to do what is necessary to pull itself out of its current crisis. California needs to raise taxes on the wealthiest to pay its debts and retain any type of infastructure. Borrowing, cutting and begging won't save it, and certainly not IOUs.