Economies: Schwarzenegger learns policy from Mugabe

When Zimbabwe ran out of paper to print bank notes on, Robert Mugabe hit on a variation of the concept of printing money: he printed IOUs.

His IOUs had a short date - the original idea was to replace them with real money when the crisis was over. That hasn't happened.

California is having different problems. It doesn't have hyperinflation and it hasn't run out of bank-note paper. But there's a reason for that - US states aren't allowed to issue banknotes.

But it does have a cashflow problem. In short, just as when Baby Bush came to power, as he leaves there are risks that the lights are about to go out in the sunshine state, the power to go down in Tinsel Town. There is no money in LaLa Land.

California's cashflow problem - after Schwarzenegger's increasingly desperate attempts to balance the budget - is now so bad that the Governor is suing the State's comptroller to force reduced hours working on more than 15,500 workers - including the Comptroller himself, the Attorney General and the State Treasurer. His plan is that they must take two days unpaid leave each month.

But that is not going to fix the parlous state of the budget. In fact, things are so bad, that the state can't pay its bills.

So it's printing money. They are calling the new money "IOUs." And it's insisting that counties accept them to fund, for example, welfare and other state aid. For the counties, the policy is expected to create massive problems: how they will meet the salaries due in the next few weeks is now uncertain - unless they can convince their employees to accept what amount to derivatives of the IOUs. That's becoming dangerously close to paying staff in tokens - and the tokens are only any use if shops will accept them. And if they do, how will those shops give change? Will it be legal for shops to pay change in, say, gift stamps?

The policy will require banks to accept IOUs instead of currency to credit their customers' accounts - how else will they pay mortgage payments? Will banks accept the IOUs as, in essence, security. Surely if they considered California's paper a good risk, they would be willing to buy California's bonds. They don't - which is part of the reason the scheme is needed anyway.

So let's follow the money: the state issues an IOU to a county. The county pays staff with its own IOU, saying it will redeem it when the state redeems the note it holds. First problem - the IOU has no currency functions except as bearer notes. So it can't be wired to employees' bank accounts. So everyone has to be paid in what is, in effect, New Cash.

New Cash is one single piece of paper: it's little more than a cheque in its physical form. So an employee drives into a petrol station on his way home. He can't use his credit card because there is, now, no money in his bank account to pay the bill. So he tries to pay with New Cash. he has 2,000 New Cash and his fuel costs 50. The petrol station has no mechanism to give him 1950 New Cash, but it doesn't change New Cash for real dollars. Why would it? If it did so, it can't take them to the bank for the same reason that the employee can't.

So it's money but it's not currency.

And that, for students of history, is where the land of the free has just aped the land of the oppressed.

Nice one, Arnold.

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Nigel Morris-Cotterill heads The Anti Money Laundering Network.