California Goes QE (Quantitative Easing)

It’s official, the SEC has declared California IOUs to be “Securities”. In effect, California has created a new currency. You can use IOUs to pay for goods and services, as well as to pay for your fees and taxes owed to the State of California.

http://www.sacbee.com/budget/story/2014742.html

We’re hosed. Now these guys never have to pass a budget. They can just keep printing “money” and spending like a drunken sailor. Think about it. If the State is short a few Billion, all they have to do is crank up the IOU Printing Press and poof, no more shortfall. Holy cow…

Wait until Spain, Italy and Ireland figure out this trick to get around the restrictions on the Euro!

The Downside to CA QE
As California prints more IOUs, its Credit Rating will continue to fall. Fitch already has California rated at the last level above Junk. So it won’t take the printing of much more money to move California General Obligation Debt (GO Bonds) to the status of Junk.

A lot of Institutional Investors are unable to hold Junk Debt, so when California GO Bonds are downgraded to Junk, these holders will be forced to sell. In September of last year, the bonds of many banks were on the brink of being downgraded and their bonds got blasted as investors sold them with abandon.

I looked at the Franklin Cal Tax Free Income Fund (FKTFX) and read that it normally invests 80% of its holdings in “Investment Grade” bonds. I looked through the fund’s top holdings and there is a lot of CA GO Bonds. If these guys are forced to sell, by mandate of their prospectus, then who will be around to buy the bonds?

Proposition 98
There are two sacred cows in California – Education and repaying Municipal Bond Interest and Principal. Did you see where California is trying to figure out how to get around Prop 98? Prop 98 mandates that about 40% of the California State Budget goes to education. California now has the lawyers trying to figure out some new math to get them out of Prop 98.

http://www.sacbee.com/politics/story/2014812.html

So where does that leave sacred cow #2?

When in Doubt, Don’t Actually Do Something Constructive, Go to Court
There is now a lawsuit to try and remove the 2/3 vote to pass to new taxes. Just stop spending so much damn money and you won’t have to go to court to supersede the will of the people!

http://www.sacbee.com/static/weblogs/capitolalertlatest/023790.html