California Can't Print Money

Well, technically the State of California does have the ability to print money. To do so however, would seem to directly contradict Article 1, Section 10 of the United States Constitution.

The most inconvenient paragraph of Section 10, at least insofar as California is concerned, states the following:

Section 10. No state shall enter into any treaty, alliance, or confederation; grant letters of marque and reprisal; coin money; emit bills of credit; make anything 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.

Sure, we understand that certain bits of this paragraph appear slightly outmoded. For instance, the stipulations regarding payments in gold and silver have been ignored for some time now.

However, we think there is a pretty strong consensus that a state is forbidden from issuing its own currency, in an official capacity, and replacing the dollar as the chosen means by which commerce is to be conducted.

Surprisingly, this is a path that California appears on the brink of heading down. Some readers may ask "Who said anything about California coining its own money?". Well, clearly the state has chosen an alternate set of terminology by which to describe it's actions.

That California is in a state of fiscal disarray shouldn't be news to anyone by now - short sighted tax policy (property tax freeze), profligate spending, serving as one of the epicenters of the housing collapse and a gridlocked state legislature have all but assured an inevitable day of reckoning for the state.

Also well publicized is the fact that California may run out of cash by the end of July, at which point the state will proceed to issue IOUs to those it does business with. (S&P eloquently referred to the IOUs as "registered warrants" in its justification for placing California's general obligation debt on CreditWatchNegative.)

We would argue that these IOUs are tantamount to coining money; after all, a dollar bill itself is no more than an IOU from the federal government. We doubt however that this distinction will ever be brought to light, as recent events (think Chrysler) would seem to suggest that financial distress is ample justification for a government to trample across years of legal precedent.

Disclosure: No position in California

Comments

[Dave Wrixon]

The issuing of such warrants really only amounts to accepting services but deferring payment, and then getting charged interest on the outstanding amount. It all just demonstrates what a nebulous concept money and particular the dollar are becoming.

However, the bottom line is that whilst we may all issue IOUs nobody is actually obliged to take them. At the end of the day, if nobody is prepared to back The State of California with hard cash at anything below a Usurious rate of interest, then it will become insolvent.

2009 Jun 21 04:56 AM

[Bruce Krasting]

Good piece. It is safe to assume that D.C. is not going to let Cal. fall off a cliff. Talk about systemic risk. If Cal. is blocked out of the debt market so will every other state. If that is the case how in hell is Treasury gong to sell the $2 trillion in bonds it needs to sell.

Look for Cal. to be 'fixed'. It is too big to fail in 2009.

bk

2009 Jun 21 09:27 AM

[OldFordTruck]

The state of California has been trampling on the constitution for many years; I don’t think this little sentence will slow them down much. Judging by California’s laws alone, I don’t think their state leaders have even read constitution and if they had, wished the document never existed. So the issuance of state IOU’s, another form of fiat money, is not outside the realm of options. I just wander where they will find the money or credit to buy one of them fancy Chinese printin’ presses like the Fed has? I don’t even think China will extend them a line of credit! As California goes, so goes the country.

2009 Jun 21 09:51 AM

[Mad Hedge Fund Trader]

they're going to need to come up with something. Sadly, once again, my once beloved but now spurned home state of California is threatening to commit suicide. The formerly Golden State officially runs out of cash in 50 days, and our body building governator, Arnold Schwarzenegger, refuses to borrow any more until the legislature delivers $24 billion in spending cuts. Standard & Poor’s has placed it on Credit Watch, and premiums for credit default swaps on the state’s debt have already spiked back up to 300 bp. I got a letter today from Robert Birgeneau, Chancellor of the University of California at Berkeley, where my son goes to school, telling me that his budget shortfall has just leapt from $67 million to $145 million, and that tuition is going up 9.3%, while staff wages will be cut by 8%, and financial aid will be chopped to the bone. Yikes! And this is the place we are counting on to deliver the scientists, engineers, and professionals who are supposed to keep us globally competitive. Pleas to Obama for a bailout have already been brushed aside, like a pesky fly. He rightly sees us as an alcoholic friend asking to buy him just one last drink. A default would be no joke, as California accounts for 15% of US GDP, and ranks as the world’s eighth largest economy. Few realize that the state is home to the country’s second highest per capita payers of tax revenue into Treasury coffers, after New York (Sarah Palin’s Alaska is the lowest). Hardly a day goes by without banner headlines about closing state parks, cancelling local sports programs, or freezing payments to mothers with dependent children. In fact, most state residents now prefer the Sacramento government to go bust in order to bring a speedier resolution. There is only one possible solution. A new governor holds a constitutional convention to reduce the vote to pass a budget from two thirds to 50%, or a statewide voter initiative accomplishes the same. Maybe ex Ebay CEO Meg Whitman, who will run for Arnold’s job next year, is up to the task?

