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Comment by TomOfTTB | Hacker News Reader

I don't think it's any violation of the Constitution per se.

Put it this way. As is pointed out in the other comment a Bond is not considered currency and states issue those. A Bond in is just a certificate of debt. Whoever issues the bond is borrowing money from you and then paying you interest in return. So it represents currency but is not in itself currency.

An IOU is simply a Bond that doesn't collect interest. California is in effect using it's governing power to force it's vendors to buy high-risk, no interest Bonds from them.

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An IOU is simply a Bond that doesn't collect interest.

A dollar is a t-bill with an interest rate of 0% and a maturity of now.

Look, I didn't make the rules. But the bottom line is in economics there is currency and there is debt. Is debt just the absence of currency? Isn't Debt worth as much as the currency it represents? Does that make the line blurry?

Yes on all counts. But that's how it works. Debt does not count as currency.

California IOUs do pay interest, at a rate of 3.75%. Since you are resident in CA, I am surprised you did not check the basic facts about this. http://www.sco.ca.gov/5935.html

Yeah, but when companies issue bonds, they use the real money issued from the sale of these bonds to pay down debts of creditors. In this case, if the IOU's are like bonds then they should be sold on the market, and the real money collected should be used to pays these small businesses, which are the state's creditors. I know a state is not a company, but when raising capital via debt, you can't just force someone to accept these IOU's when they are owed money.

But California can't sell them on the open market which is the point.

Think of it this way. California is at a point where they can't stop themselves from spending more than they owe and the result of that is no one in their right mind would ever buy a Bond from them. Because there's a really good chance they'll be bankrupt before they could pay it off.

So what the state is doing is taking the people they have complete power over (those who did work for them expecting payment at a later date) and giving them a certificate of debt so they can continue to pay creditors whose services they need and who they have no power over.

Why can't they sell them?

http://en.wikipedia.org/wiki/Municipal_bond

Many other states and munis do.

Whether its a good investment or not is dictated by the risk and interest rate associated to it. You can't not pay your obligations which in this case would be the interest rate to cover today's expenses. Otherwise we are talking about a larger issue which would be bankruptcy.

I think he meant that they can't afford to sell them. The financial condition of an issuer dictates the yield (i.e. interest rate) that investors will require to buy the bonds. California's condition is so poor that the required yield would be very high, so they have decided to force feed this debt to people who are already their creditors (in short term payable/receivable sense) but were expecting to be paid in currency.

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