Instead of receiving their state tax refunds in dollars, California residents will receive IOUs. Student aid and payments to disabled and needy will also come in the form of IOUs. California is negotiating with banks to get them to accept the IOUs as deposits.
California is often identified as the world's eighth largest economy, and it is broke.
A person might think that California's plight would introduce some realism into Washington, DC, but it has not. President Obama is taking steps to intensify the war in Afghanistan and, perhaps, to expand it to Pakistan.
How long before Washington will be printing money?
On January 28 Obama announced his $825 billion bailout plan. This comes on top of President Bush's $700 billion bailout of just a few months ago.
As large as the bailouts are--a total of $1.5 trillion in four months--the amount is small in relation to the reported size of troubled assets that are in the tens of trillions of dollars. How do we know that by June there won't be another bailout, say $950 billion?
Where will the money come from?
Obama's bailout plan, added to the FY 2009 budget deficit he has inherited from Bush, opens a gaping expenditure hole of about $3 trillion.
Who is going to purchase $3 trillion of US Treasury bonds?
Not the US consumer. The consumer is out of work and out of money. Private sector credit market debt is 174% of GDP. The personal savings rate is 2 percent. Ten percent of households are in foreclosure or arrears. Household debt-service ratio is at an all-time high. Household net worth has declined at a record rate. Housing inventories are at record highs.
Not America's foreign creditors. At best, the Chinese, Japanese, and Saudis can recycle their trade surpluses with the US into Treasury bonds, but the combined surplus does not approach the size of the US budget deficit.
If not, there's only the printing press.
The printing press would turn a deflationary depression into an inflationary depression.
Unemployment combined with rising prices would be a killer.