Saturday, July 11, 2009

Is Calfornia initiating a new secession from the union?

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.
http://www3.signonsandiego.com/stories/2009/jul/08/bill-would-allow-ious-be-used-pay-state/?california&zIndex=128426
The legislation is below:

AMENDED IN ASSEMBLY JULY 1, 2009
AMENDED IN ASSEMBLY JUNE 29, 2009
AMENDED IN ASSEMBLY MAY 14, 2009
california legislature—2009–10 regular session
ASSEMBLY BILL No. 1506
Introduced by Assembly Member Anderson
(Coauthors: Assembly Members Adams, Bill Berryhill, Tom
Berryhill, Duvall, Fletcher, Gaines, Garrick, Hagman, Harkey,
Jeffries, Knight, Logue, Miller, Nestande, Niello, Nielsen, Silva,
Smyth, Audra Strickland, Tran, and Villines)
February 27, 2009
An act to add Section 17203.6 to the Government Code, relating to
state funds, and declaring the urgency thereof, to take effect
immediately.
legislative counsel’s digest
AB 1506, as amended, Anderson. State funds: registered warrants.
Existing law prescribes procedures for the issuance of registered
warrants and provides that a registered warrant is acceptable and may
be used as security for the performance of any public or private trust
or obligation.
This bill would require a state agency to accept, from any person or
entity, a registered warrant or other similar evidence of indebtedness
issued by the Controller endorsed by that payee, at full face value, for
the payment of any obligations owed by that payee to that state agency.
This bill would declare that it is to take effect immediately as an
urgency statute.
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. 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 fulfil 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 emphasising "fiscal sustainability" and destroying aggregate demand in the process.

There are political benefits for Obama 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?

5 comments:

Matt Franko said...

Mike,
Arent the tax warrants priced in us dollars? If so, then it could be argued that Cali is not creating a new currency because the warrants are priced in dollars.

I think this is good news, and presents an opportunity to expand the publics understanding of also the federal tax system and fed monetary system.

Cant wait to see how the DDC spin this one! LOL. I can hear it: "California is printin' money! New York is printin' money, better buy gold!"
Resp,

Mike Norman said...

Matt,

Even so...I don't think the Constitution states that Congress (Federal Gov't) has the "sole" power to coin money. There are many other forms of money--bank credit (IOU's, essentially, as in demand deposits) constitute the vast proportion of what we call "money." That doesn't mean it can't be challenged on grounds of constitutionality. Whatever happens, it has the potential to open up a big can of worms.

googleheim said...

THERE IS A LIST OF LOCALITIES THAT HAVE ISSUED LOCAL CURRENCIES TO ENCOURAGE BUSINESS IN THAT LOCALE -

FOR EXAMPLE : A CITY IN WISCONSIN HAS ADOPTED "BERK-SHARES" SUCH THAT 10 "BERK-SHARES" = 8 OR 9 U$DOLLARS

THE RESULT IS THAT LOCAL BUYING IS ENCOURAGED

THERE ARE 10'S IF NOT 100'S OF EXAMPLES OF THIS POPPING UP ALL OVER THE PLACE

mortgageangel said...

"I don't think the Constitution states that Congress (Federal Gov't) has the "sole" power to coin money." Exactly. Charge monopoly money or marshmellows in exchange for goods so long as we have enough U.S. Federal Reserve funds to pay our Federal taxes.

This brings to mind all sorts of possiblities for California. A freshly balanced budget would be good for California's job market, correct? Buiness would return, new business would be planted and begin thriving again... All of this could lead in to one heaven of a housing shortage!

googleheim said...

According to Norman :

On the federal level, balancing the budget is akin to the conservation of energy > take out energy or money from one side, and you have to take it out from the other side of the ledger.

That is why it is dangerous to balance the budget right now on the national level - it will basically take water away from the green shoots.

however, on the state level which does not have the power to issue it's own currency - what they spend is to be fed by tax revenues and deficit spending is not a possibility.

Mixing up the national federal monetary system with that of the state level is something that is erroneous and mastered by the deficit terrorist creative destructionist standard of living lowering tax-payer-on-the-hook doomsaying smoke-screenists peoples called the REPUBLICAN'Ts.

surely, you must be joking Mr. Norman!