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The future of government economics?

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iStock_000000450561Small Map of USWe’ve discussed the possibility that states may begin to file bankruptcy, with first on the docket seeming to be California. What does a bankrupt state look like before it goes udner? We might have our first inkling in $682 million in IOUs that were issued by Arnie’s minions to small business owners that contracted to do work for California.

Here’s the kicker – California expects recipients of the IOUs to pay taxes on the funny money but will not accept it’s own IOUs as payment. Ouch. This could get messy fast. In fact, it already has. A federal class action lawsuit has sprung up, instigated by vendors who say the state is trying to balance its budget at their expense.

Here’s how it started. Lead plaintiff, Nancy Baird, fulfilled her contract to provide embroidered polo shirts to a youth camp run by the California National guard. The bill came to $27,000 but Nancy  was shocked when her “payment” from the state arrived in the form of IOUs which two banks refused to accept. Yet she was required to pay sales tax on this “sale” of shirts.

People of California, this is your government in action.

Who can blame Ms. Baird or other small business owners participating in the lawsuit? Many of them rely on government contracts to stay solvent. Some of the businesses say they will not survive if forced to wait until October 2009 to receive actual payment for services.

Another reason to invest in income property? We think so. As an asset that actually benefits from inflation, you won’t find yourself left out to dry with the economic shell games governments are apparently ready to play.

The Holistic Survival Team