California governor, Arnold Schwarzenegger wants everyone to treat his state's IOU's like money – from the citizens and businesses receiving these scraps of paper in lieu of cash, to the financial institutions who are supposed to swap them for legal tender. The problem is that the state government, itself will not accept its own IOU's as payment for debts – at least not until their “maturity date” in October.
In the meantime, small-business owners like Nancy Baird received a $27,000 IOU from the state government for supplying garments to a state-run youth camp, but after two banks refused to redeem her IOU, was forced to pay cash out of her own pocket for the sales tax on the transaction. She and numerous other small-business operators have filed a class-action suit against the state alleging the state has violated both the Fifth and Fourteenth Amendments. The plaintiffs seek full payment for what they are owed by the state – with interest.
Even if the state survives this challenge, the obvious question to ask is what will change for the state between now – when it claims it can't cover all its own IOU's – and October? The answer is: things will be a lot worse. Virtually every state in the U.S. is being to forced to make negative revisions to their budgets every couple of months to adjust to the most rapid plunge in state revenues in history.
Thus, by the time October rolls around, the state's financial picture will have deteriorated significantly at the same time it is supposed to produce several billion dollars to redeem all its IOU's. The only “plan” the state has is to try to borrow more money between now and then. In other words, the California government's state finances are now a Ponzi-scheme – where they have to borrow ever-larger amounts of money to pay off those at the front of the queue to collect their debts.
This is nothing new. It was the U.S. federal government which started Ponzi-scheme financing as a permanent means of financing a nation. To make its balance sheet look much, much better, the federal government does not carry its future obligations on its own books – like every business in the United States is required to do by law.
Instead, the U.S. government calls these future obligations “unfunded liabilities” - and simply pretends they do not exist. Then when Americans actually make claims against these unfunded liabilities (now somewhere in excess of $70 trillion), these expenses are a “surprise” to the two-party dictatorship in power. Worse than that, the federal government has plundered trillions of dollars from its own Social Security “trust fund”. Clearly, “federal government trust fund” is an oxymoron.
As a result, the United States is hopelessly insolvent. Merely transferring its own obligations officially onto its books would instantly bankrupt the U.S. - as it is totally incapable of paying the interest on those obligations. The only option other than immediate default would be to instantly descend into hyperinflation, since it would be totally cut off all international credit (no one will lend to someone who can't even pay interest on its debt).
The truth, of course, is that the U.S. is already incapable of paying the interest on its humongous debts – even through borrowing. As I wrote yesterday (see “Federal Reserve SECRETLY buying Treasuries at auctions”), the U.S. government is trying to hide the fact that it is already forced to print money just to pay interest on its debts by “buying” its own Treasuries indirectly, through intermediaries.
What transforms this from a “national crisis” to simply being “totally screwed” is that state and local governments saw how “well” the federal government was doing with its Ponzi-scheme accounting and decided to copy it. They too took their future obligations for pension and health care benefits off their books, et voila, all these governments were instantly much richer.
We all know what politicians do when they feel rich: they spend lots of money to buy votes. In this case, the “easiest” way for U.S. state and local governments to buy votes was to fatten up health and pension benefits for its own workers – since it didn't need to put any of those lavish promises onto its books, thanks to the magic of U.S. Ponzi-scheme accounting. Now, claims are starting to be made on those benefits at exactly the same time that every level of government in the United States is facing their worst financial crisis in history.
In another news item released a couple of days later, South Carolina's municipal leaders descended onto the state government pleading for state funds to bail them all out of their “unfunded liabilities” nightmares. They claim their plight is so desperate that they are nearly at the point of having to choose between paying police officers and firefighters to perform their duties or pay the benefits the promised to retired police and firefighters.
This brings us back to California's own fiscal meltdown. Even with issuing his bogus IOU's and borrowing every penny he could, Schwarzenegger is attempting to squeeze billions of dollars out of local governments to essentially force them to pay for his fiscal irresponsibility. Is there any reason to believe that California's local governments are at least in as desperate a crisis as South Carolina's local governments? How would those South Carolina municipal leaders react if they arrived at the state capital seeking hand-outs, and instead were told that billions would be squeezed out of their revenues to try to close the state's budget-gap?
Given the severe implosion of California's economy, it is only logical to assume their local funding crises are even worse than those in South Carolina. Thus, as we pass the mid-point of summer, and autumn approaches, we find that California has still done nothing to solve its own fiscal crisis. Instead, it has only delayed financial Armageddon for a few months, while simultaneously ensuring that most of California's local governments face financial crises at least as bad as those of the state government.