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California Budget Crisis and Economic Downturn

Recent news articles on the economy and future prospects for California are more than worrying. I think it will be worse.

The article in the IJ on Tuesday by Adam Beam (June 30th2020) argues from figures given in the budget analysis that a $54.3 bn deficit was “closed.” This was achieved by tax increase and delaying payments. This only means the budget was not balanced as delayed payments are still owed and expectations of revenue from taxes in a recession is always iffy, but in a depression can be expected to fall substantially.

There are also cuts in state jobs and these along with layoffs in the private sector will push state income even lower. This short fall and loss of jobs as well as income will increase the burden on the unemployment insurance fund. It is likely to be depleted again and hoping the President will do something positive is foolish.

The bond market does not look much better and it is unlikely to be bolstered by the Fed in the near future. The Financial Times, on Tuesday, carried an article reporting that Wall Street banks had made a “bonanza” in debt sales to companies that were trying to boost their cash in advance of a major crash in the markets.

I do think California needs to go it on our own. We need a buffer for unemployment and we need to stop the job loss. A CETA training (Comprehensive Employment and Training Act) effort and grants to small business would go far.

Where to get the money? Registered Warrants. We have a $16bn shortfall (the Governor’s proposed budget cuts $20bm with some deferment and “loans”) now and it will be worse in 2021-22 we should issue $20bn now.

It seems it is time for the State of California to issue Registered Warrants (IOUS) as they did in 1992 and 2009. This would allow the State to avoid layoffs as well as produce our own version of the New Deal and get around the Republicans blocking extensions of unemployment benefits.

These get around Article One Section 10 of the US Constitution prohibiting states from "coining money" letters "marque and reprisal" or bills of credit. According to Schltz and Caine's Financial Development of the United States, published in 1939, in the 19th century, especially before 1856, many states did issue their own money before the Constitution was ratified, and routinely issued letters of credit and a variety of bonds. Limits to bonds were put by the credit agencies that sold them for the states (often banks) this rested on credit ratings. The attraction of the Registered Warrants is that while the state can set the interest, they are only paid at maturity and they can be sold, discounted and loaned by second and third parties. Thus they act like money.

In 1992, the State of California pressured banks and other financial institutions to accept the Registered Warrants at face value and not discount them to holders. That helped hold their value and gave them a high degree of negotiability like legal tender. So unlike bonds they (in theory) would not fluctuate in value.

Shortly after issuing the Registered Warrants, the US Securities and Exchange Commission ruled that they were securities. In 2009, the State of California again issued RGs and 4 of the largest banks refused to accept them and they began to circulate at between 80 and 90% discounts. The State stopped issuing the RGs in Sept after $2.6 billion had been let.

This was a huge boon for California as it produced a tremendous amount of liquidity without going through the banks or bond agencies and market. It was as if the State had issued money, and like money, not all of the RGs were ever recovered. Many became lost or collectors' items. As of November of 2010, when the state stopped accepting redemptions, some $50,000,000 worth were still outstanding.


1992 legal status:

In the middle of 2009, the State of California Government ran out of money during the last financial crisis (timeline). As an emergency…


California IOUs — a silver lining?

In the middle of 2009, the State of California Government ran out of money during the last financial crisis (timeline). As an emergency…

In the middle of 2009, the State of California Government ran out of money during the last financial crisis (timeline). As an emergency…


Economy, California budget, Registered Warrants, Tax