California was once touted as the 6th largest world economy. Actually, it probably still is. The problem is the budget doesn’t balance. And, unlike the US government who can issue debt and then buy it back when it doesn’t sell (look it up! That’s what they’re doing!), a state doesn’t have the luxury of a printing press in the basement.
That is, unless, they can create a transferrable IOU.
An IOU is a promise to pay and if the promise to pay is solid enough, and others believe in it, then you’re likely to have someone who will take it off your hands. In the case of a dollar (or a twenty or a hundred), that’s exactly what is happening. People have agreed up on a unit of measure and that’s how much stuff you get for the dollar.
If the dollar weakens, or in other words, people’s confidence dwindles, you get less stuff. In other words, prices have gone up and you have inflation.
So, if the California IOU is transferrable, which it surely will be, at least at some markets, then it really is money.
Voila! The State of California has created a printing press in its basement.
A few banks (Wells Fargo, Bank of America and Chase) have tentatively offered to exchange the IOUs for actual US currency, but only until July 10th. I think the limited time offer is because they don’t know how bad this is going to be.
And, at some point down the line, I’m sure that someone will exchange for the IOUs, at less than the face value.
So what does this all mean for our country? It means states are going to need their own bail-out or we’ll soon have dozens of new currencies in our country. And if the feds bail out the states, then local governments won’t be far behind.
It’s an uncertain time and for Americans who have ridden the train to prosperity and certainty of appreciation, it’ll also be a reality check.
My advice is the same as it was 5 years ago: Start a business. Create your own currency. Your business is the only certainty you’ll have in these coming days.
And, by the way, Happy 4th of July! It’s time to declare your own independence.