Wednesday, June 24, 2009

A cash shortfall not seen since The Great Depression!!!

State controller John Chiang warned today that if legislators and Gov. Arnold Schwarzenegger fail to come up with a budget-balancing package in the next week, he would begin paying California's bills with IOUs on July 2.

The controller's warning came as legislators began what many on both sides of the aisle acknowledged was a rhetorical song-and-dance over closing a $24 billion deficit that stretches over the fiscal year that ends Tuesday and the one that begins Wednesday.....

"Next Wednesday we start a massively unbalanced spending plan and a cash shortfall not seen since the Great Depression," Chiang said in a news release. "The state's $2.8 billion cash shortage in July grows to $6.5 billion in September, and after that we see a double-digit freefall."

Resorting to IOUs -- whose technical name is registered warrants -- would mark only the second time since the 1930s that California has paid its bills that way. The last time was 1992.

Chiang and other state officials had said that the state would first probably resort to delaying payments to vendors, local governments and others of the state's creditors while a budget balancing deal was worked out so the state could borrow money from Wall Street for its cash flow problems.

Both borrowing for cash flow and delaying payments are commonplace. In fact, Chiang delayed payments in February for 30 days while legislators and the governor wrestled with a budget deficit.

But, Chiang said said, the current cash shortfall was five times larger than the February hole.
Since Gov. Schwarzenegger said last month he would not authorize a form of short-term borrowing through what are called revenue anticipation warrants, Chiang said IOUs were the only option.

A federal court ruled in 1996 that state employees couldn't be paid with IOUs. Others who receive them will draw interest on them, but banks and other financial institutions can refuse to accept them. Chiang said the IOUs would have a maturity date of Oct. 1

Could you imagine paying your taxes this way??????


  1. Alstry, If the gov. keeps printing more and more play money you will be paying your taxes with paper just as worthless.What are you doing to prepare for the doomsday scenario that you see looming on the horizon? Do you know Scott personally or are you just bothered by his optimism?

  2. I don't know Scott personally...he is clearly a very intelligent person and a classical economist.

    He and I simply see the world differently looking at the same data.

    I was hoping, through socratic discourse, he could change my perspective....but so far his wisdom hasn't soaked in yet.

    Maybe with time.....

    Looking forward, I am not sure I see a doomsday scenario, save major international conflict, but more like a total reset.

    How that plays out is still a bit cloudy....that is what I am working on right now.