California Prints Its Own Currency - A Satire?

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Following the lead of the Federal Government, California this week began issuing its own currency, which it plans to use to stave off bankruptcy. "As our state staggers under massive debt, uncontrolled spending, and dysfunctional government, we look to the example of our national leaders," said Governor Arnold Schwarzenegger. "When faced with these exact same challenges, Congress started printing money. If it's good enough for Washington, it's good enough for Sacramento!"

Called "Individual Registered Warrants (IRWs)," State Controller John Chiang indicated that California would send out $3.4 billion of this negotiable scrip in July alone. Small business owners, government supported private agencies, taxpayers owed income tax refunds, and many state contractors will be forced to accept the scrip, which is set to mature in October - if the state resolves its budget woes.

Anticipating a flood of cash-strapped recipients looking to convert their IRWs into something that can be used to buy food and pay rent, Payday Loan companies in California began advertising instant redemption services. Liquidity will come at a stiff price, with exchange rates discounted up to 40% off face value. "Given the high probability of default and the inevitable public vilification of anyone who makes a profit buying IRWs, we feel this discount rate is appropriate," explained a Payday Loan officer who would only give his name as ‘Vito.'

Other bankrupt state governments are looking to follow suit. In New York, whose legislators were last seen conducting a pie fight in the State House parking lot, Governor David Paterson indicated that plans to print Empire State Entitlement Certificates (ESECs) were in an advanced stage. "ESECs will be as good as gold," claimed the Governor, who recently returned from a fact finding mission to Zimbabwe to study that country's currency system.

Goldman Sachs has set up both a trading desk and electronic currency exchange to handle the expected influx of new state currencies. Lawyers for financier Bernard Madoff filed motions to delay his prison term so Mr. Madoff could respond to urgent requests to help design the new exchange's accounting system. A number of derivative instruments insuring the financial returns from a weighted basket of state currencies and lottery tickets have already begun trading as hedge fund managers sought new ways to profit from the next financial meltdown.

Confounding bearish sentiment, IRW futures surged on the news that House Speaker Nancy Pelosi and Senator Barbara Boxer were preparing to introduce legislation declaring IRWs legal tender for the purchase of any product manufactured by a company that is at least 10% owned by the US government. A spokesman for GM, speaking off the record, said the company is inclined to support this legislation provided IRWs could be used to satisfy outstanding pension obligations. When asked whether IRWs could also be used to purchase stock in banks that have been more than 10% nationalized, Speaker Pelosi paused, whispered something to an aide, and thanked the reporter for his suggestion.

Reaction from the White House to the burgeoning state currency movement was muted. "Extraordinary times call for extraordinary measures," press secretary Robert Gibbs offered when asked whether currency competition from the states would be welcomed. "While the issue requires further study, we are pleased to see forward- looking governors doing what they can to save or create jobs."

Free market advocates who have long opposed currency monopolization by the Federal Government were left in a quandary. "We would prefer to see private currencies backed by gold, not by the taxing power of bankrupt state governments," said Ed Crane, president of the libertarian CATO Institute. Nobel Prize winning economists for the New York Times pooh-poohed the antiquated notion that gold would be an appropriate medium to back currency. "Inflation fears are a form of mental illness," stated Paul Krugman in a column that lashed out at those reluctant to accept state scrip. "This is a time tested solution that played a major role in the Great Depression. The only problem with state currencies is that we don't have enough of them."

International reaction was mixed. EU Analysts were amused to see the US currency system begin to fragment just as European national currencies give way to the Euro. China's Vice-Premier Li Keqiang did not return calls seeking comment, though he was spotted stocking up on toilet paper at a recently opened Wal-Mart outside of Beijing.

Bill Frezza is a fellow at the Competitive Enterprise Institute, and a Boston-based venture capitalist. You can find all of his columns, TV, and radio interviews here.  If you would like to have his weekly columns delivered to you by e-mail, click here or follow him on Twitter @BillFrezza.

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