California Begins Issuing Monopoly Money

I have mentioned before the contrast between the restructuring and hard choices being made by the private sector and the response of state and federal governments to the economic downturn. When the term “private sector” is used it’s important to understand that the descriptive includes individuals, families, small employers and larger corporations (Fortune 1000 companies, with the obvious exception of the TARP recipients) that employ thousands.

The private sector has, during the last eighteen months, severely reduced spending, increased savings and paid off debt. This is the natural reaction to a view of an uncertain future. American spending habits are as well known as they are immense. Given an optimistic outlook Americans will not only spend substantial amounts of their current income, they will spend equally large proportions of future income (by borrowing). However, in the presence of real uncertainty, they are quick to change their habits and behave in a manner that is characterized by increased saving, reduced spending and rapid debt reduction (all of which are happening now).

Contrast this behavior with the actions of state and federal governments of late. The U S budget has exploded in size, government debt has skyrocketed and government savings….well, you get the idea. It is the epitome of irrationality to believe that the private sector will somehow find itself in better shape while its government conducts its fiscal and monetary affairs in such a radically different manner. Today brings news that the state of California, having run out of cash and unable to reach a legislative solution, is printing IOU’s to pay bills. These IOU’s are a form of currency (does printing currency sound familiar?) and it will be interesting to see how the marketplace assesses the value of these pieces of paper. As Joe Weisenthal notes:

Please, please, please let there be an after-market in these IOUs. We’d love to see how they’re valued and how businesses will conduct exchange using them.

It appears that California is becoming more like the federal government and less like the private sector in attempting to resolve its budget woes. Ironically, that might be a good thing if the ultimate outcome is that voters see that the IOU’s are worth nothing without a real plan for fiscal sanity in future budgets. This may be a Prop 13 moment in California as the Golden State demonstrates for the rest of the nation that fiat currencies have no value and that the federal government is no different. (There are more than a few people that have recognized that the federal government is not unable but, rather, adamantly unwilling to reform itself and therefore “the Beast must be starved”). Maybe we are again at a moment when Clifornia is the future.

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