The State of California has spent far more money than its taxpayers can provide. A dysfunctional Legislature and a referendum system that locks in certain budget decisions made it impossible to cut the out-of-control spending that led to the problem, so California has started issuing IOU's to pay its vendors and benefit recipients.
The Wall Street Journal has posted an example of
California's IOUs.
Local banks are accepting these registered warrants, as they are officially known, and allowed depositors to draw on them immediately. In effect, California has begun issuing its own currency.
The green pieces of paper with Presidents on them have value because we all agree that they have value. Even when the U.S. was on the gold standard, there was only enough gold in Fort Knox to cover a small fraction of the bills in circulation. Paper money greatly increases the efficiency of our market system. But it also provides a tempation for free-spending governments unwilling to address their fiscal problems: inflation.
By issuing its own currency based on future payment in U.S. dollars, California has effectively increased the money supply, and inflated it way out of debt. Even the largest state in the Union will have only a marginal effect on the value of hte dollar, but it will have an effect. By adding California's registered warrants to the banking system, there are now more dollars chasing the same amount of goods.
Inflation has always been the last resort of desperate politicians who can't their bills. It wipes government debt away by shrinking the real cost of repaying those obligations. But it has a high cost. Inflation is a hidden tax on every dollar we've saved and everything we buy. Remember this alternative the next time a politicians claims that we can't afford to cut spending.
