Is the State of California bankrupt?

In a message dated 2/3/2010 09:48:18 Mountain Standard Time,
writes:

California IS BANKRUPT, and California must either break

into 4 or five new California’s, or SECEDE from the Union.

Vermont is headed for SECESSION from the worn-out

U S A , and California MUST do the same–and SECEDE!!

There is another solution. See a report I wrote on this last summer:

CALIFORNIA’S IOUs OFFER A WAY OUT OF ITS FISCAL CRISIS
By Marshall Auerback
Republicans and Democrats alike embraced legislation last week that would
make California IOUs acceptable payment for all taxes, fees and other
payments owed to the state – an action that effectively would mean that
California is entering the currency business. Some commentators, notably Lex of the
FT, have suggested that the proposed California “IOUs” “would create a
vicious circle for the cash-strapped state, forcing issuance of even more
IOUs.”
Quite the contrary: In fact, California’s innovative IOU proposal
represents a way of alleviating the state’s fiscal crisis, not exacerbating it.
While it might appear that the new law seems merely to allow California to
deficit spend just like the Federal Government – in actuality, the effect
is far more profound than that. Allowing the IOUs to become an acceptable
payment method for state taxes, instantly imparts value to them – in effect,
what you have is a state of the union creating a parallel currency right
under the noses of the Treasury, alleviating its fiscal straitjacket in the
process.
So why are so objections being raised? The confusion seems to arise
because of a mistaken understanding of the nature of modern money. Modern money
has no intrinsic value in the absence of state sanction. In the words of
economist Abba Lerner:
“The modern state can make anything it chooses generally acceptable as
money…It is true that a simple declaration that such and such is money will
not do, even if backed by the most convincing constitutional evidence of the
state’s absolute sovereignty. But if the state is willing to accept the
proposed money in payment of taxes and other obligations to itself the trick
is done.”
The modern state, then, imposes and enforces a tax liability on its
citizens and chooses that which is necessary to pay taxes. The unit of account
has no real value if not ultimately sanctioned by use from the State. By
extension, the state is never revenue constrained because it alone determines
what is money. The tax is what gives the currency its value insofar as it
functions to create the notional 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.
It is in this context that one has to look at the California IOU proposal.
It is important to note that the IOU would not replace the dollar, but
operate in parallel to extinguish state liabilities. And if the IOU becomes
functionally like a currency, then California’s bankruptcy problems are
over. By imparting a value to these IOUs (i.e. letting them be used to settle
state tax) this will ensure a demand for the state’s IOUs. Each individual
vendor, contractor, or even state employee will accept the state’s new
warrants up to the individual’s expected tax liability. Eventually the
warrants will also be accepted by retail establishments and others, including
banks, which also have liabilities to the state of California—meaning that the
state could (eventually) issue a number of warrants equal to the total of
all such obligations owed to the state, on an annual basis.
There are other historic examples of local currencies operating in
parallel with national ones. As economist L. Randall Wray has noted, in Argentina
as the financial crisis deepened after 2000, local governments began to
issue “Patacones” (bonds with interest) as local currencies, paying workers
and suppliers, and accepting them in tax payment. Utility companies began to
accept them—knowing they could pay part of their taxes with them–and
acceptance spread even to international corporations such as McDonald’s.
(_https://wallstreetpit.com/8333-berkshares-buckaroos-and-bear-dollars-what-makes-a-
local-currency-tick_
(https://wallstreetpit.com/8333-berkshares-buckaroos-and-bear-dollars-what-makes-a-local-currency-tick) )
It is true that this legislation represents a profound break from all
federal laws. But this is another instance where Obama’s obliviousness to the
ramifications of the states’ respective fiscal crises has come back to haunt
him. He and his advisors keep thinking that if they provide “liquidity”
to banks, the banks will go out and lend. They don’t seem to understand
that credit is not a “flow” but a two-way contract between lender and
borrower: Incomes have to improve first before credit conditions can improve.
Rising incomes create improved credit worthiness and ultimately improving
asset values, thereby enhancing lending activity.
Of course, if the Federal government truly finds California’s proposals
far too radical, then there is a simpler solution at hand: a payroll tax
holiday and revenue sharing with the states will go a long way toward
alleviating the states’ respective fiscal crises and almost instantaneously improve
private sector incomes and aggregate demand.