He began with a reference to a line in the Jim Carrey film, Dumb & Dumber: "Those are just as good as money. Those are IOU’s":
The movie’s villain finally gets his million dollar briefcaseI was unaware, but, apparently, California has now not only attempted to pay its creditors with IOUs, but it has also attempted to collect "income" taxes based on those IOUs even while certain parties claim it refuses to accept the return of the IOUs themselves as a form of tax payment. [The Board of Equalization website itself, however, claims it will accept the IOUs--or "Registered Warrants"--as payment. --Of course, if you happen to owe less in taxes than the value of the warrants, you will be stuck with a scrap of paper--or not (because the state says, if you attempt to pay with the Warrant that has a face value greater than your taxes, it may hold on to the overage for up to 120 days)-- . . . a scrap of paper that promises to pay you far less in interest than a free market ought to give you for the risk you are taking by lending to a low-grade debtor. Indeed, according to the BoE itself, their current rate is all of 0.0%!]. . . opening it only to find a stack of cocktail napkins with the letters “IOU” scribbled next to hundred-thousand dollar amounts.
It was a classic comedic moment back in 1994. . . but unfortunately for many of California’s creditors, it’s become a harsh reality today.
Whether California is willing to receive tax payments via its own warrants or not, the fact remains that, based on the cost of insurance against potential default on their debts (instruments called credit default swaps, or CDS's) more and more entities in emerging economies are being rated higher than U.S. entities. Thus, for example, as Laura Cochrane of Bloomberg reported, "Eleven years after Russia defaulted, investors want less to insure its debt than California’s.
Writes Packer:
[A]t the moment, Russia, home of large swaths of natural resources and a crony government can get cheaper insurance for its debts than California, home of. . . large swaths of natural resources and a crony government.
Of course, one of those governments has at least tried to make some strides towards capitalism, and the other has taken the other route. It doesn’t take the pricing changes in the market to tell you which.
As though it couldn’t get any worse, California then decided it wouldn’t honor the IOUs it created and forced on its creditors. This, of course, makes it an even worse currency investment than the ruble. And the Zimbabwe dollar.
Let me be perfectly clear here about a nearly-universal truth of economics. . . when an entity that’s not legally entitled to create their own money supply decides to create their own money supply, RUN, not walk, to the nearest exit. Because all that happens onward is an acceleration of government theft.
After all, what would happen to you if you tried to pay your bills with IOUs? Go ahead, try and buy a Ferrari with a piece of paper with some numbers on it and say, “That's every bit as good as real money, sir. That’s an IOU.” You’ll get laughed off the car lot.
Yes, people are laughing at the plight of California, but the joke’s not fully on them. Using the power of the state, the joke’s on anyone who had the simple misfortune of doing business with them.
The lesson here is simple: don’t believe or do business with any entity that doesn’t follow its own rules. After all, California – along with 49 other states – is bound by the words of the 10th Amendment: “No state shall make anything but gold & silver coin a tender in payment of debts.”
The solution is blood simple, but the path to it will be difficult for many involved.
