Many local governments and agencies will collapse, perhaps even some states (e.g., Michigan?, California?).

Speaking of California, a business associate just received a tax refund from the state as an I.O.U.

—Guest commenting on "Some guesses about the economy in 2009" by Fabius Maximus

Before I incite a riot at the California Capitol, let me say right off the bat that I have no idea whether this is true. Comments by "Guest" are notoriously unreliable.

It could be that Guest's business associate received a letter such as—

Dear Mr. Punkinhead:

This is to notify you that your Form 2BPADE-N-BLUD(O+) for the Third Quarter of 2008 has been verified and you will receive a rebate of $0.35 no later than January 1, 2012.

Sincerely,

John Chiang
Controller

P.S.: If you would like to donate your refund to the State of California, please return the enclosed card (postage required). Thank you.

This is not a true IOU but a promise to pay, which we should all send to our creditors from time to time. No, a true IOU comes in the form of scrip, which is more like a personal check without a bank account—or issuing your own currency.

I learned about scrip from Grandma Fuse, who taught school during the Great Depression. The state was unable to pay its teachers and issued scrip instead. Fortunately some of the local merchants would accept it, but others not. Many merchants couldn't afford to accept it since they were essentially making a loan to the state.

In light of that memory I've been wondering when talk of scrip might begin. I need wonder no longer—California is already working on the design.

Sue Doyle reports—

For the first time in 17 years, California finance officials warn they could pay taxpayer income tax refunds in April with IOUs. And don't get any ideas: Residents who owe tax cannot pay the state with IOUs.
....

In a letter Tuesday, state Controller John Chiang notified agencies that could be affected by the IOU payments. It could start in February with paychecks for the state's 1,700 elected officials and their staffs.

Only once since the Great Depression has the state turned to such extremes. A budget standoff in July 1992 slammed the state into a cash shortage, and several thousand state employees were paid in IOUs until a plan was approved.
....

If IOUs come into the plan, it's unknown now how they will work at financial institutions or whether residents can cash them like checks.

Wells Fargo Bank has made no decisions yet about how to handle state IOUs, said spokeswoman Mary Trigg.

We're monitoring the situation closely," said Trigg. "We're aware of it."

If IOUs are issued, they will earn an interest rate that could go up to 5 percent. But no rates have been determined at this time, Roper said.

Just what these IOUs could look like remain to be seen. Roper said the agency is creating a design, but nothing has been printed because it's unclear whether the state will actually issue them.

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Scrip

Tags: news and politics recession economic depression state finance budget deficit