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California Begins To Issue IOU's!


Parsad
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There are many ramifications if this drags out into next year.  The BofA has also agreed to accept the IOUs for now, from all their clients.  I wonder how they will report this on their books.

 

The hit on Municipal social services that are funded by the state will be hit hard.  Then there are the Grants for university education.  The small businesses that deal with the State will fall very quickly if the banks start refusing to accept the IOUs.

 

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What happens when people refuse to accept the IOU's?  Will the government then step in?  They are already beginning to cut services...I would imagine property taxes will go up if Prop 13 is repealed?  What if they can't repeal Prop 13, as they need a two-thirds majority?  Do commercial taxes go up...but businesses will relocate head offices.  So many possibilities.  This is not a situation I have any comfort with!  Cheers!

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This situation kind of reminds me of General Motors at about exactly the same time last year. The data is there for everyone to see, but very few believe what is likely to happen. Complete denial. It is pretty obvious that the only turnaround possibility is a strong uptick in the economy and all the information available says that it will take a long time for that to occur.

 

That guy is pretty clear about what is next and he has been right before.

 

http://money.cnn.com/2009/06/25/pf/california_bonds_trouble.fortune/index.htm

 

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Projecting ahead...there has to be another flight to quality coming in the bond market if states and municipalities start defaulting.  Cali is the 8th largest economy by GDP.

 

-O

This situation kind of reminds me of General Motors at about exactly the same time last year. The data is there for everyone to see, but very few believe what is likely to happen. Complete denial. It is pretty obvious that the only turnaround possibility is a strong uptick in the economy and all the information available says that it will take a long time for that to occur.

 

That guy is pretty clear about what is next and he has been right before.

 

http://money.cnn.com/2009/06/25/pf/california_bonds_trouble.fortune/index.htm

 

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"there has to be another flight to quality coming in the bond market if states and municipalities start defaulting. "

 

I am right there with you. Although, I am constantly questioning where will this money go?

 

In 2008, treasuries were the place to be. Across the entire spectrum. The issue that I see this time is that people will start to realize that another U.S. crisis will simply mean again more debt being issued by the U.S. and again a Fed growing its balance sheet. The psychology will start to shift at some point that what the Fed and the Treasury are doing is not temporary, but is really levering up and hurting the country longer term.

 

If a crisis erupts this year, some will shift their assets into long term treasuries for sure (it has always worked...), but you will have a vast number of treasuries being issued at the same time to still deal with last year crisis. It was not the case in 2008.

 

Then if you look at short term treasuries, there is really no supply to deal with a surge in demand. They are still priced for crisis with the 3 month at 0.15%, 6 month at 0.29% and 12 month at 0.46%. A surge in demand will mean negative yields.

 

Contrarily to last year crisis, I am starting to believe that gold will not go down, but rally hard if another crisis develops. The U.S. dollar may not even be a factor since there are problems almost everywhere. Inflation or deflation may not even matter either. The issue becomes devaluation on a global scale: more layers of government debt to fund stimulus plans and to "help" constituencies and a race to devalue each others currencies to remain competitive.

 

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Guest Broxburnboy

The State of California is simply issuing its own money because its US dollar credit  is impaired and because US dollar credit is still largely frozen. It is claimed that  this is a temporary measure, although government's record of rolling back new sources of revenue is not good. BTW when the income tax in the US was introduced, it was a temporary measure (to fund the Union's side of the American Civil War... war debts again).

If other credit impaired states follow suit, it weakens the US dollar internationally as well as at home, as a portion of state GDP must be reckoned to support the state currency instead of the national one.

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Look at the major banks in the area, & sell out-of-money puts with a view to acquiring the underlying.

 

An ivestor might rationally accept the states IOU at a discount because they're expecting a fed bailout, but nobody is going to accept a munis IOU. When the first muni 'hits the wall', financing will close on all them - & the balloon goes up.

 

Either the fed covers the munis directly (unlikely, as it would have to be for every muni in the country), or they cover the muni by directing $ through the state (more likely). Given the states frozen budgetary decision mechanisms, most would count on perhaps 2-3 months for the $ to actually reach the muni.

 

Property values, especially heavy muni services uses (commercial) could expect a temporary hit, which will hit the banks. Geographic concentration, & media hysteria, will make those hits harder. Temporary additional TARP funds to cover the banks liquidity drains, will add fuel - & all bank stocks will trade lower.

 

But ..... it's temporary, as this whole event is only because the state can't make decisions - & that is a relatively easy fix. The major banks in the area end up stronger than they were going in.

 

Not great if you live in this state, but an opportunity if you can tolerate the volatility.

 

SD

 

   

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In the Depression, when some municipalities were shut out of the bond market, due to high deficits, banks provided finances but also provided conditions on the financing like reducing spending.  In those days, there were no block grants of federal money to the states.  The RFC was established in late 1931, to provide federal loans to industries (railroads), banks and local governments.  The RFC was dissolved in 1934 as direct federal aid was provided to the states and municipalities. 

 

When a municipality defaulted, like Arkansas or Detriot, the entity would exchange existing obligations for lower yielding bond with sinking fund features based upon taxes collected along with a plan to reduce spending.  The municipality was able to dictate the terms much as in the auto bailout because there is no recourse when you are dealing with the government.

 

Packer 

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