2009 Jun 21 09:55 AM

[sethmcs]

I propose a quick dip bankrupcy modeled after GM and Chyrsler. We will split all the assets into Good California and Bad California. We will sell 35% of good California to the Chinesse with a option to increase ownership to 49%. The US gov't who will provided a 100 billion DIP financing will get 55%, California pension funds will get 9%, and bond holders get 1%. Bankrupcy attorneys will get to pillage Bad California of all assets for legal fees.

2009 Jun 21 10:58 AM

[john s. gordon]

well they can't print 100$ bills legally but @ one time they dug a lot of gold out of the hills & now is the time for all good men & boys to go out there & dig some more.
i am reminded of my friends @ aerojet general on the american river near sacto who were spending their lunch hours scubadiving & scavenging nuggets from the riverbed. the old dredging methods from 100 yrs ago were inefficient & left a lot of value in place.
> jack

2009 Jun 21 11:18 AM

[Rhino Realty]

The bigger they are, the harder they fall.....why not sale CA to the other 49 States. Each State gets a 1% interest in the newly created State.

2009 Jun 21 11:26 AM

[Dave Wrixon]

And what happens if the Chinese want vacant possession?


On Jun 21 10:58 AM sethmcs wrote:

> I propose a quick dip bankrupcy modeled after GM and Chyrsler. We
> will split all the assets into Good California and Bad California.
> We will sell 35% of good California to the Chinesse with a option
> to increase ownership to 49%. The US gov't who will provided a 100
> billion DIP financing will get 55%, California pension funds will
> get 9%, and bond holders get 1%. Bankrupcy attorneys will get to
> pillage Bad California of all assets for legal fees.

2009 Jun 21 12:15 PM

[bbowen7]

Mad Hedge Fund Trader focuses on the spending side of the equation. If we had increased state spending in line with population growth and inflation since 1990 (or 2000), we'd have a surplus instead of a deficit. The biggest nut is state and local worker compensation (including pensions) - untouchable by the Democratic legislature. The second biggest problem is driving out of business and high income tax payers. The rest of the problems (dysfunctional governmental processes) are very real, but no solution which doesn't address the cost side is another short term fix.

I kind of like sethmcs' answer.

2009 Jun 21 12:26 PM

[jksisco]

California represents a classic case of irresponsible legislators who ignore reality in favor of wishful thinking, coupled with an apathetic and mostly uninformed voting population. A bankruptcy, although painful would be a godsend to right a ship listing aimlessly.

2009 Jun 21 01:51 PM

[RLLH]

Good idea but would it not make more sense to give it back to Mexico?


On Jun 21 10:58 AM sethmcs wrote:

> I propose a quick dip bankrupcy modeled after GM and Chyrsler. We
> will split all the assets into Good California and Bad California.
> We will sell 35% of good California to the Chinesse with a option
> to increase ownership to 49%. The US gov't who will provided a 100
> billion DIP financing will get 55%, California pension funds will
> get 9%, and bond holders get 1%. Bankrupcy attorneys will get to
> pillage Bad California of all assets for legal fees.

2009 Jun 21 02:12 PM

[Bobco23]

California may be the light at the end of the tunnel.

Apparently there is a limit to taxation, the lifeblood of government. This could be the tipping point when the 100 year growth in government implodes under its own weight.

Thanks CA. This is the only thing good you have ever done for the rest of us.

2009 Jun 21 08:09 PM

[Genesis]

I hear California has a lot of defense industry so maybe we need another war. Money just magically grows on trees whenever there's a war. Or they can find all the marijuana growers and tax them. Of course, it's all being grown for medical use - for depression, I think.

2009 Jun 22 12:56 AM

[perceptions_now]

Would you really want YOUR STATE to just PRINT MONEY, like the FED?

2009 Jun 22 05:39 AM

[Chancer]

Now, that's a great idea (NOT).

Allow the liberal Dems to raise taxes with a 50% vote- not even a 51% majority.

Since all the liberal Dems in the CA legislature want to raise taxes, why not just allow them to raise taxes with one liberal Dem vote.

And how much is enough for them to satisfy their unsatisfiable wants for more money; is it 15%, 20%, 30%, 50%, 75%, or how about 90% of all wages to pay for their welfare state?

I see no reason why the liberals in CA should not be willing to pay 90% of their income in state taxes.


On Jun 21 09:55 AM Mad Hedge Fund Trader wrote:

There is only one possible
> solution. A new governor holds a constitutional convention to reduce
> the vote to pass a budget from two thirds to 50%, or a statewide
> voter initiative accomplishes the same.

2009 Jun 22 03:24 PM

[Chancer]

I have never understood why liberals who want to pay more taxes do not just voluntarily pay more taxes. The government (Federal and state) will allow you to pay more, as much more as you like.

If half the country is liberal and wants more taxes, it seems like their voluntary payment of more taxes would both help the government and accomplish their desire for more tax revenue.

2009 Jun 22 04:18 PM