Schwarznegger to Obama: Watch and Learn

By Marshall Auerback

According to the San Diego Union-Tribune, Republicans and Democrats alike embraced legislation last Friday that would make California IOUs legal tender for all taxes, fees and other payments owed to the state.

Effectively, California is using its IOUs to create a currency. If this bill passes it would allow California to deficit spend just like the Federal Government and with the IOU’s acceptable as payment of state taxes, it instantly imparts value to them (see here and here). In effect, what you have is a state of the union creating a sovereign currency right under the noses of Treasury, Fed. They are stumbling their way into it, and as they do so, some of the true nature of contemporary money is being revealed. It will be viewed as a stop gap measure at first, and then could very well become entrenched as states realize they have a way to escape balanced budget requirements.

Contrary to most conventional economic thought, whereby people think we pay taxes to create revenue, in fact, it works the other way around under a fiat currency system. The government doesn’t need money to spend, but in fact uses tax to manipulate aggregate demand, not raise funds to “pay” for government. The tax is what gives the currency its value insofar as taxes function to create the demand for federal expenditures of fiat money, not to raise revenue per se. Value has been given to the money by requiring it to be used to fulfill a tax obligation, but the money is already in existence, not “created” by the revenue.

Most significantly, the Federal government retains this monopoly under our existing monetary arrangements. If California is successful here in allowing its IOUs to pay tax, it has profound constitutional ramifications. It certainly means considerably less muni bond issuance in the first instance, if the proposal passes constitutional muster.

It will be interesting to see what the exchange rate is between California IOU and US currency – the IOUs do offer a yield, so should be less than par by design. I wonder if NY is next.

This is like some sort of return to the 13 colonies with all kinds of ersatz currency floating about. It’s hard to believe the Rubinite wing of the Democrats will just let it be, given the threat it represents to Wall Street’s prevailing economic interests, but it is an understandable response to a federal government which continues to champion the interests of the rentier class above the vast majority of Americans by emphasizing “fiscal sustainability” and destroying aggregate demand in the process.

There are political benefits for Obama, as Mike Norman has noted, to rid himself of the shackles of conventional (and wrongheaded) economic thinking: If the Federal government allows this proposal of the state of California to go unchallenged, it would relieve the President of a major political quandary, which is, does he help California and then open himself to aid requests from other states? (Which his advisor, David Axelrod doesn’t want), or, does he let California go and lose 56 electoral votes in the next election?

By allowing them to “solve” their own problem in the manner proposed by the legislation he avoids the quandary. And given that, from a money paradigm at least, he and his team probably don’t know how destabilizing (to the current system) this is, they just might let them do it until the import is fully understood.
It is true that this legislation represents a profound break from all federal laws. It is almost bound to incur some sort of constitutional challenge, representing as it does, a profound threat to the Federal government’s currency monopoly powers. But this is another instance where Obama’s inattentiveness to the ramifications of the states’ respective fiscal crises has come back to haunt him. This situation would not have arisen had Obama embraced a simple revenue sharing plan with the states (so that the states’ respective fiscal policies would be working in harmony with his proposals, rather than mitigating the impact of the Federal fiscal stimulus), as recommended by any number of prominent economists, such as James K. Galbraith of the University of Texas.

It will be interesting to see how this plays out. As California goes, will the nation follow? Will we ultimately be confronted with the spectacle of “President Schwarzenegger” trying to legalize the drug output of the Emerald Triangle so he can tax it, thereby enabling us to shut the borders on the rest of this mess? Arnold always wanted to be President, but Constitution would need to be changed. Maybe this is his path to President of the 8th largest nation?

14 responses to “Schwarznegger to Obama: Watch and Learn

  1. Jct: There’s nothing wrong with small denomination California State IOUs if anyone can pay their taxes with them. When Argentina’s government workers were faced with cuts, their unions talked 6 state governments into paying them with small-denomination state bonds which could be used to pay for state services and taxes by everyone. When the local currency is pegged to the Time Standard of Money (how many dollars per unskilled hour child labor) Hours earned locally can be intertraded with other timebanks globally! In 1999, I paid for 39/40 nights in Europe with an IOU for a night back in Canada worth 5 Hours. U.N. Millennium Declaration UNILETS Resolution C6 to governments is for a time-based currency to restructure the global financial architecture. See Too bad California IOUs won’t be accepted in payment for state taxes and services like state bonds were in Argentina. Too bad California IOUs will be denominated too big to use as local currency. Too bad Argentina people were smart enough to avoid the tent-cities catastrophe and California people are too stupid to follow their example.If they make IOUs legal tender, I take it all back.

  2. California's IOU's are nothing more than bills of credit by another name. The US Constitution clearly prohibits States from issuing bills of credit, IOU's that are used as money. The US Contitution also prohibits States from making anythings legal tender, including federal reserves notes, excempt gold and silver.

  3. I agree with TCallen, but someone I had discussed this issue with keeps saying that they are merely debts and not bills of credit.

  4. Yeah? The Constitution also forbids the President from engaging in war without a declaration of war from Congress, and I think there's also something in there about "cruel and unusual punishment" being prohibited. They aren't playing by that rulebook anymore, so they can't pull it out and make us play by it.

  5. Interesting perspective! I'm just concerned that CA is now another government entity that is going to spend more than it makes every year in the future if this passes. Its a little like the house of cards the housing industry faced. Consumers bought more house than they could afford and when ARM rates went up and values down, the whole thing collapsed. What happens when nobody wants CA IOUs at face value? Its gonna hit the fan then and everyone is going to have IT on them…

  6. Jct: Count on the constitutional experts to advise people to continue starving than to save themselves unconstitutionally.

  7. Have a look at any reasonably well-written history of Germany from 1933 to 1937.

  8. What constitution? Long live Arnold, first Emperor of California!

  9. The U.S. is well on its way to becoming what John Robb called a hollow state. If Swarzennegger ignores Rubin and the Supremes, I doubt if Obama will send in troops to enforce the diktat.

  10. Maybe the Chinese will endorse the CAIOU (sort of like goodbye in Italian) as the new world reserve currency. Let's see if they start an arbitrage on CAIOU's. The whole thing is no more ridiculous than many other things at this historic moment of governmental and public insanity. Maybe this debate will enable all of the Michael fans to focus on something else for a while!!!

  11. So what about the LIBERTY DOLLARS? They had true value.

  12. What is stopping Arnold from a presidential bid anyway? Everyone knows Obama is not a US citizen. If you don't then try this website there are hundreds of others… The DNC even removed the phony "Certificate of Live Birth" and the website posting it called "Fightthe smears".com Do your own research!

  13. I recently came accross your blog and have been reading along. I thought I would leave my first comment. I dont know what to say except that I have enjoyed reading. Nice blog. I will keep visiting this blog very often.Patricia