California is Nearly Bankrupt — And They’re Printing Money!

How does an effectively bankrupt state pay the bills? By printing its own currency! California is issuing IOUs instead of paying bills in cash. In other words, instead of borrowing from people who want to lend money, and using that money to pay its bills, the state is borrowing from people who it already owes money to, and promising to pay the bills a little later (with a little interest).

The IOUs can be redeemed at face value, plus 3.75% interest, by Oct. 2 or earlier if a budget deal is signed and the state has enough cash to cover them. Some banks and at least 25 credit unions have agreed to accept the IOUs. Bank of America, Chase, Citi and Wells Fargo have said they would accept the paper through July 10.

In other words, you can treat the IOUs more or less like an actual dollar payment — the banks will accept them, and California will eventually pay them back (or default on the rest of its debt).

This is expensive and inconvenient to the average taxpayer. Instead of borrowing a few billion dollars at a time from people who want to lend money, the state is borrowing a few hundred dollars at a time from people who want cash. The IOU trick gives them some breathing room, though, and presents the possibility that California can coast into an economic recovery without gong bankrupt first.

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