Compounding state law is a gerrymandered legislature, which effectively ensures the maintaining of status quo. Thus, the legislature is never beholden to anyone. Many state legislatures have this problem (see New York). As if these two issues were not enough, state government cannot raise tax without a vote of the people.

California has created a toxic stew of its own making. As far as I know, and I will admit freely if contrary evidence is presented, no other state or Ireland has created such a doomsday scenario. Given the self-inflicted nature of this wound that is killing the state, I have little sympathy for the state legislature or its citizen.

They made the mess. They can clean the mess up. As a non-resident, I should not and will not provide a bailout.

So establishing confidence in script requires backing. CA wouldn't have Au or Ag to do the job – if the State had the cash to buy the metals it wouldn't need script. CA could use State-owned land, offshore drilling rights, etc. to back the script. It worked for Schacht at the Reichsbank after hyperinflation.

This could be fun.

I agree that the Federal Government turning 'a blind eye' to this is the equivalent of added stimulus for states.

Very interesting.

Might not letting states issue IOUs, and treating them as currency, amount to much the same thing? If we had, say, a $200 billion dollar stimulus package for giving aid to the states, which the feds would pay for by printing money and then going to the bond markets, how different is that from letting states issue $200 billion of scrip?

The problem with bailing out California is that every other state in financial trouble will expect the same help. Allowing the California IOU's to be treated as currency will open the door to other states following suit as well.

In the end I expect California and the Federal Gov to make a deal where California limits the exchange of IOU's to something that does not compete directly with Federal Reserve dollars.

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Now here's a curve ball for ya: what would happen if a state or even a private bank were to issue currency redeemable in gold or silver? What would the implications be for the US Federal Reserve? This was the situation for many years in the US. Private banks often issued their own paper currency redeemable in gold and silver. There is nothing illegal about this, though one would assume a new law would be crafted and passed to prevent this from occuring. On that note here is what happened recently to a private currency issuer, http://en.wikipedia.org/wiki/Liberty_Dollar#Fed....

Interesting times…

I see excessive monetary stimulus as poison to judging risk, asset allocation and longer-term inflation. In general, I would prefer an Austrian approach of consolidation both fiscally and monetarily. But to the degree depression is the outcome, and the spigot needs to be loosened, I think it is the fiscal spigot first (initially through automatic stabilizers and then through other temporary means).

His argument is just the opposite.

Depression IS a potential outcome and I do think it has been forestalled/averted – in part because of stimulus. Ultimately, I see this is a philosophical question more than an economic one because it is very difficult to tease out the individual factors responsible for economic success or failure when so much has been done.

What do you think about the larger point that Evans-Pritchard was making that not only is fiscal stimulus leading us towards the Irish (California?) dilema but that the only road out is monetary stimulus coupled with multi-year cuts in national spending?